 The first item on our agenda is to decide whether or not to set item four in private. Are members agreed? Are members having indicated that agreement? I would like to take this point to indicate to the committee that Patrick Harvie has resigned from the committee and no doubt due Elevation to Ministerial Office this afternoon. Although he's only been to two meetings in this session, I'd like to thank Patrick Forrest for his contributions to date. We will now hear from two separate sets of witnesses. The first panel is from the Scottish Fiscal Commission, with whom we will discuss a number of recently published reports, including their economic and fiscal forecasts. Members have received copies of their reports, along with a private briefing paper from the financial scrutiny unit in Spice. I welcome to the meeting, Dame Susan Rice, DBE, chair, Professor Alison Smith, commissioner, and John Ireland, chief executive of the Scottish Fiscal Commission. We are also joined remotely for this session by Professor Francis Breeden, who is also a commissioner with the SFC. If members have any specific questions for Professor Breeden or if Dame Susan wishes to bring them in at any point, please make this clear so that our broadcasting operators can activate Professor Breeden's microphone. I intend to allow 75 minutes for this session. Before we open up to questions from the committee, I invite Dame Susan Rice to make a short opening statement. Thank you, convener. Good morning, and thank you for the invitation this time to give evidence to the committee. I'm joined here in Parliament, as you said, by Professor Alasdair Smith and by John Ireland, our chief executive, and Francis Breeden joins us remotely. We published our latest economic and fiscal forecasts last Thursday following a recommendation from last session's committee. We also published the second part of our forecast evaluation report covering income tax and non-domestic rates. Along with the report that we published in July, we now have the full statutory evaluation or annual evaluation of all of our forecasts. Our third and final publication last week was a fiscal update looking at the evolving budget position for this and the last financial year. We hope that those reports will assist the Parliament in its pre-budget scrutiny. We're all struck by the success of the Covid vaccines in weakening the link between case numbers and serious illness. This led to a clear shift in Government policy since the January forecast. Even though case numbers have been climbing steeply this month, hospital admissions and deaths remain low and public health restrictions in Scotland are minimal. We're taking a much more positive outlook for the economy than we did at the start of the year. We now anticipate that GDP will reach its pre-pandemic level by the second quarter of 2022, almost two years earlier than we forecast previously. Prospects for long-term recovery are good as well. We've reduced our estimate of long-term scarring or damage to productive capacity to 2 per cent, down from 3 per cent last January. However, there are on-going risks to recovery. We're all mindful of the current rise in cases and the longer-term possibility that vaccines may not be effective against new variants or that the protection they offer may wane over time. The First Minister is clear that, in the event of significant pressures on the NHS, heightened health restrictions would be considered. Many of our tax forecasts have also been revised up significantly since January. That is due to both the improved prospects for the economy and rising inflation. For example, our income tax forecast for this year has been revised up by around £900 million. Let me be clear, though, that this significant increase in expected income tax receipts will not feed into this year's Scottish budget. That element of the budget was fixed earlier in the year using our January forecast, and the offsetting block grant adjustment was set using the OBR's March forecast. The latest estimate of this year's net income tax position accounting for our new forecast of Scottish receipts and the same block grant adjustment is £1.3 billion. The large difference is the result of a significant improvement in the economic outlook between March when the OBR made its forecast and now when we have done ours. There is no evidence of a significant divergence in Scottish and UK economic performance that would support such a high net funding position. We expect that, when the updated OBR forecasts are published in October, the net funding position for income tax will be reduced significantly and will return to a level similar to previous years. Turning to social security, we are predicting that spending on devolved payments will increase from £3.7 billion in 2021-22 to £5.2 billion in 2026-27, as more people receive support each year and payments are upgraded by inflation. From next summer, the Scottish Government will gradually be replacing the UK Government's personal independence payment, or PIP, with its own adult disability payment, or ADP. This is a major step in the devolution of social security and, for the first time, we have estimated the additional spending. Although there are no changes in the overall structure of the payment, there are changes to the processes for application, review and appeals, as well as changes in how the payment is communicated. We expect that, by 2026-27, spending on ADP will reach £3 billion, which is £0.5 billion higher than would have been spent on PIP. We also expect that spending on carers allowance to increase as more people become eligible through the larger number of adults receiving disability payments. The Scottish Government receives funding from the UK Government-based approximately on what would have been spent on PIP in Scotland, so the additional spending on ADP will need to be met by raising taxes or reducing spending elsewhere in Scotland. That forecast is, by its nature, uncertain. It is always difficult to estimate spending on new social security payments. In this case, we only have limited information to guide our estimates of how the delivery innovations will affect the caseload and average payments. A reminder, too, that the Scottish Government has other commitments to increase social security spending, including doubling Scottish child payment, which we have yet to include in our forecasts. That is all from my comments. Thank you. Thank you very much. Before I let members of the committee in to ask some questions, I will have some opening questions, as is going to be the norm in this committee as we go forward. You talked about taxation and, obviously, that is of extreme interest to not just the committee in the Parliament but, obviously, the wider public. I was wondering if you can talk to us a wee bit about the impact of fiscal drag inflation on taxation as we go forward. Whether or not the Fiscal Commission can quantify specifically the impact of that compared to the increased output as a result of the reduction in Covid pressures? I think that we could all say something, but I am wondering, Francis, are you the best place to respond to that question? Yes, somewhat distant, but maybe out of the way. Street in the deep end. Exactly, that is right. Sirius, as you correctly pointed out, one of the other things that changed about the outlook is, certainly, the short-term significance, the higher inflation than anybody was expecting. That will have fiscal consequences. Clearly, most of those sort of come out in the wash in the sense that a higher inflation not only increases spending, it also increases revenue, so the net mainly watches out, but you are correct to point out that there is also some fiscal drag. That will mainly be the same for the rest of the UK as for Scotland. Again, the impact on that position is not so large, but the inflation will generate, effectively, more real revenues. It will mainly be anusury, just nominal, but there will be a little bit of a real gain with the higher inflation occurs over a long period. That will, of course, mean that more people will come higher tax payers than is currently the situation. I will point out that there is operating of the thresholds, or most of the thresholds, so some of that will be said. Spice has produced an interesting document. You may have seen it being touched on in the press, which says that because of the Scottish Government's tax policy, some £500 million was raised in taxation. However, only £148 million of that benefited the Scottish budget due to block grant adjustments. I have a spice explanation here, but I wonder if you can touch on that a wee bit for the record. That is a very interesting report and a valuable piece of work. However, it is addressing a question that is different from the kind of question that is in our remit to answer. The spice report, as I understand it, is looking at the issue of what would the Scottish income tax position be if income tax had not been devolved versus the current situation where large part of income tax has been devolved in this set by the Scottish Government. That is a hypothetical question about how the devolution of income tax has changed the system. Our job, essentially, is not to make judgments about the devolved system of income tax versus other hypothetical alternatives, but to look at how the devolved system of income tax is working. We make income tax forecasts, we forecast the effects of Scottish Government policy changes, notably the introduction of the new tax bans two or three years ago. We are focusing on a slightly different set of issues. We do not get in the business of making judgments about whether it is better to have devolved income tax or not to have devolved income tax or what the effects are going to be. I appreciate that, but I wonder whether the Scottish Government forecasts of what specific tax levels would mean in terms of the block grant adjustment, so that the Scottish Government has a clearer focus and view of what a specific tax policy might result in. When there is a change in tax policy, as there has been in a number of years, we forecast what those effects would be and we also have forecasts of what the block grant adjustment is. In that specific context, in a particular year, when we have a Scottish Government proposal, we have our forecast of income tax revenue, including the effects of this year's policy change, which is compared with the block grant adjustment to give the net effect on the Scottish Government's budget. That is very clear. In your report, you talk about house prices and house price stability being established in the current financial year. You then say that prices will grow in subsequent years. I wonder how you have come to that conclusion. It seems to me that house prices appear to be rising quite significantly at this current time. They have been rising for a while, and the average house price is now a little bit over £200,000. We expect that that will rise to some extent over time. Is there a specific... Sean, do you have a... I think that the graph of all the forecasts are right. There's been an upward movement in prices over the last year, and as Susan said, we've breached the average price of £200,000 now. This financial year, we're expecting that to remain reasonably steady over the year as a whole, obviously. We're only part of the way through the year. In the subsequent years of the forecast, because of the growth in nominal income within Scotland, we're expecting that those prices to continue to rise. It's almost like there's a gentle point of inflection during this financial year. Obviously, we've seen some data so far, and we're expecting that for the rest of the year, so the prices do remain stable. I've actually got pages of questions here, but I want to let the committee in after the next one. It's just basically about just a different topic again, and it's about international supply pressures. You say in your forecast that we assume there are no future waves of rapidly rising hospital deaths and hospitalisations, but then you have on-going international supply pressures, which was combined with domestic recruitment challenges, to your forecast. Of course, that's not just the impact of Covid, but Brexit also. I'm just wondering how you're able to quantify the risks in terms of the supply pressures, because we've heard significant rises in raw material prices, for example, which can obviously impact on the Scottish Government's capital programme going forward or ability to deliver it. Those two pressures certainly exist. Just for clarity, the supply pressures are not simply a direct relation to Brexit, because they come from countries all around the world. We've been mentioning previously that China is on a huge building and construction plan just now, and they're using a lot of their supplies rather than exporting them. The supply pressures come from a lot of places. How do we quantify them? John, do you have the detail of that? What we've done, in essence, is that we've thought about the mechanism by which the supply constraints are likely to impact on the Scottish economy. That's taken into account in our forecast in two ways. We've built that into our judgment on output, so we've thought through the potential impact on production of supply constraints this year, primarily. You see that reflected in the path of output. Output is, although it's rising rapidly this year, it doesn't bounce back as quickly as it could have been in absence of supply constraints. The other thing that we've done is that we've looked at inflation, and in common with the Bank of England's latest monetary policy report, we're judging that inflation will peak at 4 per cent by the end of this year. We're seeing a price effect, and that's also built into our forecast. There are the two mechanisms by which we've attempted to quantify those supply constraints. If I could, the quote you read out mentioned a bit of a blockage around job recruitment. It's a slightly odd situation. I expect that this will change over the coming months. There seem to be lots of jobs as businesses begin to gear up in hiring, and yet there are lots of stories about the inability, for instance, to hire lorry drivers and, therefore, to get things delivered. There's something funny happening in that part of the labour market. The UK-wide furlough scheme, as it's called, is coming to an end at the end of September. There's some speculation that people will have stayed on that. We'll see whether their employer is still a viable business or not, and at that point they may decide to look for another job. They have to look for another job, but there's a bit of stasis right now, possibly until that cliff edge. We don't know, but that's partly speculation that we've had. We've got skills and geographic mismatches in terms of the labour market, which is very significant. Liz, the follow-up question. Notwithstanding the better news that you published last week, namely that you felt that the scarring of the economy wasn't quite as bad as had been originally anticipated, you also mentioned that you felt that there were significant risks ahead. You flagged up that that was partly due to the fact that it's difficult to predict consumer behaviour in the future and business behaviour. That all ties down with the fact that there are very significant pressures on the budget because public spending is rising, public sector debt is rising, tax receipts are likely to come down because some businesses are failing. Would you be able to say to the committee, without hinting about Government policy—that's not your job—where you see the most significant risks ahead in terms of what the economy's shape is going to be? I've turned to all my colleagues to come in on that. When we look at the economy forecast and we talk about risks, we've really only called out downside risks. We haven't called out any upside risks. The downside risks draw from the economic impacts of unknown possible changes in health policy that then impact on economic activity. However, we really do expect—because we've already seen—those households that have managed to save starting to spend again. There's also been a lot of house improvement and activity around households as well. In fact, a shortage of a lot of the trades that serve this really have a full order book and it's hard to get that through, so that will continue activity. Alice, do you want to come in specifically on that? There are a couple of downside risks worth mentioning. One that we give significant attention to in the report is the downside risk that the future of Covid might be problematic. There might be a vaccine escape, for example. Although our main forecast is based on the assumption that we're not going to have another period of