 Welcome to the second meeting in 2016 of the Finance Committee of the Scottish Parliament, who I first of all remind everyone present to please turn off any mobile phones or other electronic devices. As members will be aware, Richard Baker has resigned as an MSP on Monday. I would like to take this opportunity to thank Richard for his contribution to the Finance Committee and wish him every success in the future. We are therefore down to six members of the committee at least for today. Our first item of business is to take evidence in relation to the recent UK spending review from Paul Johnson, director of the Institute of Fiscal Studies. I would like to welcome Mr Johnson to the meeting and invite him to make an opening statement. Paul? A couple of points to make as part of the opening statement. As will have been clear following the spending review, the scale of the cuts being imposed was significantly less actually that was implied by the manifesto of the Conservative Party last May and a bit less than looked likely following the budget last July. In particular, that meant that the scale of the cuts imposed on the so-called unprotected departments was somewhat less than we expected beforehand, but nevertheless significant. The average cuts for unprotected departments over the next five years is still in the order of 17 or 18 per cent. The pre-spending review figures suggested that it might be as much as a quarter or even a little bit more. One of the questions is why that change, first of all, since the manifesto and secondly since the July budget, well, since the manifesto, there has simply been policy change. There has been a decision to delay some of the cuts and there have been decisions to increase taxes by around £15 billion if you put the July budget and the autumn statement together. Secondly, and this is very much secondary, there were some forecasting changes from the officer budget responsibility, which gave the Chancellor some additional room for manoeuvre. The third point that I would make is that the reason that some relatively small changes made quite a big change to the scale of the implied cuts for the unprotected departments is that there is a very big gearing effect in the sense that the unprotected departments are becoming a smaller and smaller fraction of the total, so relatively small amounts of additional money can make quite big percentage differences. However, I would stress that the scale of the changes is still, the scale of the cuts both over the next four years and over the period since 2010 are still very substantial indeed. The second thing to say is that obviously all of this has been bookended by the fiscal charter, so there's a very clear rule that the Chancellor wants to work to, which is to get into surplus by 2019-20, and he continued to be aiming at a surplus of around £10 billion by that date. As I say, it was in part some of the small forecasting changes that allowed him a little bit more flexibility than he might have expected. I think that one of the big open questions about the next two or three years is how he will respond if forecasting changes move in the wrong direction, because the fiscal target that he's following through this Parliament is extremely different from the fiscal target that he was following through the last Parliament. In the last Parliament, if forecasts changed, if the economy was doing a little bit less well than expected, he could push his point of reaching budget balance out. His current rule does not allow that, and as the Office of Budget Responsibility has said, there's about a 45 per cent chance that he won't meet that fiscal target because of the way that forecasts tend to change. The big unanswered question following the spending review is what happens if forecasts change only quite modestly over a three or four-year period. £10 billion three years out is a tiny number. £10 billion is a lot of money, but out of £7 billion or £800 billion of spending and taxes, it's a small change, and changes much bigger than that will happen in one direction or the other. That leaves quite a bit of uncertainty around how it will respond, whether that will be either on the tax side or the spending side. The third thing that I'd say is that a significant part of the spending review announcement was to partially undo the welfare changes that were announced in the July budget. I think that the crucial thing to note there is that that was undoing the changes to tax credits which were announced for this April onwards, but to make no change at all to the long-run structure of the universal credit benefit, which was cut back in the July budget. That has two effects. That will protect everybody in cash terms. There will be no losers this April and indeed in the long-run. Anyone who is currently on tax credits will be protected, but all those moving on to universal credit afresh or moving off tax credits and then after a period of moving on will get less than they otherwise would have done, so he's managed to save as much money as he was hoping in the long-run, but without hitting people in cash terms in the short-run. Of course, a concomitant of that was—maybe this is something that tells us something about how he might treat his fiscal charter—that he is abandoned, essentially, the welfare cap that he put in place just a year ago. That will be broken each of the next three or four years and then only met by a whisker and even then with