significant economic restrictions related to Covid, none of us can discount the risk that that might turn out to be too optimistic. We can all think of what the implications of that would be. On the economic side, as Susan said, our outlook at the moment is considerably more optimistic than it was in January. That's based not just on the fact that the pandemic itself has—the situation with the pandemic has eased with the roll-out of the vaccination programme. It's also that the bounce back of the economy as restrictions were removed has been faster and healthier than we and pretty much everyone else had expected. It's possible to take the view—for example, if you're thinking about economic scarring to contrast our situation now with the situation in the 1980s and 1990s when economies were responding to the decline of heavy industry and the decline of heavy industry, coal mining and so on, left a lot of scarring in the economy, which lasted for a long time. People lost their jobs, who never came back into employment. Communities lost economic opportunities and new economic opportunities didn't come back. At the moment, our view and the view of many others is that Covid doesn't look as if it's going to be like that. The bounce back is going to be reasonably healthy. Young people will have difficult labour market experiences for a year or two, but we can hope that that won't last too long. With all of those things, we have to be realistic and recognise that we may be making an over-optimistic judgment there and that it will turn out that the long-term damage to the economy is actually greater than we are currently forecasting. That's one other significant risk that I think we need to think about. On the second point, which has been a lot of interesting articles and debate recently about the playoff between inflation and economic growth, which was followed by one of the interesting comments that the Government of the Bank of England made a couple of weeks ago. Do you have, in your overview of the Scottish economy, areas in which you think that there is good potential for economic growth relatively quickly? Secondly, what areas do you feel in terms of tax revenue coming in would be helpful in terms of the Scottish economy and Scottish budget? That's a big question. Francis, do you have any thoughts here? I think that, in our report, we looked at a bit of the structural breakdown. Clearly, one of the important things about the economic effects of everything has been is that it has hit certain sectors much harder than others. Certain sectors of many sectors have pretty much affected what others have taken a very significant hit. We are clearly expecting those that we are hoping and expecting that those that took a significant hit will be part of the major part of the bounce back. Therefore, that will be an important part of where the economic growth and the tax growth comes from. I would say that one of the things that will happen, or we expect to happen as a result of Covid, is that a bunch of structural changes in the economy will be accelerated. One of them is the fact that, in nothing that we do with you in a rumble, we've all got screens now. That will change the structural economy and that will change where growth comes from in the future and, in a sense, slightly more optimistic if you're scouring, is partly because we generally expect the research to show that some of those structural changes will be beneficial in the longer term. Clearly, at the point of structural change, it's fair to say that the forecasts and trying to work out which sectors will benefit and which will lose is actually very difficult because structural change is very difficult to predict. Can I just do a closing sentence following Francis' comments? It isn't so much sectors as were but maybe sectors as will be. If you look at agriculture, which is a big part of Scottish economic activity, to the extent that the agriculture sector reinvents itself to some extent in anticipation of changes in eating habits and diet because of net zero sensitivities, sectors will change for what is happening in society more widely. It's a little bit hard to pinpoint which ones will change and change quickly. I'd like to follow on from some of the topics that have already been touched on. By and large, I have a question about some of the short-term elements that we've been discussing and some of the longer terms that you've just been touched on with Liz. In the shorter term, your forecast here has us returning to pre-Covid levels in quarter two. I just wonder how safe that forecast is for the very reasons that you set out, given that furlough is coming to an end. Also, if you look at some of the things that have been happening over recent months, we have the phenomenon of unexpected savers who are spending money on things that they wouldn't have otherwise. I just saw a report yesterday showing that used car prices are up by 15 per cent. You just highlighted on home improvements. Strikes me that those are not sustainable spending patterns and that those cannot really be sustained into the medium or long term. Is it safe to straight-line our economic performance from quarter two of this year, as your forecast would appear to do on the basis of your report? Or could we at least, if not expect, have a sense that there is a risk that we may have more of an oscillation in terms of our recovery? Or there may be some sort of headwinds that are accounted for from some of those effects? Absolutely, there are headwinds that will always be some headwinds. However, one of the factors that encouraged us to bring that timeline earlier is the fact that in the second lockdown in January we found that businesses overall and in general had figured out how to operate during a lockdown, during the funny time that we had for all of the last, close to a year and a half. Because of that, they were back, they worked out how to sell online. All of those services had improved and therefore we saw the economy coming back up to speed sooner, it's really sooner than we had thought previously because the economic activity was a little bit stronger, so that was one of the factors behind our thinking. But again, Frances, maybe I'll turn to you, because you've got a lot of thoughts here. Yeah, just quick first on the first question, and you're right, and we highlight that in our thought that clearly one of the tricky moments for the economy will be when we are slightly encouraged, the fact that there is significantly fewer people on furlough than there were even a few months ago, and therefore that makes us slightly more confident that we can share that particular tricky moment slightly better. But I think you're right that we're going to have a period where spending patterns are going to flip around. Those excess savings are understandably going on mainly on durable, long-term goods in the sense that that's a way of investing from your excess savings. What we're expecting is that that will be replaced more by the standard consumption patterns that has the economy recovered, so you will see those sectors like hospitality and recreation, all those ones stepping up to take over what's currently being dominated by durable consumption at the moment. I think that your question raises a good point, which is those transitions in consumption, and each one of those transitions is necessarily uncertain, and therefore there is definite risks as the economy comes back on and even keel again. I wonder if I could just challenge the point that you set out there about business having figured out how to operate through Covid. Certainly the businesses that I speak to have managed to get through Covid, but even though they may be trading, their trading is significantly down from where it would be. 60 to 80 per cent for a lot of consumer facing businesses is not usual. That's not sustainable for them. Furthermore, most of those businesses have got through to that point by accumulating quite significant sums of debt, whether that's through Government schemes or deferred rent with landlords or other arrangements that they have made. Even businesses report to me that small businesses' owners have been cashed in their pensions, and I am told that a lot. It strikes me that those businesses are now operating with a very different set of circumstances now compared to pre-Covid, and that too must imply a degree of fiscal headwind when you start looking at those figures. They are certainly the overall economic performance of the country. Yes, and your point is absolutely correct. I wasn't implying that it's been a good road for all businesses. It's just that compared to our expectations earlier, businesses had actually rallied overall—and not every single one, but on average—had functioned somewhat better. The other factors that we looked at earlier this year is the fact that education schools opened up a little sooner, so we had more economic activity or more output related to that fact. Also, the vaccination programme, which had barely started at our January forecast, rolled out with a speed and a success that I'm not sure many people anticipated, and that added to output on the health side. So what helped us to change our view about the economic activity and the speed of recovery was simply that things happened, but happened a little sooner than we expected. I could ask one final question around the longer-term impact of all of this. I totally accept that right now it's very difficult to predict what the long-term structural changes in the economy will be. I quite agree that they are certainly going to be there. I wonder whether some of them, if not able to safely predict, are certainly a good bet. It's very likely that there will be structural changes. Again, think about the consumer-facing economy, especially retail. Declaring an interest as a former retailer, those patterns of spend have permanently changed. I don't think that there's anybody in the retail industry that thinks otherwise. To what degree you are starting to look at or identify those changes so that you can embed them in your forecasting as soon as possible and anticipate them, because some of them, as I say, are very likely to. Likewise, in terms of changing patterns of work, having a screen and being able to work over a Zoom is all well and good if you are somebody who deals with things that are suitable for that. If you are a retail worker or a delivery driver, doing those things by Zoom is somewhat more difficult. Again, not just sectorally but types of employment, the recovery might well look very different depending on where you are and what industry you work in. Are you starting to try to identify that and embed that in your forecasting? I have a quick comment about an awful lot of deliveries that we all received now that we didn't receive before at home. What will probably come is a rethink of how deliveries are actually done. Small lots of hubs where different organisations can have an exchange from large-scale lorry containers to the whole thing about the last mile delivery. There is a lot of work going on but it is still to develop, so things will change as well. We just need to remind ourselves that it will not just go back to being the way it was before. Alice, do you have any views in this space? I am afraid not, so I don't have any further wisdom to add. I suppose the only thing I would add is, as well as looking at the sectoral industry-based factors that you have been talking about, we are preparing our forecast by looking at a very high level output series as well. To some extent within that you get a cancellation out of the effects that you are talking about. The centres with really strong growth will, to some extent, be mitigated by the sectors with slower growth. You might see some greater stability at that aggregate level than you would if you start looking at the detail underneath it. I am thinking more of the high street in non-domestic rates. From your forecast from 2022-23 to 26-27, non-domestic rates are due to go up by 17 per cent. I am just trying to think how realistic that will be when we think of how much the high street would have changed through this pandemic. Are we also looking at how different businesses are going to be paying NDR going forward, or is that not part of your forecast? Francis, I see you nodding. Sorry, I walk at home for a couple of seconds. I am sorry about that. On NDR, the bounce back that you mentioned is really just the end of relief. That is somewhat baiting, but I think you are right about the longer term issues of that commercial property. It is something that we have looked at very carefully, and we have really tried to use context with industry, context with the trade bodies, to try and get a feel as to whether the use of commercial property change will have a big impact on the nature of that tax revenue. You are right to highlight that as one of the areas that we have already mentioned and that is where the structural change will be. We anticipate that there could be something going on, but we really need to keep an eye on that. At the moment, we do not have any strong indications of structural change in use of commercial property, but that is clearly a thing that we have got a very close eye on, because that is a very much a pinch point for the structural change that we want to anticipate. There is a lot of information that still needs to come out in the NDR space. There were a large number of appeals called material change of circumstance appeals, and everything slowed down in terms of the assessors coming to conclusions as well. We have to wait and see how the numbers actually play out here. There are some question marks, if not downside risks. I was looking at income tax revenue as well. From 2020 to 2021, it is moving from just under £12 billion to £17.3 billion in 2027. At the same time, the 16 to 64-year-old workforce has decreased by, I think, 60,000. I am just trying to work out how there could be such a big increase when the workforce is falling. That is primarily driven by the economic growth in the forecast. Partly, as we have already discussed, there is an element of inflation in that, and partly it is real growth. The Scottish workforce is expected to decline numbers, but the overall Scottish economy is nevertheless growing in income tax. In income tax grows with a somewhat accelerated effect as the economy grows. In the report, the nominal earnings are due to rise between 2.1 per cent and 2.5 per cent, which does not really match the increase in income tax. I am just trying to think whether I am missing something here on the amount of income. Do you assume that bans are going to change, people are going to be paying more tax per person or how is it? One factor is that most income tax is paid by a relatively small minority of taxpayers, the better off taxpayers. There is not a straightforward one-to-one relationship between income and income tax. As I said, as the economy grows, one effect is that people who are not paying tax are drawn into paying income tax, and people are drawn into income tax at higher rates. That has an accelerating effect on tax revenue. The relationship between tax revenue and income that is in our forecast is a perfectly normal kind of relationship that would be expected. We are not doing any fancy magical mess here. Are assumptions made in the tax bans? Do you assume that they are staying as they are, or have they just gone up in line with inflation? I think that when you asked the question whether we were expecting a change of tax bans or something of that sort, we work with what the policy is today, so we do not think that the Government may change tax bans. The answer to that is that we are not playing with scenarios of that sort. We work with what we have today. We do make assumptions about indexation of bans and not indexation of bans. For example, the UK Government has announced that the personal allowance will be frozen for the next few years, and we build that into the forecast. We use policy announcements in that sort of way. Inflation has been mentioned a few times already, so I do not want to spend a lot of time on that. However, as I understand it, you have followed the Bank of England, rather than the OBR, mainly because it is forecast more recent. My interest is, if we are at 4 per cent just now, how confident are we that it is going to fall to 2.5 per cent? It seems to me that some of the pressures like shortage of labour might continue longer term, and would that therefore mean that inflation continues higher a longer term? I suppose that being of a slightly older generation, I do remember inflation being at 15 per cent, so 4 per cent seems reasonably low to me, but by recent years it is relatively high. Are there any thoughts around that? I think that Francis has some thoughts. I think that you are entirely correct that it is a risk and that we very much agree with Bank of England's assessment that the current information is that it is a short-term issue, but short-term issues do us have become long-term ones. Particularly as you point out, if the constraints are in the labour market, that is where you will start to see the longer-term pressures on inflation. I think that there is currently a lot of pressure in the supply chain, which we do think will just watch out over the coming period, but I think that you are right to highlight that as a risk and in the sense that the ultimate ball work against Bank of England is going up to 15 per cent again. If the Bank of England itself perceives that risk and inflation will react, so it has not reacted to this rather temporary increase, but it will react more than more. It thinks that it is a longer-term increase. Another issue is more widely the whole question of population. Our birth rate has been low in recent years, but that has been made up for by immigration on the whole. There seems to be a bit of a reduction in immigration at the moment. Can you ask what your assumptions are about population and how big an impact should we worry about that? My simple thinking is that if the population is growing, the economy will probably grow. If the population is falling, it is very difficult to make the economy grow. Especially in relation to the rest of the UK, if their population is growing in ours, where do we go from there? It is a very important space to think about. First of all, the fertility rate in Scotland has been dropping, but it is not just in Scotland. This is happening in countries all around the world, so it is a general phenomenon, but our fertility rate has been dropping. If you asked about comparison to the rest of the UK, population growth there is a little faster than ours, and we expect that to continue to be faster. The other factor in the population is that what we have in Scotland is the sort of growth of the older population, many of whom are no longer active in the labour market. They are no longer working, so you have fewer children coming in. Therefore, we expect fewer people joining the labour market in due course. More people in that older age group who may not be actively working but may actually be costing. We look at both sides. When we talked about ADP as a benefit, there will be more people, possibly for longer, who attract that benefit. It is a combination of things balancing each other, and it matters. Presumably, the birth rate is not going to change very rapidly, but the immigration side could change. There is demand from industry that immigration should be allowed for specific sectors. At the moment, the UK Government said that it would not do that. How important is that? If there was a big, suddenly immigration was allowed, would that make a big difference to the forecasts? One could only speculate except to say that, if immigration was allowed, what would matter most is that the immigrants were people of working age and came into the economy and started creating more activity. I was interested in your report on page 33 of mine—I am not sure if that is everyone's page 33—but it is called box 3.1 uncertainty indicators. As I understand it, that is a new measure that you are trying to do. I was quite fascinated by it, so I wonder if somebody could explain it to me and what it tells us. I am very excited about this because we have created it. It is very good. This is about political uncertainty. It is about the impact of what is being thought about, discussed and debated out there in public. If that creates greater uncertainty, that may affect the decisions that people make economically and the behaviours that they show economically. The Scottish Uncertainty Index has been created and it has gone back for any number of years to look back to see what it reflected in terms of events in society. We will continue to monitor this. John, do you want to say anything more about it? What we have done here is taking methodology that other people are using, including the Bank of England, to look at policy uncertainty in the political sense. It is based on online searches of newspaper articles. We select a number of key keywords and the index picks up how many times these words occur in newspaper articles. In a sense, it is very simple. It takes a bit of time to do, fortunately, because it is all automated, so that makes life easier. What I thought was fascinating was that, if you look at that box, you can see the first independence referendum features in that index, the EU referendum features in that index, and the impact in Scotland is greater than in the UK as a whole. The Brexit negotiations and when independence was coming back into the news in 2019-20, again, you can see that. We are interested in this. We need to do a lot more work on this and calibrate it to what is happening in the economy. However, we thought it was a good starting point. How objective is it? We do not all have faith in newspapers and how I think it is not necessarily that what the newspapers are reporting is accurate—maybe accurate it may not be, depending on your faith in newspapers and journalists—but what matters in a sense is what people are talking about. It is capturing that sense that this is in the news. Because other people have done it and people have done it across the world and the Bank of England is doing it for the UK and has done it for some time, we have some sort of faith in the methodology for that reason. What would the impact be on actual people's behaviour? If there is more uncertainty, does that mean that people may be saved more, for example? You could speculate almost anything, but people could hold back on big spending decisions. They could consider where they live and whether it is time to change jobs and take a risk or not. There are lots of ways that could impact on their decisions, but those decisions will then have an economic impact. We will keep an eye on that going forward. It is important to say that we are at the stage of developing the index. We have not done that sort of second step that Susan is talking about, to actually look at how it impacts upon the economy. The final area that I just wanted to ask you, which is an area that has come up before, is how you are at the moment with getting the data that you need and the quality of the data either from Scottish sources or UKHMRC. You have been on the committee for a while and have known our journey along that road much better than ever before. We have developed some good relationships with some of the major UK agencies that provide us data. It takes time for them to change reports. Sometimes the timeliness makes a difference to us. As you know, we make every effort possible to use publicly available data. That is part of our approach towards transparency that we can publish the sources of the data and what those data are. We are in a much better space. That does not mean that there are not even improvements that could be made. Every year we publish, because we were asked by different parliamentary committees some years ago, we publish a report on a statement of our data needs and we identify what next would be helpful to us, but it has improved. John. Can I just add to that that the position, as Susan says, is stable this year. For the past three years we have produced a statement of data need on recommendation from the previous sessions economy and fair work committee, but this year we have decided to move that publication to every two years, because there is nothing at the moment really pressing in our data needs. We have not done it this year, but we will do it next year. I have been listening to the relative contributions with great interest and the themes that keep reoccurring are uncertainty and complexity. I can appreciate the very difficult job that you have to do to reconcile what has actually happened against the forecast of what might happen. I am interested in exploring that a bit further. We have touched on some of the rationale that you use for your analysis when questions have been asked. I am personally interested in understanding the rationale for some of your analysis in your report, if you like. For example, climate change is going to affect us and net zero targets are being talked about a great deal. My question is in terms of your analysis, how are you reflecting issues such as this and can you see a development of your report where you are reflecting more on your analysis? I am looking at any of my colleagues. Francis, you want to come in there? I think that we will want to develop in the area of looking at these longer-term risks, so you are right. It is a current risk, as well as a longer-term risk. There are issues. In fact, we have been raising them already in this meeting about long-term population changes in these areas, which I think we could use for the look at them. They are not written about very much in the current report, because the current report has a very specific focus, which is on the short-term forecasts and the budget implications of that. I think that you raise an important question. I think that the only thing I would add is what I said to Mr Johnson slightly earlier, that a lot of this stuff around net zero and the commitments and the changes, for example, to energy efficiency and the production of energy are the things that go underneath the sort of the balances and changes there. On the top-level aggregate we have forecast for five years, you probably would not see an immediate impact, but there is really important stuff going down underneath which we need to keep an eye on. Francis Johnson says that thinking about 20 years forward is very different from thinking about five years forward. In that respect, I was equally excited about box 31 starting to get into that sort of thing. Following on, perhaps in a sort of similar theme around GDP per capita, we know that there are endless debates about how effective that is as a measure, but we know that it is internationally understood and you are using it quite rightly. However, I am wondering what, if any, thinking you have given to other measures in addition to GDP per capita, because of its known and understood crudity, particularly as we start to move into somewhat amorphous, I know at the moment, but a so-called wellbeing economy? I just wondered what thoughts or consideration you would add to that. That is a very good question. Again, I see Francis nodding, so let me turn to you. I agree that these are an important area. I agree with the concept that GDP is a somewhat narrow measure, but sadly, from my point of view, because we have a very significant focus on the budget and on money, it is actually the measure that matters to us for that particular job of looking at the budget. I do not think that it is really in our world to look at those measures, but I do agree with you that those measures are valuable and important. I would encourage others to think about it better, or I would like to say that if your role is ours, as is taken in the sense that the monetary implications, the budget implications, GDP is actually pretty much the best measure for our job. We still have some time, so I am going to let colleagues come back in again. First of all, I will ask some more questions. The first one is really a follow-up to John's question about the uncertainty index, and it is to ask whether you feel that the co-operation agreement between the Greens and the Scottish Government, where it would sit on the uncertainty index, does it make the ability of the Scottish Fiscal Commission the ability to forecast more or less certain? We do not forecast political outcomes. No, but there is financial detail in there, for example, £500 million for the north-east, in addition to 10,000 more affordable homes, etc., etc. So there are specific components within that deal. Focusing of Government expenditure is limited, in essence, to social security. Now, there are some content of the agreement between the Greens and the SNP there, for example, the doubling of Scottish child payment. In a sense, the direct impact for us is really around expenditure commitments within our remit, such as security spending. Of course, the other thing that is interesting in that sense is how it will change the budget process, because we have been used to operating in a world in which the budget process is two bites of the cherry, the initial budget and then the negotiation is about how to get it through Parliament. Obviously, that will go away and it will make our pre-child forecasting and that sequencing different. In that regard, there will be a reduction in uncertainty. Yes, it will be upfront uncertainty, one off rather than two off. Thank you. This morning, members of the committee received a letter from the Cabinet Secretary for Finance, which was quite detailed and no doubt colleagues will be asking about that in the next session. However, one of the things that she said in the letter is that there is logic for publishing the medium-term financial strategy alongside the Scottish budget and thereby basing it on the updated SFC and OBR forecasts. Publishing it before the October forecast would mean having used OBR forecasts from March, the effect of which would be to give a misleading sense of the fiscal outlook. Is that something that the commission would agree with? The statement that relying on the OBR forecasts from March, because the OBR forecasts affect the BGAs, therefore affect our budget position, and those forecasts are out of date. The OBR are the first to say that, obviously. We expect October 27 for them to produce an up-to-date set of forecasts, so there is legitimacy in saying that those are out-of-date numbers, but beyond that, how would that be? It's not as difficult as we haven't had sight of that letter from the Cabinet Secretary. However, when it comes to thinking about this year's MTFS, which I presume the letter is talking about, there are some time of considerations there about when the forecasts are in a sense as up-to-date as possible and when they coincide. However, to give you a considered reaction about that letter, it would get it to read the letter and get back to you. If it's okay, we can certainly write to you and give you some sense of what our views are about that letter. I'm sure that the clerks will let you have that. We only received it at 7am this morning, so I'm sorry for throwing that at you. I think that Alistair wanted to add something. Obviously, John said that I'm not going to respond to a letter that we haven't seen. There are uncertainties arising from the fact that the OBR forecasts are important to the Scottish Government's budget because they affect the block grant adjustments. The current OBR forecasts are somewhat out-of-date and we will have more up-to-date forecasts in October. We have highlighted some areas in a report where that is significant. We clearly indicated that the current forecast of the net position on income tax should be looked at with great caution. As much faith in our income tax forecast, as we always do, the income tax BGA is based on an out-of-date forecast, so the net position shouldn't attach too much weight. However, there are other important elements in the budget, and the social security budget, in particular the adult disability payment, is a big element in the budget, where uncertainty about OBR forecasts is not really a factor for postponing CAs consideration of issues. You have talked about your social security a couple of times and no one in the committee has yet asked about it, but the prediction is of a £1.5 billion increase in social security spend of which the adult disability payment will be a major component over the next five years, according to your figures. Given the fact that it has been mentioned a couple of times, is that cause concern to the fiscal commission, or is it just something that you just want to ensure that we don't omit in our deliberations? It's not our job to be concerned about policy. I say that somewhat tongue-in-cheek. What we're trying to call out is that if there's a difference between the funding available to the Scottish Government in the case of social security benefits, some of it comes from DWP, and because of the Government's policy to make these benefits more widely available and easier to access to more people, there will be greater spend here. The Scottish Government is required to have a balanced budget, as you know, and that means that if it spends more in one place, it needs to match that in some way, and matching that would be from within Scotland, so either by raising taxes within Scotland or by not