some interesting accountancy by the end of the Parliament. Of course, there's a whole set of other things that were going on in there, but I think those are the three points that I'd make as the big headlines, as they were, from what we found after the spending review. Thank you very much for that poll, it's greatly appreciated. We have both had copies of your statement from 26 November and, of course, preceding that also, the outlook for the 2015 Spain review, so we are seeing some questions based on that and, indeed, what you just said. In terms of looking at the outlook, one of the things that I found interesting was the section on the total departmental spending envelope, and, obviously, you talked about the departmental expenditure limits and annual managed expenditure. What you say basically is that annual managed expenditure will grow by 4.1 per cent in real terms between 2015, 2016 and 2019-20, but departmental expenditure limits will need to be cut back by 3.2 per cent of this period to keep to government's total spending plans now. I'm not so much concerned about the specific percentages because, obviously, things have changed a bit since the review itself, but the general trend seems, obviously, towards AME, Rylel and Dell. What does that mean for the stability of the public finances? There's a couple of big things going on within the AME numbers. One is, actually, over time that we are, for working-age welfare, actually seeing a significant reduction in the fraction of national income being devoted to that. I can't remember the exact timing, but I think that by the end of this Parliament we'll be back to its lowest level for something like 30 years. In terms of the AME numbers, the fraction of national income going to working-age welfare is set to fall and to fall quite significantly, certainly between the period between 2010 and 2020. What's driving AME up are two other things. One, of course, is pension age welfare, a combination of an increasing number of people over pension age. That number is increasing by 2 million over this decade, so we really are in a position where demographic change is having a significant effect right across the public finances. If you look at spending on social care, if you look at spending per capita across a range of things, if you look at spending on health, demographic change is having a big effect, but it's clearly having a big effect on the AME numbers. In addition, the average pension entitlement among those hitting pension ages is continuing to increase relative to the oldest pensioners. Secondly, whilst interest rates are very low, debt is continuing to grow and, therefore, that bit of AME, which is debt interest spending, whilst not historically high levels, is nevertheless growing as debt grows. In terms of your question about what impact that has on the stability of the public finances, I think that I'd say two things. One is that we are dependent more than we otherwise would be because of the stock of debt on what happens to interest rates going forward, and indeed to inflation. That bit of debt, which is index linked, which is £200 billion or £300 billion, depends on the rates of inflation and, if that goes up, clearly we end up spending more. As it's happened over the past two or three fiscal events, inflation expectations have gone down, so that's given the Chancellor a windfall that won't be at the true every time that will happen in the opposite direction at some point going forward. That will create potentially challenges. The basic interest rate matters a bit less in a way because, obviously, the stock of debt isn't affected by the rate that you have to pay on new debt, but the debt nevertheless rolls over over time, so as interest rates increase, that will again have an effect on the public finances. Again, this is something that has been a positive shock over the last few fiscal events, but at some point will become a negative one. Into the longer term, clearly the increased spending or driven by an ageing population, it's not so much something which is going to create uncertainty in the public finances because it's something we can foresee with a considerable amount of certainty, but it will clearly create less space for other spending because of the changes that we're seeing. Thanks for that. You've said in your remarks from 26 November talking about the Chancellor saying that he's going to need his luck to hold out. He's set himself a completely inflectable fiscal target of a surplus in 2019-20, and you touched on that, obviously, in your opening statement. Since then, we've had the Chancellor's seal last week, and I quote that we face a dangerous cocktail of economic threats, so there seems to be an indication that we're going to be heading in the wrong direction, even since the statement in November. RBS yesterday predicted a 20 per cent market fall and urged people to sell, sell, sell, which I thought wasn't... It's going to be self-reinforting. I mean, one wonders, actually, about why they would do that, but anyway. You've basically said that if he's unlucky, and that's almost a 50-50 shot, again, you talked about the OBR's prediction of a 55 per cent likelihood of reaching the Chancellor's reaching target, how likely do you think that that proportion is just given what's been said in the last week or so? Of course, it's changing the interest rates across the Atlantic, but clearly a lot of the recent news has been new and