spending some other programme in order to fund this programme. The thing about social security, and particularly the ADP, is that it's a large number and it's somewhat open-ended, because once people qualify, they don't often come off it, and we don't know how long and for how many years they'll be receiving the benefit. It's not a one-off benefit at a certain point in time, which is easier to predict, so we raise it simply to bring out that perhaps need for thoughtfulness in terms of looking at the budget overall. Yes, and the child payment could be £163 million a year, I think, in your opening statement and in your report, you said about half a billion extra would have to be found by 2026. Is that correct from resource budget? Yes, and there's still a tiny number of social security payments where we don't have the clear policy yet on the Scottish side, so we haven't costed them. That's a big sum of money, half a billion pounds, so it just has to be thought about and anticipated. Okay, Liz wants to come in, and then Daniel, and then I'll come back in again with another question. Thank you, convener. Obviously, one of the dates that's on the horizon of the not-too-distant future is the out-turn report for the fiscal framework, which I think the Government's identifying as the 1st of October. That will lead on to the revision of the fiscal framework and the agreement, et cetera. Are there things that you would like to see within the fiscal framework parameters that would make forecasting a bit easier? A good question. There is to be a review and always has been in the plans of the fiscal forecast in this time period, this fiscal year. It's not our job to shape or drive that. It's really between the Scottish Government and the UK Government. Are there things that I would like to see in terms of helping, perhaps, to reduce uncertainty and plan ahead in terms of forecasting? Let me just say if we're consulted, we will obviously respond to that. One of the things that we have raised before, and I thought of saying it just a minute ago, is something around greater certainty, greater expectation, planning perhaps around the timetabling of the NTFS of the budget, of when these activities will happen. We require so many weeks to produce our budgets to the extent that we know ahead of time when these are coming. That would be really useful to us, and we've been very open about that. John, other things? I think you were asking specifically about the fiscal out-turn report. We've been working with the Government for many years on that, and it's fair to say that over the years we think the quality of that report and the information needs and the transparency has increased enormously. Without saying it, it's absolutely perfect, but we're pretty happy about the way that's been going and the improvements in that report over the years. Would it be correct to say that, with all the additional forecasting that now goes on and the improvement in the use of that data, do you feel as statisticians who are predicting on the future in terms of making use of that data, do you think that economic forecasting is getting more accurate? It's complicated. Alistair, can you guess your go? It is the case that, over the life of the fiscal commission, the availability of data as Susan has said has improved and that has somewhat reduced the uncertainties that we face, but forecasting is inherently a business of dealing with uncertainties. We're not looking for magic solutions that are going to make our job easier. In a sense, that's not the issue, but fiscal uncertainty is not about making our job easier. It's about making the... The question that John and Susan said is not for us to propose what changes in the fiscal framework should take place, but the central question for the fiscal framework is whether there are uncertainties facing the Scottish Government in the current system that could be different in a different system. Put it another way, if there are improvements in the data that have happened over a period of time, that would imply that your job has become slightly easier, maybe not perfect by any means, but slightly easier. That begs the question whether you feel that because it's slightly easier that what you are producing for government is more accurate, even though it's got complexities, it's more accurate than it used to be. Would that be fair? I'll be optimistic and say yes, that's fair. Let me just say that accuracy is a word that makes me take a deep breath because forecasts are never really accurate, but what we have done over the time we've been in existence with the better data and also just more sophistication is create our own models and improve our own models for the forecast. I think we're doing a much better job now, so we have our own economy forecast and we created ourselves. Initially, we didn't use that, and this is better. We're using different data sources, we understand the impact of RTI data as opposed to the data that we used to use from HMRC, so all of those are improvements, but more accurate makes me hesitate briefly. We'll take it as an accurate answer anyway. I just want to return to the issue that the convener raised regarding the block grant and income tax revenues and the spice paper. In particular, I recognise what you were saying, that you don't want to get into the realms of hypotheticals of previous regimes, but the fundamentals here, as I understand and set out in the paper, are that the current fiscal framework, in a sense, relies on income tax growth. The fundamental point that this would seem to point to is that income tax receipts per capita in Scotland have grown more slowly than the rest of the UK. Is that a conclusion that is supported by the data that you have? What are the reasons behind it? Critically, the reason that I'm asking the question is that I think that we're all very mindful that the fiscal framework is being renegotiated, and therefore the fundamentals of how that works and what it is that we benefit from in terms of income tax growth being so critical of the current regime, as I understand it, is clearly very important as that is renegotiated. What insight do you have in terms of income tax receipt growth per capita in Scotland versus the rest of the UK? The fundamentals of a devolved income tax system is that Scottish income tax receipts depend on the income generated in the Scottish economy. In a non-devolved income tax system, Scottish income tax receipts depend on Scotland's share of UK income tax receipts. That fundamental feature means that, if the Scottish economy evolves in a way in which the pattern of income is different from the UK, devolved income tax receipts in Scotland will be different from what it would have been in a non-devolved system. That's just stating the basic facts. What that highlights is that Scottish income tax receipts and therefore the Scottish budget depend on the performance of the Scottish economy, depend on the growth of Scottish productivity, because high productivity basically means a high proportion of high-paying jobs, high income tax paying jobs in the economy. There is nothing magic about that, but it does focus attention on important questions about the long-term growth of the Scottish economy, the growth of productivity, the demographic changes that Susan was talking about earlier, the proportion of the non-working elderly population to the working population. Those are the issues on which the future of the Scottish economy depends, as they do for any other economy. Devolution focuses attention on the Scottish economy specifically even more than ever. To take that next step, I absolutely understand those points, but I think that the key conclusion that has been drawn by this paper is that that growth has been slower in Scotland than the rest of the UK. Is that a conclusion that you would share and do you have insight into that? As John Smith said earlier, the Spice report is asking a question that is different from the kinds of questions that we ask. We are not going to take a position on whether we line up with the Spice report, because that is not our job. I think that I better stop there. The Spice report is addressed to a very serious and important question. It is different from the questions to which we address, and therefore I am not going to get into a detailed discussion of the way that the analysis of the Spice report is. We want productivity to go up so that people are paid more, so that they pay more to access the fundamentals of what we are looking at in broad terms. He is just warming up for the cabinet secretary. One final question from me and then we will call a session to a hall, which is in terms of the fiscal overview. The Scottish Fiscal Commission notes that the UK Government has not guaranteed any additional funding for Covid-19 for 2021-22 and there are currently no arrangements for deferred funding. You have said that, given the Scottish Government's requirement to maintain a balanced budget, I quote, large changes to Covid-19 funding late in the financial year may create difficulties for the Scottish Government's management of its budget. Can you just talk us through one or two of these difficulties? Last year, there were several tranches of funding from the UK Government, which went to the nations and spread out, which related to Covid measures. They came at different points in the year, but the numbers involved that kind of funding are only firmed up towards the end of a fiscal year, so usually I think in February. That makes it very hard for a Government that has to have a balanced budget and has to make spending decisions throughout the year and how to wisely spend money. The Scottish Government spoke to the UK Government and what came out of that in early summer last year was a guarantee that the number that had been put on the table at that point was a minimum and would not drop below, and then there were more tranches after that. There was one tranche that was announced, I believe, in March weeks with the UK budget, weeks before the end of the fiscal year, and that would have been impossible for the Scottish budget to put into place and to spend. Scotland has a hard stop at the end of March to fund councils and to confirm income tax bans, so it does not have flexing time at that point. The UK Government or Treasury specifically agreed to let that money carry over to be used this year, so those were helpful forms of support to ensure that the money could be used properly and thoughtfully by this Government and, I assume, by the other nations. This year, there is about a little over £4.5 billion of Covid support funding that has been put on the table, but there are no guarantees of that sort and there is no promise about it carrying over at this point in time. That number, which may go up if things got worse or maybe stays the same, possibly would go down by the time the February supplemental estimates are agreed. That is relatively late in the financial year, so that is why we pointed that out. There is not quite the certainty around this extra funding. If it helps, I could say that, last year, the late funding was £1.2 billion worth from the UK Government, and you can only use up to £700 million in the reserve. You can see that last year, even with the greater ability to use the reserve because of the Scotland economic specific shock, you have that sort of constraint of £700 million. Thank you very much to witnesses for that very interesting presentation and the questions that were answered this morning. We are now going to call a halt until 11 pm. We are now to move to our second session of the day in which we will hear from Kate Forbes, Cabinet Secretary for Finance and Economy and Douglas MacLlan, Deputy Director, Budget, Pay and Pensions of the Scottish Government. I welcome our witnesses to the meeting, not least because the Cabinet Secretary has just come straight from a local government committee and has had an exceptionally busy morning already. Members have received a paper, providing background information for the session, but before we open up the session to question the committee, I invite the cabinet secretary to make a short opening statement. Thank you very much, convener. It is great to be with you this morning. I am sorry not to be there in person. I hope that this might be with the finance committee in person, since the pandemic struck. I certainly want to continue to build on what I think is quite an open and collaborative approach with your predecessor finance committee in the last week, and I am very grateful for the air and engagement that my officials had with your clerk on the team. I have a few issues that I wanted to raise at the outset, and I am getting quite a bit of feedback, so hopefully you can all hear me okay. The first thing is that I know that the committee will want as much early clarity on the process on the timetable for next year's budget. I would very much like to build on the experience that I have had over the past few budgets in contending with the implications and uncertainty around the timing of the UK Government's next fiscal school event and to move the very consideration with the committee in what those implications are, because, in light of the uncertainty of the UK Government's budget, there are pros and cons of whether we go ahead of the UK Government's budget or we wait until the UK Government's budget. That debate has been informed by the SFC's forecast last Thursday, with the OBR now requested by the chancellor to keep its look at the things of the future. There are obviously a number of other areas that the committee will need to touch on, so I only want to make one more point about handling that from here. Let's just say that we are pushing the SPOTL's first framework for that. The constitution will enhance the Scottish approach to taxation and get out of our programme of work for tax over this Parliament. I very much look forward to the committee's views on that as well. I will stop there and make the point that I am getting quite a lot of feedback, so I hope that you can fill me in so that I can hear you. Thank you. Thank you very much, cabinet secretary. Some of the members have a wee bit of difficulty in hearing you clearly. I do not know if we can see if there is a possibility of any technical adjustments if not. We will just have to soldier on, so if you can bear with me just a wee minute or two. I have been advised that broadcasting is trying to improve communications, but we should also deploy on in the meantime. I hope that you will be able to hear me. I will try to see it clearly and not be as west of Scotland as I normally am in asking these questions. You are being a poshie in all that. You will probably be able to translate what Daniel Johnson is saying much more clearly than I am. First of all, the fiscal framework. I am just wondering whether there has been any progress made in terms of the review of the fiscal framework, because I know that there has been some real difficulty in getting the UK Government around the table and, of course, we are hoping to have this review by the end of the year. Thank you for that. There has been progress in the things that we continue to engage on an on-going basis with the UK Government. Obviously, the fiscal framework will be reviewed in 2022, and it will be preceded by an independent report that is presented to both experiments by the end of this year. I think that the committee would agree that the fiscal framework has been subjected to quite unprecedented stress-testing, and we would have anticipated pressures on it when it was originally agreed in 2016. It is my view—this is where there is some disagreement—that the review should be quite broad in scope and the report and the review should consider the operation of the framework and how it can be improved. There were arrangements for the review that required going to Greenwood with the UK Government. We have not been able to achieve that agreement to date, but I will be discussing the next step with the chief secretary in the coming weeks. My goal is to get agreement and to ensure that we meet that time to go. I would really welcome the support of the committee in continuing to make the case to the UK Government for a broad-ranging review that is in line with the predecessors that report on what the fiscal framework is, and I hope that we can work together to achieve a meaningful review rather than just ticking the box of our review. Obviously, politics moves very fast in Scotland, and we now have an agreement between the Scottish Government and the Green Party through the co-operation agreement, and ministers will indeed be appointed this afternoon, including a former member of the committee, Patrick Harvie. I am just wondering what work has been done in looking at the implications of this in terms of the public finances as we go forward. For example, the number of affordable houses to be built to 2032 will increase from 100,000 to 110,000. Of course, that is at a time of labour and skill shortages. £500 million will be invested in a just transition fund for the north-east and Murray, and there is going to be a fair review to provide a real estate alternative to car use and increase investment in active travel and public transport. There is also the likelihood that the funding for that would impact on other Scottish Government policies and programmes. I am just wondering if you can take me through the process for us to how that will work in terms of taking the budget forward. As you can imagine, in terms of the financial implications, I have been, for one of a better phrase, all over that to understand what the implications and the consequences might be. You talked about housing as one example. We set out the budget for our original target of 100,000 homes as part of the capital spending review. As a result of a number of different discussions, we will have the programme for government next week as well. That is a really important consideration. We will be considering the capital requirement. In terms of the core financial implications on the resource side and the capital side, those will be settled as part of the budget-setting process. We have come to an agreement. The responsibility now is for us to fund that part of the budget. The second part to that is a multi-year co-operation agreement. That leads us into the resource spending review. The resource spending review is where we had intended to cost and plan for multi-year commitments. The co-operation agreement will now be stacked to the end of that resource spending review. With a little bit of history—although I am sure that you are all excited about this—we had hoped to do our multi-year spending review last autumn. We could not proceed with it then, because the UK Government planned resource spending review last year and did not go ahead. We are hoping—certainly the hints are there—that the UK Government will do its comprehensive spending review this autumn. That allows us then to push our own plans for the multi-year spending that we intend to do, which will include the co-operation agreement. A number of members myself included raised issues with regard to tax and demography. One of the issues that are of concern is the need to grow the Scottish economy relative to the UK economy. We have real demographic challenges and there is a productivity issue as well, so I am wondering what steps are going to be taken on that. We recently pointed out that the UK has had the lowest economic growth of any north-west European state over the past 12 years or so since financial crash, but Scotland does not seem to have done particularly well in comparison to that in that some years are reflected by the block grant adjustment. What can we do to try and increase that productivity so that we can restore and improve some health of the public finances and indeed enhance them? There is a lot in that question, so if I try and take it in turn, my bottom line is that the primary way of increasing public revenue in order to fund public services is broadening and increasing the tax rate. To do that, we need to maximise the number of people and the number of people in their well-paid, secured employment. That is the bottom line, and I am sure that the SFC is making that point in relation to the updated forecast. There are two family ways of doing that. One is that the first is my primary concern, which is an economic strategy over the next 10 years that deals with the structural challenges of productivity of maximising the number of their paid jobs. We have, hopefully, heading for a significant lower unemployment that we perhaps feared, but at the same time, a lot of businesses are saying that they are struggling to recruit. Many of them have formally relied on EU labour, but without the staff, those businesses cannot do and develop. With the staff, those individuals are not earning and therefore are not paying income tax. The two ways to ensure that their economic strategy for the next 10 years has a later-like focus on the areas where we want to see growth and development on economic recovery. The second thing is that we need people. If we first focus on ensuring that, as many of those who are already residents think that they have the right skills but are not, we need to ensure that we have an attractive immigration policy, and that is what so many of these sectors are doing right now, but they just cannot recruit because of the previous reliance on EU labour, which is not materialising. In terms of what I am going to do, those are the answers. One is that we need a long-term economic strategy that deals with these structural issues, such as productivity, and that is what I intend to do with the economic strategy that should be published in the next month. The second thing is the immigration of attracting a workforce to the country, being able to fill those roles, to be able to allow those businesses to trade profitably and to enable people to paint over that. I agree with the comments that you have made. However, the UK and Scotland have the same immigration policies, so what can Scotland do to improve its position relative to the rest of the United Kingdom? In terms of block grant adjustment taxation, that is obviously a major consideration in terms of future budget considerations. I will take one short detour, because you talked about block grant adjustments. One of the areas that needs to be reviewed by the fiscal framework is the point around income tax and income tax methodology, because the SFC has detailed that in their reports. We are conscious that the methodologies that apply for our tax ends are probably not as helpful as it could be in that we have a different tax piece in the rest of the UK. For example, we need to perhaps maximise the number of people paying. What is the tax base at the upper end because of the way that it is calculated? At the moment, there is a question about the methodologies that are applied to the tax base in the way that block grant adjustment is calculated, but I shall leave it on one side. In terms of what else we do, we are more exposed to the impact of oil and gas. You have seen that in the SFC's forecast that was published last week, when there is a reduction in demand for oil and gas, that clearly has implications for individuals working in that area. Therefore, we are more exposed to the income tax implications of oil and gas. My view is that we need to diversify, and that is the point of the UK community strategy, which is to focus on the opportunities with alternative emerging technologies, with renewables and with the transition. We are seeing things around the world, businesses and countries around the world, but we are happening to get a competitive advantage with the new emerging technologies. I want to ensure that it is happening in Scotland and that supply chains have been in Scotland but that they are creating good jobs as a result of pioneering research and development. That is one area that we can have a competitive advantage if we get it right. None of that happens automatically without intentionally trying to ensure that we capture the opportunities that are in Scotland. I have just one final question from me before I open the questions out to the committee. The Scottish Fiscal Commission noted that the Government has not guaranteed any additional funding for Covid-19 for 2021-22, and there are currently no arrangements for deferred funding. It has said that large changes in Covid-19 funding later in the financial year may create difficulties for the Scottish Government's management of its budget. I asked that question of the SFC, but I am just wondering if you can respond as to what kind of difficulties that could create for the Scottish budget going forward. It is one of my greatest headaches because last year we were deeply concerned that the UK Government could rise up or down the funding that we receive. Bear in mind that consequentials only emerge from money that is actually spent, not money that is announced. Last year—I use last year as an important comparison—when, for example, the UK Government would announce £600 million for the Scottish Government to spend on business, we would be under pressure immediately to spend that, that money could then be changed having already given that money over to business. Midway during the year, the UK Government implemented a guarantee that the money would not be revised down. Unfortunately, that guarantee has not been extended to this year, so that means that money that is announced could actually be clawed back. In the past, it has often been clawed back as late on as February or March in the financial year. Because I got to balance my budget, who is attending, that means that, in February or March, having already confirmed that, for example, teachers would get a certain amount of money or businesses would get a certain amount of money, I am then left having to repay some of that money to the UK Government late on in the financial year. Clearly, I do not have the capacity in a fixed budget to suddenly create more headroom once we have already confirmed that money is being spent. That happened the year before Covid. In February 2020, we got confirmation that of the money that had been announced to us during the year, the amount that we were going to get to the UK Government had to repay some of that money in that case it was captured very late in the financial year. The big question for me is that I cannot afford to hold money back because businesses need it, public services need it. Are citizens need that money for the UK Government's service and we mobilise them in the justice system? Equally, in the back of my mind, I have got this fear that money that is announced could be revised down. As a result of what happened in education, I think that it was £28 million that had been previously announced, which was clawed back in May. It is easier to handle if it is earlier in the financial year, but if it is in February or March, it is just almost impossible, because we cannot borrow it, but we cannot suddenly create additional money to pay it back. Okay, thank you very much for that. I am now opening up questions to the committee, and first we will be deputy convener Daniel Johnson to be followed by John Mason. Can I begin by saying, following on from the community's remarks at the beginning of the session, that we can both agree that we both have excellent diction and enunciation? I really want to follow on from some of the things that have already been raised. Clearly, you have read the SPICE report and the Fraser Valander looking at the out-turn reports and comparing against the tax plans. In the 2019-20 budget, the Scottish Government expected its tax plans to raise an additional £500 million, but, based on the out-turn, that has only been £148 million. I understand that the things that you are hinting at in terms of the block grant mechanism, but what is clear from both of those bodies is that what that fundamentally tells us is that income tax per capita has not grown as much in Scotland as it has in the rest of the UK. First of all, I am just wondering whether you agree with that assessment. More importantly, given what you were just saying about the need to expand the income tax base, I also make sure that people are earning more within that. What does that say about the policies that you are pursuing and what policies will you pursue to ensure that, essentially, people are earning more so that they pay more tax, which I think that we can all agree would be a good thing? On that first point around the out-turn report, I understand the premise of your question. It is important to reflect that our income tax policies still raise £148 million over and above the block grant adjustment. In other words, that was £148 million that would not have been secured for the public purse if it had not been for the change in policy. There are two additional points that I would make. The first is that we have been clear that our income tax policy is endeavouring to do two things. There are two results that we are seeking to achieve. The first is, obviously, security of public revenue. In order to say that the health service will get $1 billion over the next year, I need to know that that money is coming in, so we need to be sure that we are going to raise it. We are also trying to ensure that it is fair. We have been clear that we had intentionally made changes to maximise the progressivity of income tax. It is not perfect, but, again, we only have power over rates and bans. We do not have power over the personal allowance, incentives that are gifted and over the interaction with pensions. It needs to be seen in that context. Having said that, I want to ensure that we secure the long-term sustainability of income tax policies. In other words, we continue to ensure that we have the money that we need. Right now, we are undertaking a policy evaluation to better understand the impact of the 2018-19 policy reforms. We are hoping to publish the findings later this year on precisely what the impact has been of those policy changes, so I am sure that that will be of interest. We have continued to see Covid accepting a growth in Scottish receipts and exceeding that of the rest of the UK. That is the second consecutive year that growth in Scottish receipts has exceeded the rest of the UK. We want to see that growth continue. Obviously, we will wait and see what the impact of the Covid year has been. If I could make one third point, which is around the risk that all of that creates, because if you look at the reconciliations over the past two years, you can see that the fiscal framework is not sufficient right now to deal with that level of volatility in the forecast error. The existing borrowing and reserve powers in the fiscal framework are insufficient right now to deal with that volatility. I will stop there, but I think that there are three implications of all of that. One is that it is important that we have more than one objective for income tax. Two is that it is important that we continue to raise more than we would have from the block grant adjustment. Thirdly, with that level of risk and volatility, what is the best way of managing that? That is where we need to have a broader review of the fiscal framework to ensure that it can deal with that level of volatility. I agree that we need to get into the detail of the fiscal framework. I do not think that we have time to do that this morning. However, where there is clear agreement is that we need to ensure that, on a per capita basis, we are increasing income tax. Fundamentally, that tells us that people in Scotland are earning more money, and that is a good thing. Indeed, you summed it up quite well earlier on. More people participating in the economy are earning more money, and that is fundamentally underpinned by productivity. My concern and relating to some of the things that the convener was raising is that, to me, that sounds an awful lot like economic growth. I am very clear that economic growth is a good thing, especially when it is underpinned by growth and productivity, because it means that people are better off and lead better lives. There are certain people who are about to join your Government who think that economic growth is a bad thing. I am just wondering what the Scottish Government's view is on economic growth. I can be very open and honest about my view on economic growth. I should point out that the co-operation agreement had some excluded areas, and you will find GDP growth in those excluded areas, which I am sure that you have read already. My view on that is that we need fairer and increased prosperity. You cannot have economic growth without looking at fairness, because that does not secure the outcome that you and I are both talking about. If we just see ballooning of the highest earning and the tax revenue that comes from that, and we still see huge levels of in-work poverty, that is not a good result. Economic growth has to be fair and distributed. My view is to ensure that the focus of Government is in supporting businesses, industries and sectors that will bring more people into safe, secure and well-paid employment. We have seen the implications of that over the pandemic year. Being in employment is a great blessing, but in and of itself it is not enough to ensure that you are not in poverty. It has to be safe, secure and well-paid. There are great opportunities in the Scottish economy when it comes to the just