bad relative to what we knew even, what is it, less than two months ago, since the autumn statement. My inclination is not to build too much on what is still a short period of additional news, but it is all bad. The stock market in this country has gone down. Clearly there are problems in China, but the most recent public finance numbers from the OBR are less positive than the ones that they knew about when they were making their forecasts at the autumn statement. There are a set of things that are looking less positive than they did two months ago. How big a difference that will make to the OBR's forecasts in March? I don't know, and they will have quite a difficult decision to decide whether this news that has come really quite recently is enough to make a significant change to their longer-term growth forecasts. If they do, and they wouldn't need to be very much in the way of a change, that would make the fiscal rule much harder to meet. I mean, I don't have the numbers in front of me, but you wouldn't need to change growth forecasts by more than a few tenths of a percentage point each year going forward to mean that on the current set of policies we wouldn't meet that 10 billion surplus. As I said at the beginning, that leaves a very difficult set of choices for the Chancellor. Does he, under those circumstances, decide that he does need to cut spending on the police or local government or social services or whatever that he managed to protect back in the spending review, or does he need to find some additional taxes from somewhere else, or does he actually do something much more loose on his fiscal charter than he's currently intending? Or does he just wait for something to turn up? I mean, one entirely plausible response would be to say, well, look, public finance... Exactly. Public finance forecasts have changed in the last three months. It would be silly, wouldn't it, for me to make a big change in policy, given that we've seen these things move around a lot? I'm not going to change policy at the moment, but if, in a year's time, they're still looking bad, then at that point I'll change policy, that would be something that he might decide to do. Okay. In your outlook, you were predicting, you know, that in England, 64.3% was going to be the cut in local government grants over the entire decade. What's that likely to be now? The... We've got a number for... I mean, I can't remember where that 64% number was, but essentially central government grants to local government if you exclude that bit, which is made up of business rates, will essentially fall to close to zero by the end of this parliament. So that's a remarkable change. Now, of course, that does not imply a reduction of anything like 64% in the spending capacity of local authorities, but this is part of a, you know, a genuine... Within England, a genuinely revolutionary change, I think, in the way that local government is financed. So you will have moved from a position in 2010, where effectively local government was financing about, I can't remember, a quarter or a third from council tax, and all of the rest was money that came essentially directly from central government. Now, a large chunk of that was business rates that was taken into central government and then redistributed, but to local government it just looked like 25 or 30% was coming from my council tax, and the rest was just coming in a grant. By 2020, essentially 100% will be self-financed about a third from the council tax and about two thirds from business rates. And the difference being that business rates will now... All the business rate revenue will automatically go to local authorities, not in the sense that each one will keep all of its own business rates, but in two senses first that will be kept specifically within the local government, within local government, and secondly any change within any local authority in the business rates revenue resulting from additional business and so on will be kept within that local authority. Now, actually the level of expected business rates revenue by then suggests that in fact central government will give local government additional responsibilities because the scale of the cuts from central government, one of you, won't be big enough for local government, so to create those additional real cuts, as it were, they'll local authorities will expect to be given additional responsibilities. Now, we didn't hear, I thought we might hear, but we didn't hear in the spending review what those additional responsibilities will be, that is something that we'll find out more about. The last thing I'd say on that is that we heard later in a week or two after the spending review some more details about how central government grant to local authorities would be distributed, and actually the way that that happened changed somewhat, so as the period between 2010 and 2015, broadly speaking, the grant to each local authority fell proportionately, fell much the same, so those local authorities more dependent on grant suffered more in total. Now, that was changed somewhat in the December numbers and the overall, you've got something closer to a similar proportionate reduction in overall spending power rather than the same proportion cut in central government grant, so that's more close to where we were pre 2010, so the period between 2010 and 2015 was significantly harder for those local authorities more dependent on central government