transition and the green economy, when it comes to new and emerging technologies, when it comes to alternative forms of energy, and ensuring that each of our local economies is thriving. To take a more regional approach, if Adam MacGlashore is doing well, the national picture will probably look quite healthy. I have a vested interest in ensuring that the Highlands are doing well, the South of Scotland are doing well, the Netherlands are doing well and the areas of deprivation are doing much better. When it comes to inclusive, sustained economic growth, we have to make sure that it is fair and that it is not just economic growth for the sake of it. I almost completely agree with everything that you have just set out there. We need growth because, ultimately, that should lead to greater fairness and greater prosperity for people. My only concern is that I think that you and I might agree more than you agree with some of your new ministers, but I will leave that there. The final point is that we were discussing earlier on this morning with the Fiscal Commission its forecast. On the one hand, they look very encouraging that we will return to pre-Covid levels by quota 2 of 2022, which is a good deal earlier than we expected. Talking to them, there are a number of risks. Indeed, one of the things that they said was assuming that the current relative absence of restrictions is maintained. Given the events of recent weeks, we are all concerned about the levels of infections. There has been an understandably talk of circuit breakers and the possibility, at the very least, of restrictions being reimposed. I am just wondering what work is being undertaken within the Scottish Government to look at what the impact of those might be and how that would impact spending within the current year and whether you could outline what the fiscal consequences might be of a circuit breaker or any other interventions that might be required if the situation does not improve. That question is a really good question. If the SFC forecasts our cause for optimism, I do not think that we can downplay the difference between the January forecast, which I had to base my budget on, and a really tough outlook for the Scottish economy, reflecting the huge impact of the pandemic versus where we are now. Those forecasts are based on, I am sure, various variables that the SFC would have gone into—vaccinations, lockdowns and other things. On the fiscal impact, one of the biggest challenges from a financial perspective is the fact that there has not been that much additional consequential funding from the UK Government in the past few months. We right now are trying to remobilise the health service, the justice system and a whole host of different public services, as well as dealing with the on-going Covid impact from a budget that has not been supplemented by additional consequentials coming from the UK Government in the way that it was last year. At the moment, the pressures on the Scottish budget are such that we really need the structural support for businesses to be in place. If we were to find ourselves going into another lockdown at the moment, that is not what we are discussing at the moment. We are talking about trying to maximise the impact of the baseline measures, but if we were to, then we have no certainty that furlough will be in place, we have no certainty that self-employed income support will be in place and I have no certainty that there will be any additional funding in place. I am not sitting on funds right now that I could deploy to support businesses. We would need additional help from the UK Government. There is a bit of a deja vu. Last October, where furlough was due to come to an end, we asked repeatedly for it to be extended. It was extended at the last minute, but the Scottish Government's resources are just not sufficient to help businesses to the level that they need to be supported through furlough and self-employed income support. We would need to ask the UK Government for additional help, because it would require funding on a scale that we cannot provide in light of the need to balance and fix our budget. I cannot borrow from those emergencies that you are talking about. One of the subjects that we talked about with the Fiscal Commission was the question of inflation. They seem to be following the Bank of England projections, which are more recent, I think 2.5 per cent, falling from the present 4 per cent. They seem reasonably relaxed about inflation in that, if we had to pay out more, we would get more in by way of tax and so on. I just wonder if you are relaxed about inflation or if it is a concern for yourself and for the budgets. Yes, those matters are always a concern in the sense that they are one of the many variables that we are dealing with as we try and manage our budget. I said already that this year's budget feels extremely challenging, because there is the need to remobilise our services. There is the need to deal with the on-going Covid implications. There are a number of pay deals being negotiated that are multi-year. We are also dealing with the probably more challenging outlook of funding from the UK government, but we are hopefully going to publish a comprehensive spending review of multi-year. When it comes to the biggest impact of inflation, it is trying to understand what our costs will be and whether there is sufficient budget to deal with those costs. We do not have a broken record, but because I have limited powers to increase capacity when it is needed—for example, if inflation was to rise considerably, meaning that our budget does not go as far as it needs to go—I cannot suddenly increase. If I take our capital or our budget, if I take the affordable housing programme that Kenny Gibson talked about at the outset, I am trying to budget for that and to understand what the costs will be is where I am most challenged, because the UK government or any Government around the world that is dealing with those fluctuating costs can make the appropriate changes to either borrowing or other areas. All that I can do is cut the cake differently. I cannot increase the size of the cake to deal with increased costs. Clearly, when it comes to pay deals, workforces will be looking for adequate recompense for their labors. There will be inflationary implications. Inflation is a very important reference for those pay negotiations. If the UK Government pay is flatter, we do not get the additional consequentials from that either. That was a very long and roughly answer, but there are quite a few ways in which inflation has an impact, and it is something that we are monitoring carefully. I appreciate that, because I think that it is an important issue that I lived through through higher inflation some years ago, and it does concern me very much. Another area that the SFC was more positive about was the long-term scarring effect of Covid, which it had thought was going to be greater, around 3 per cent of the economy, and now they are saying 2 per cent. Are those figures you recognise and you would agree with? They are very helpful figures. We have been, for the last year, in discussion with the chief economist, looking at the ways in which Covid would have long-term impact. I think that it was as early as probably last summer that we were looking at very much a key recovery, in other words. I spoke to the finance committee before about that, where we saw that some businesses and some sectors were doing relatively well, comparatively well, new businesses being created. If I take one industry, the tech sector would obviously boom in and clear the other sectors, which would be really struggling. That could be the SFC's figures, which suggest that there would be less long-term scarring. I think that there are sectors that will probably be dealing with that scarring longer than other sectors, so, while the national picture might be more optimistic, there are probably sections of our economy that will need help for longer and might see longer-term scarring than other sectors. I think that it is a different picture when you break it down. That was also a point that the SFC made about the different sectors recovering in different ways. They were slightly more negative about non-domestic rates. They were forecasting lower than they had previously thought in January, and 27 million lower this year, 34, 48, went forward. Again, is that inevitable? Is that just a result of Covid, do you think? There is an impact of Covid. We have also recognised the fact that we have maintained that 100 per cent rates relief for a full year. We are tracking that. Obviously, it is one reason why our guarantee when it comes to local government is so important because of the fluctuations in non-domestic rates. It is out of the border where non-domestic rates are at sea a dip, then local government is exposed to that. Whereas in Scotland there is more of a guarantee around local government getting the income that we confirm that they will receive. The final area that I want to touch on is social security spending. The SFC has made forecasts that the adult disability payment, which is replacing PIP, is likely to cost some 500 million more. If we are putting more money into social security, that will have to be balanced off somewhere else in the budget. Are they being over pessimistic there, do you think, or have you got those figures in your budgets? Two points. I suppose whether or not I agree with the SFC, the value of the SFC's forecast is that I have got to live with them. I have got to live within their forecast, particularly for revenue but also for a spend. That is another area that I will go back to earlier question, where there are impacts of increased inflation or higher inflation or monitoring the inflation. We will continue to provide that support, which we are obliged to do, which is quite right for demand-led payments, not to sound like a broken record, but it is precisely why that level of volatility needs the requisite tools to manage it, because it is a risk. Any demand-led payments create a risk for the Scottish Government in terms of managing within our fixed and balanced budget. The SFC is right in saying that I cannot increase the size of the cake. One slice of the cake is bigger than originally intended, but it needs to come from elsewhere in the Scottish Government, and that is the level of risk and volatility that I have to manage within a balanced and fixed budget. I am totally in favour of a more generous social security system than the UK has, but it comes at a cost. To some extent, whether we are independent or not, it will be demand-led. We are always going to have to manage that, is that right? That is right. I agree with you. It is the nature of it. It is demand-led. We make a big effort in promoting uptake, because we believe that it is right for people to get the help that they need, and clearly that has an impact on demand and on the budget. We will fund that need, and that demand, because it is important that, as a fear and kind society, we protect the most vulnerable. I turn our attention back to economic growth, which I think is very important with one political party exception. It is in line with what you were saying in your last budget speech and in some of the questions that you answered in the last Parliament where you said that business wants certainty and predictability in planning ahead. What plans does the Scottish Government have in relation to working with the UK Government about access to cash and banking services? I will work with the UK Government constructively on every issue that is of importance to the people of Scotland, business support and other support. The difficulty that we face right now is bluntly a complete lack of clarity on what is happening. Where, for example, if we take something like green ports, free ports, which have a direct impact on local areas—I say that just speaking to you down the road from the Cymru port for the authority—there is a direct impact. Our problem is not a lack of engagement or a lack of constructive engagement, just not getting a solution or a resolution. We had hoped for a resolution on that one in the March budget this year, so were the Welsh and the Northern Irish expecting. It has not come. The same would apply to things such as the levelling up agenda and funding that might come through that or otherwise. It is less to do with constructive engagement and it is nearly always to do with a lack of clarity. I think that there was a newspaper headline last week on suggesting that we had rejected millions of pounds, which was used to me, because, for the most part, just a complete lack of clarity or engagement. Even for local authorities, if they are engaging with local authorities, they will know that it feels a bit like a lottery to them at the moment of engaging with the levelling up agenda. They do not know what the process is precisely. I will engage constructively, but it really helps to know precisely what is happening and not getting pulled in at the very, very 11th hour. There are obviously some of the schemes that are levelling up that you have just mentioned that are extremely important and that can be Government-led, but there is a cash flow problem for many businesses in Scotland, just as there is in the rest of the UK. I wonder what discussion is not a political question and what discussions are happening between the two Governments about how to improve access to cash and banking services, because that is absolutely critical to a lot of the survival in the future for many businesses. Thanks for clarifying that question. Engagement on the banking point is happening quite extensively, so we do that through the banking forum before we engage with banks and with the UK Government. On the nitty gritty of how it happens, I have had a quadrilateral meeting with my counterparts in Wales, Northern Ireland and the UK Government, where at the last one the agenda included access to loan funding and what the banks were doing or not doing that we would like them to do, so there is that engagement directly in actual face-to-face conversation with the UK Government on banking. In terms of access to cash, we have made the point about extending some of the schemes that we think should be extended, but there is a general commitment to work together on supporting businesses, particularly as the point—I think that the Scottish Financial Enterprise said that businesses are facing a role of liabilities right now as they look ahead, so that point was discussed at length at the last quadrilateral meeting with the chief secretary and my counterparts in the other devolved Governments. Just on the infrastructure angle that you referred to previously, good quality infrastructure is absolutely critical to economic growth and to ensuring that business has some certainty and can plan ahead. I just want to ask you about two things. First, there have been reports that because of the new deal between the SNP and the Greens, some of that infrastructure planning that the SNP previously was committed to might be in jeopardy, so you could just comment on that. Secondly, there was a report just at the weekend that some money that had been offered to the Scottish Government for road improvement infrastructure hadn't been used. Is that correct? On the capital point, we obviously published our capital spending review last year. We had originally published it before the UK Government published their spending review. Their spending review is due in the autumn, so it would have been the case anyway that we would have had to look at our spending review or capital spending review or a multi-year commitment to infrastructure in light of what the UK Government publishes. That will be the case. Clearly, we have to factor in what capital we receive and what our commitments are, but our commitments still stand. We have not moved back on our published commitments when it comes to capital investment. That is all subject to what capital is allocated to Scotland as part of the spending review. Do you want to come back on that? I just want to—I mean, that's interesting that you say that, because obviously that's contrary to some of the reports that we were getting. However, as Cabinet Secretary for Finance, do you feel that there is a strong commitment from the Scottish Government that the infrastructure projects that were announced will go ahead? I think that business and industry are looking to them as being extremely important, particularly in terms of connectivity and accessibility. We have had a huge fuss. There is nothing to do with the Scottish Government about ScotRail commitments, changing services and whatever and people are very anxious about the lack of connectivity and increased journey times, whereas the projects that the SNP had committed to were trying to address some of those connectivity issues. Therefore, I am just asking if you can give a commitment that those will go ahead, because they are obviously extremely important to Scotland. They are extremely important, and my commitment to them going ahead is subject to a massive issue that I do not have control over, which is that when we published our spending review last autumn, we said that we are going ahead of the UK Government. We are basing those proposals on the best available evidence that we have at the time, but we are publishing ahead of the UK Government's spending review. In autumn, I really hope that the chancellor publishes his multi-year spending review. The capital has to be multi-year. You cannot work from year to year with your capital plans. What we did last year was, in good faith, basing the best available evidence, that when he publishes his capital review, what I would be looking for is to make sure that what we have committed to can be funded by what we are given. We will need to make sure that there is money coming in for the man to go out. I totally understand that, cabinet secretary. I am just interested that, in terms of the deal with the Greens, whether the Greens would come along and say that one price of the deal was that one aspect of the infrastructure development might not go ahead, is that something that could jeopardise any of those projects? That would be a big concern to many people, particularly in more rural aspects of Scotland. If everything related to the Green deal has been published and we have not sacrificed our commitments, the A9 is still going to be dualled. The A96 is referred to in the co-operation agreement in terms of the priorities for the next few years. As far as I am concerned, as somebody who represents a rural area, there are no consequences for the projects that, as a local MSP, I am fighting for. Usually, I will all be myself. That does not work very well, but I am fighting for a local investment in local communities. That will continue to be the case. What I am trying to say in a roundabout way is that the biggest impact does not deal with the biggest impact on the cash and the actual hard money to invest. I will pause there, because I wanted to talk about the reports on the funding. I was quite confused by that, because there is a real irony at the heart of the reports, which were essentially that the UK Government is using the internal markets bill to try and spend directly in areas of devolved competence and then saying that we are not engaging sufficiently. The irony is that having joined the Welsh on the Northern Irish and saying that it is an attack on devolved competence would then be accused of not engaging sufficiently seems quite ironic. A big problem with levelling up for unionisation of spend is that we are usually kept in the dark. Occasionally, we are brought into the light to be told what is happening. That is a way of experience, as far as I am concerned. It is really difficult to prioritise your spend when you have another Government spending in devolved areas. Local authorities are all, as far as I can see, considering whether or not to bid for things such as levelling up fund. That is a big question for us. At the heart of Coslo's methodology, to use that as an example, is a point around fairness and distribution. Every local authority gets a fair share of the capital that is available. If some areas are getting substantially more directly from the UK Government, does that mean that we compensate the other local authorities with our capital, so other local authorities get the capital that would have otherwise been shared fairly across local authorities? Where we are already spending in, for example, some of the key roads that were referred to in that news report, if they are getting money directly from the UK Government, should we use that funding for other priority projects that have not yet been funded? It is extremely difficult to determine how to use limited capital funding, as far as we can, on hospitals, projects, roads, schools, when the UK Government is making decisions about capital spend that we are not cited on. I think that it was David Doogood that made the comment on missing out on money. I am certainly not rejected any money. I am not aware of ever rejecting any money. Scotland needs as much investment as possible, but equally it seems a bit rich to accusers of not engaging when they are actually coming over the normal devolved processes for distributing funding. Good morning, cabinet secretary. You very neatly led into one of my questions, which is concerning the very alarming statements from the Fraser of Allander institute in the first version of the report that you will know about for the ESRC, which she said, the effect is to circumvent not only the Barnett formula, but the devolved Governments themselves. I was very interested to hear about some of the implications of the spend coming in left field, if you like. My question to you is, have you given further detailed consideration to a range of different scenarios where that could undoubtedly both have unintended consequences, but potentially undesirable consequences as well, both in your ability to control and manage the budget and to deliver on your policy imperatives? Thanks for that. Just to clarify, are you talking specifically about things like replacement for EU funding and levelling up and so on and so forth? Yes. The general new funding streams, levelling up community, renewal, UK shared prosperity and so on? Yes. There are three issues if I could break them down like this. The first is the lack of clarity, and I know I have already mentioned that, but the lack of clarity on how some of these schemes are currently operating or will operate or how they are accessed by communities, local Government and others is extremely unhelpful. Even before I get into the territory of saying that the UK Government shouldn't be interfering in devolved areas, we are faced with trying to prioritise a lot of infrastructure projects that are so important to communities. I have already said hospitals, roads and otherwise. The lack of clarity means that some of these communities, local authorities, do not know whether they will secure capital funding through these alternative routes. I can think of one of my local authority areas where it is a transport infrastructure. They are considering going after levelling up, and they are also lobbying us for funding. What do I do? Do I allocate that funding, not knowing if they will get alternative sources of funding, knowing that if they do get alternative sources, could that money then be used for another community? The lack of clarity is making our financial decision making process extremely convoluted, and it is not giving local communities and local government the certainty that they need. The second point is one of fairness, because, again, right at the heart of the methodology when it comes to local government is this point of fairness. I cannot announce any schemes or any funds without cause telling me quite rightly that it should be feared equally across local authority areas. One local authority area is getting substantial additional funding through the levelling up fund, and the others are not. Do I use that funding that I have to compensate those, or do we still share it over equally? Will those local authorities that have not secured funding be content with that? There is a point there about clarity. The second thing, which is really important, is that right now it will not, in any shape or form, compensate for the loss of EU funding. The assumption that it will is totally flawed. If I think of the highlands where I am speaking to you from right now, an area that has disproportionately benefited from EU funding because of its rurality, because of its deprivation, because of the transport distances, levelling up funding is not going to compensate. Shared prosperity funding is not going to compensate for the loss of that EU funding, and the additional complex routes to funding where it is essentially a lottery are going to make it even worse. The third point is that I do not believe that that will be additional. The UK Government chancellor talked at length about the additional capital spend on infrastructure across the UK. In the same breath, I mentioned a budget for Scotland that saw our capital budget cut by 5 per cent. I have posed the question—my counterparts in Wales have posed the question to the chancellor or the chief secretary in the past—as to whether all this capital will be additional or whether we will see a net decrease in our own budget as it is redeployed through alternative routes. The silence has been deafening, but what we have seen in last year's budget on capital is that the increase in what UK wide spend is seeing a decrease in the Scottish Government's capital budget, which means that that money will be spent on, I do not know, PIC projects or whatever the UK Government is choosing to prioritise, but there is an actual tangible impact on our own capital budget, which is spent on schools, hospitals and roads. Those would be my three primary concerns. The convoluted process and lack of clarity is undermining the certainty of making plans, and it is leading to increased fairness in unfairness across Scotland. Secondly, there is no compensation for EU funding, and thirdly, there will be an equal and opposite decrease in the Scottish Government's budget that goes directly on hospitals and roads, etc. I want to move on to something else, which I would just like a bit more information. I think that it would be of general interest to everyone. You mentioned in your letter this morning that you plan to launch Scotland's first framework for tax. It would be helpful for you to share what additional information you can about that. I am just generally interested in the discussion that we had about tax last week. Yes, so the new framework for tax supplements, the Scottish approach to taxation, which is our policy framework for how we make tax policy. It is inviting stakeholder views on how we can better design and deliver tax policy in Scotland. Clearly, the devolution of income tax and other taxes is still relatively new. Tax stakeholders continue to tell me that engagement and understanding of devolved taxes still needs to be built and developed. The framework is trying to put more flesh on the bone of our approach to taxation. It builds on what we have said before, but it is also inviting views on how we improve the design and delivery of tax, inviting comments from stakeholders. I hope that it might also be the broader awareness of devolved and local tax powers, which are still relatively new. There may well be a residual benefit to help the larger, probably understand the perhaps dog's dinner that is the current fiscal framework as a by-the-by. The other thing that I wanted to ask you about is to do with local government. As you know, they have very similar challenges in terms of at what point they can be confident about money appearing and so on. In terms of the review of capital accounting, which I think your request is being led by directors of finance on behalf of local government, I wondered what, if you were able to express any views on the extent to which your focus should be on understanding service concession flexibilities to facilitate financial planning, or do you intend to wait for the outcome of the review before local councils can get some more certainty about flexibilities they have? Thanks for the question. It's an area that local government has been raising with me quite frequently. At two points, one is that we aren't waiting for the outcome of that review to try and provide local government with certainty now, and there was a request that we provide additional certainty now, and I have confirmed to COSLA that I am content to do so. COSLA had raised the English model, where proactively, prospectively, they could make changes to capital accounting, and we have obviously already moved in terms of giving a two-year additional flexibility on that. I have also confirmed to COSLA that I am willing to extend that further in the same vein as the English model. Councils have additional discretion on what is model to use. It is still important that we have the review, however, because there are questions about what is the most prudent and sustainable approach over the long term, and making sure that it is consistent with not just other public bodies but with their accounting standards as well. Just the last question, thank you very much. Just picking up on something that Elizabeth Smith said in terms of the debt burden of small businesses, could I ask when you are having your conversations with the UK Government that they implore on banks the need for flexibility in some of the loan schemes that are there? There are some protections in place, for example, no PGs for sea bills loans and so on up to a certain amount, but the fact remains that post-2008 recessions saw some really poor behaviour by banks in terms of forcing SMEs in particular into very distressed circumstances where they were then made bankrupt or sequestrated. So, could I ask that you add your voice to that that banks are made to understand their obligations to SME community in particular? Absolutely. Those are issues that have been raised with the UK Government and I will continue to raise them but also to raise them directly with banks because we have a very good and constructive relationship with the banks in Scotland. I think that this crisis has actually been quite helpful but the real test is now when it comes to that wall of liabilities and how they help businesses through the next few years when repayment of bounce back loans, sea bills, et cetera, is not being required or is the widden required. The SFC predicts a 17 per cent rise in non-domestic rates between 2022-23 and 2027 and we have a revaluation next year. With the changes to certain sectors such as retail and commercial, do you think that that sort of rise is going to be achievable because a lot of businesses will be thinking, where is that money going to come from? Yes, and just to be clear, and I might ask if Dougie wants to come in on this as well around non-domestic rates, that does not indicate that there will be a 17 per cent increase in the tax rate, obviously. It just is referring, hopefully, to the strength of the business community as well in terms of business survival rates and business growth. Clearly Scotland right now has the lowest poundage rate in the UK, that means that we are delivering a lower tax for over 95 per cent of properties and they get that here in Scotland. When it comes to the next few years, we have got to make sure that we continue to provide that certainty to business and to try and allow them the headroom to recover. That was the reason this year for extending that 100 per cent rates relief, because knowing that they are not paying non-domestic rates, hopefully it allows them to recover and to use that funding that they would otherwise be paying in tax to invest in their businesses or to see through the rest of the challenge that we face. In terms of the revaluation, I know that there was a lot of discussion about the revaluation. One of my primary reasons for scheduling the revaluation when we have is in order to allow the impact of the pandemic to actually be seen in rental values. My fear is going too soon and I know that the North East has a particular reason for why the revaluation should be earlier rather than later in light of the big economic challenges that the North East faces. The reason was to ensure that rental values had filtered down and the revaluation was a fair revaluation. Going too soon could have meant that the rental values had not changed. People were not, for example, rewriting their tenancy agreements. They were waiting until after the pandemic to do that. My hope is that with the next revaluation it will be a lot fairer in taking into account the impact of the pandemic and the rateable values will reflect the impact of the pandemic. Therefore, they will pay a fairer amount in taxation. I am happy to take in follow-up on that and that probably covers it. Dougie probably does not need to come in unless he wants to. Another question that I have is around the NDR pool, which now stands at a deficit of £192 million. What impact is that going to have to businesses as we move forward through the pandemic? That, I guess, will have to be repaid back into the pool. It is good to have a question on the NDR pool and it probably reflects your wealth of experience as a local councillor. On the NDR pool, that should not have an impact on businesses directly. The NDR pool is our way of managing the risks to public finances from NDR. You will know, because we have been in conversation before about this, and when it comes to local government spend, we guarantee the amount of NDR that local authority receives. In some years that means that you and the north-east are saying that that is not fair. In other years, when it comes to, for example, the pandemic, it means that local authorities can object with certainty and security that the way that we manage the potential fluctuations in non-domestic rates from year to year is through the pool. It will not have an impact on business. It does not influence or inform my view on what rate of taxation to implement. My interest is trying to make sure that Scotland is as competitive as possible when it comes to the poundage. Our non-domestic rates pool is just our means of balancing the account from year to year. To balance it, I would imagine that the intake is going to have to increase to pay that £192 million deficit. It is a good case of reconciling forecasts with out-turn. At the beginning of the year, we will forecast what we think we will receive in non-domestic rates. We plan what we will spend on public services on the basis of that forecast, but, clearly, forecasts are just forecasts. The out-turn and the amount that we receive in non-domestic rates could be higher or lower, so it is a balancing account to manage and ensure that we can meet our commitment to spend £6 million, for example, on the health service, because, at the end of the day, it is just a forecast that we base our budget on, not the actual amount of tax taken. If we have had that estimate being wrong for the past two years, how confident are you that it will be right for the next four years? Very confident in that the SFC has done its job, but, clearly, this is a time of huge uncertainty. John Mason asked earlier about whether, or somebody else asked earlier about whether there were other issues that needed to be factored in, example, a further lockdown. There are a lot of uncertainties right now in terms of the performance of our economy. Clearly, that has an impact on tax take. So, two years ago, I could not have foreseen that we would be implementing a full year of non-domestic rates relief at 100 per cent. I just cannot foresee it. Right now, there is quite a lot of volatility, so the SFC and others are very good at their job. They do the best forecast they can. I cannot deviate from that forecast. I must spend within that forecast, whether I think that it is right or wrong. I must spend within that forecast. But, from year to year, that forecast will be out of, you know, no forecast is perfectly and completely aligned to the outturn, so it means that there will be some addition or some reduction. But, again, I happen to bring Dougie in who, if he wants to, comments that that probably hopefully answers your question. The forecast will never be exactly right, but I have confidence that the SFC knows what they are doing. Does not come in? Yeah, nothing much to add. I think that if I have understood your question correctly, Mr Lumsden, I think that you have got a shared understanding of the non-domestic rates pool and, you know, the forecast is just a forecast, isn't it? It will never be exactly right. Given that it is a balance in the account from year to year, the NDR pool will always be either in deficit or in surplus from year to year, and we, of course, we try to balance it from year to year. Thank you for continuing. The SMP Green deal has been mentioned earlier. Do you see any consequences to the oil and gas industry from the deal that is being proposed? I know that a lot of people in the northeast are very nervous about this, especially when we see a future member of the Government saying that, if you work in oil and gas, you should be looking for a new job, so that does not inspire confidence going forward. What is your view on whether people in the oil and gas industry or jobs are safe, because it is still a big piece to the Scottish economy? My answer to that would be that workers in the oil and gas industry have some of the most critical skills that our economy needs over the coming years. My commitment is to ensure that they have access to skilled work that reflects their talents and capabilities. Across the world, every society, every Government is grappling with what a just transition looks like. For my view, a just transition means a fair transition and we do not leave people behind. Therefore, right now, there are huge opportunities on the horizon. There are huge opportunities as part of that just transition when it comes to renewables. The oil and gas industry is already grappling with this themselves. Irrespective of what I or my Government have said, we have had 18 months of a global reduction in demand, which has seen a lot of people concerned for their jobs, and therefore the wider supply chain, which you will be more versed in than I am, the wider supply chain being concerned about what their future holds. Government's job is to try and provide that certainty by looking at how we diversify an economy, which has been impacted by issues outside our control. Nobody could have foreseen Covid, nobody could have foreseen that perhaps renewed and intense focus on the climate emergency. Our job is to make sure that every individual working in oil and gas right now, who have some of the most important skills internationally, continues to be able to use those skills in a meaningful and secure job. In so doing, ensuring that the north-east continues to be a vitally important contributor to the national Scottish economy. It was mentioned earlier that the social security bill was going to rise from £3.7 billion to £5.2 billion, but that is without adding in some of the SNP manifesto pledges. Does it concern you that rate of increase in a relatively short space of time? Trying to ensure that we have sufficient budget for commitments is clearly an issue that certainly dominates my attention and social security is no different to make sure that, as part of the cake of funding, we are cutting it in a way that is fair. I do not think that anybody could disagree that, as we emerge from the pandemic, there are some individuals and sections of society that have been more exposed to the impact of the pandemic than others. Inequality has been exacerbated. In the same way as my job is to try and help businesses through this tumultuous time and give them the support that they need to do the same spirit of helping families through. It is one of the reasons that we first wanted to help local government to freeze council tax to ensure that there is more money in people's pockets. Clearly, the social security system has got to help people who need it, when they need it, with a view to either helping them to get back on their feet or at least ensuring that we tackle child poverty. In terms of the premise, it is not a concern that it is important to do, but we ultimately need to make sure that there is the funding in place. When it comes to the budget—I am sure that I will be in front of the committee again in the not too distant future to talk about the budget—we have choices about what to prioritise. We cannot create new money to what to be prioritised within the budget that we have. I have a couple of questions to wind up with. One is about capital budget. Raw material prices are growing between 5 and 15 per cent a year. You said that the agreement with the Greens would not threaten the delivery of Scotland's capital projects that are already committed to. Clearly, if there is significant pressure on the capital budget because of inflation, that might make it more difficult to deliver some of those projects. What discussions have you had with the UK Government regarding perhaps an uplift to the Scottish Government's capital programme budget? Yes, I regularly engage with the UK Government. I firmly believe that one of the most powerful levers that we have when it comes to economic recovery is capital investment in infrastructure. It creates jobs, it supports businesses and it is good for local communities. It is a triple win, as far as I am concerned. Because our primary source of funding is the UK Government, that is the primary means by which I am trying to secure additional capital. Capital is one of the areas of greatest risk when we look at the future right now because of the unionisation of spend on the internal markets bill. It is an area that I continue to press for additional security, certainty and a plea that we do invest in infrastructure over the coming years as a way of recovering well and better. When I asked the question about the deferred possibility of deferred funding, members asked about, for example, the impact that it would be on a number of areas of the Scottish budget. You talked about how difficult it was, as did members, for example additional funding coming in at a time when local authorities were agreeing their own budgets, council tax being certainly being agreed, etc. However, if we are in a situation and I hope that we are not because I hope that the UK Government will do as it has done previously and I agree to carry over if necessary, do you have any shovel ready type projects in terms of providing additional support for businesses or other areas of the economy should we get into that situation so that that money is used effectively? The short answer is yes, but the way that we budget is trying to get a sense for the full year. What we do not want in our budget is that we spend and then have to save, save, save because suddenly money is getting caught and then at the last minute getting more money. We have said that it is an ineffective way of budgeting. The way that my team and I manage the year's budget is to try and get a sense from every portfolio of what they want to do, what they want to achieve. Clearly, for most of the projects, they are not just in one year, they are multi-year projects. Building a new hospital is multi-year, so you cannot just turn on the tap for two months and hope that that delivers a project. We try and manage that demand over a longer period of time because very few projects can be delivered with just a month's extra funding in one year. The key is being able to carry forward. The key is being able to manage our money over several years because having that arbitrary break at the end of the financial year and not being allowed to carry capital forward leads to very ineffective budgeting by spending it in one month when you should really be spending it over several months in the next financial year. Neatly allows me to segue on to your letter to the committee of the eighth of July when the Scottish Government indicated that it started to work to support a potential multi-year resource spending review concluding in autumn. I am just wondering where we are currently with that. Is it on schedule and will it be informed by the fiscal framework? Yes and no, but the biggest component is the UK Government spending review. Last year, as I said already, we proceeded with a capital spending review, even though we did not have a capital spending review from the UK Government. There is just a lot of inherent risk in that. It is our primary source of funding. When it comes to our resource spending review, we are undertaking internal work right now to develop sustainable multi-year financial plans. I know that it is of great importance to local government and other bodies, including the NHS, to be able to plan on a multi-year basis rather than to learn from year to year. Often, local government, for example, has third sector organisations that want that multi-year commitment and they cannot get it. That internal work is on-going. We have not taken a final view on publication timeline, because so much of it depends on whether or not the UK Government does publish its own comprehensive spending review in the autumn. However, if we have more clarity on that, I would commit to fulfilling our commitment certainly to set out a framework in advance of a spending review and to engage with ourselves, as well as wider stakeholders, to inform that final document. Thank you. You wrote to the committee just this morning, early this morning, regarding a number of matters. The heading of the letter was process and timetable around the Scottish budget, 2020-23. You touched on the delayed medium-term financial strategy, and you said in a quote, that there is logic for publishing the MTFS alongside the Scottish budget and thereby basing it on the updated SFC and OBR forecasts, publishing it before the October forecast would mean having to use OBR forecasts from March, the effect of which should be to give a misleading sense of fiscal outlook. I want to raise that matter with the Scottish Fiscal Commission, and I agree with that. Where are we in terms of the MTFS? Are we going to see that alongside the budget? Do you have any further thoughts on the timing of the budget, given all the stramash that you have outlined in your letter regarding the difficulty in not having to confront timings for UK fiscal events? We will start with the MTFS and then move on to the wider budget. The original intention would have been to publish in May, but due to the elections, that was not possible. I would be quite interested in what the committee's view is on that. There is an ongoing uncertainty because of the UK Government's plan for a spending review. Spending their spending review would be very helpful to inform our medium-term financial strategy, because, on the basis of best available evidence, it is not based on the latest data from the UK Government. There are no perfect timing options, given that the MTFS could not be published in May. It does not make sense to publish the MTFS in advance of OBR forecasts. If OBR forecasts are published on 26 October, or we have a promised UK spending review, it would be quite misleading to rely on OBR forecasts from the previous march. There has been a lot of movement, but there continues to be a lot of movement in our economic and our fiscal outlook, so block grant adjustments that were based on march forecasts would significantly overstate our budget. That is the territory that I am in just now. I am really happy to take the committee's view on how we can spread out scrutiny of the budget, the MTFS and the resource spending review in a way that allows you to give it the appropriate attention that it needs. I will be open to your views on how I can best work with the committee on that. I would intend, certainly for the 2022 MTFS to revert back to its previous publication timetable in May. That is in line with the written agreement. I hope that that gives enough information without concluding a position right now, so that you can perhaps take a view on that. In terms of the budget timetable, we have obviously had two years of quite significant delayed budgets. There is no perfect time, because if the UK Government publishes its budget first, we have the best available evidence that we need. However, if there is any delays to the UK Government's budget, there will be less of a position of choosing whether to take inadequate and inaccurate information and base the budget on that in order to give security and certainty to businesses and local government, or whether to increase the delay of giving that certainty to local government, etc. However, to have the best available evidence, I would very much like to revert back to what we formally did, which would be to consider a budget in late autumn. Yes, thanks. I mean, we weren't the things you've said in your letter. Is it a chance that it's publicly asked for the office of budget responsibility to produce forecasts on the 20th of October, so does that mean that you believe there's likely to be a budget in mid November or soon after? That would be my hope, but we really need the UK Government to confirm that. We need the Chancellor to confirm that, and until he confirms that, I'm working off hints and suggestions and indications that haven't been anything more concrete. Okay, well thank you very much for that. We'll certainly deliberate over that in our next private session, which is just about to start in a few minutes when we consider our work programme. So, I'd like to thank both our guests today, particularly the Cabinet Secretary for Answering so many questions in such depth, particularly after a previous session at the local government committee. I realise it's been a very heavy morning for you, so I hope you'll have a wee break now before the rest of the day's proceedings. Without further ado, I'm going to take the next item in private, so I'll now end the public session of the committee and we'll come back in five minutes.