grant, in other words, those which are broadly poorer, or in fact those in London, whereas the ones that changed in 2015 was more spread across in terms of spending power spread across local authorities. The reason I ask about that is obviously because we've had evidence from our own committee that we should adopt a similar model in Scotland, so that's why it's of specific interest. One of the things that you mentioned in your 26 November statement is about the £3 billion tax and payrolls of companies with pay bills over £3 million. I'm just wondering what impact that will have on those individual companies as there have been any analysis on what that will have to mean. There seem to be a suggestion by the OBR that that might impact on the actual wages of the employees themselves. In the long run, I think that that is the most likely effect. That is effectively a payroll tax and therefore that will increase the cost to businesses of employing their staff. In the long run, one would generally expect that to result in a reduction in wages, just as we think that employer national insurance contributions are probably largely incident on the wages of the employees that they employ. The apprenticeship levy clearly has a second significant effect, which is that because you can offset it against anything that you might spend on apprenticeship training, that essentially up to the point at which your apprenticeship levy runs out. That means that the cost of apprenticeship training to you as a company is effectively zero because instead of paying £100 or the Government, you pay £100 for your apprenticeship. That could have two effects. That could result in a real increase in genuine new apprenticeship training or it could result in some re-badging and re-labeling of activities in a way that qualifies for that money but does not change behaviour enormously in a real sense. Which of those predominates? I think that we will have to wait and see. It will be nice to get some serious evaluation of the effect of that. Moving on to welfare, which you touched on in your opening statement, you have said in your paper that in terms of disability benefit reforms, year after year expected savings from this reform go down. Why is that? The DWP in their initial analysis is particularly of the movement from disability living allowance to the personal independence payment. First of all, they expected this to be rolled out much quicker than it has turned out to be rolled out. Secondly, they expected much bigger savings following the rolling out of it on the basis of new medical tests. Neither of those predictions have proved robust and, indeed, each time a new prediction has been put in place that has proved equally unrebust as the previous one. I think that what they are finding is that it is much more difficult to do what they want to do from an administrative point of view. Secondly, most of those who were benefiting from the disability living allowance were, quote, genuinely facing the kinds of disability that they were saying they were facing. Now, why did they get that so wrong? You can understand, as it were, the reason for wanting to make this policy change, spending on disability living allowance rose, and I don't have the numbers in my head, but it rose really very fast in the period from the late 1990s through the 2000s. What I think happened there was that, not in a way, in a sense, either that there were huge amounts of fraud or that the population got massively more disabled, it was just that disability living allowance was a new benefit introduced in the early 1990s. More and more people became aware that it was available, and as they became aware that it was available, they claimed it, actually moving back from that situation unless you are going to significantly change what you are trying to achieve. That, to some extent, is still looking to benefit largely the same group that the disability living allowance was intended to benefit. Actually, what we are finding is that there is not that scale of opportunity to reduce spending that DWP thought there was. It is sticking with welfare. I mean, I found it quite fascinating if you said that if you thought the announced saving in 2016-17 was £4.4 billion, not £3.4 billion, you would be right. The £4.4 billion number was just wrong, and you have an interesting quote. You say that the challenge of estimating interactions with the HMRC, tax credits and DWP benefits in the run-up to a fiscal event where the treasuries policy costings process does not permit us to call on the expertise of officials across both departments and all measures that might be subject to interactions. I am just wondering if you can talk us through this a wee bit, because it does seem interesting that figures seem to be £1 billion out on that. I mean, £3.4 billion has created a significant percentage difference. I mean, the reason that I put that quote in there is that that was a part of the process that I guess we hadn't been quite aware that there was that degree of constraint on the process that the OBR had in terms of costing it. Essentially, that means that because of budget secrecy, officials in HMRC were not allowed to know what the policy decisions were in DWP and vice versa. Therefore, OBR was not able to discuss with DWP officials changes to HMRC benefits and vice versa. I think that there is an interesting question for the OBR as to whether it should be more insistent about being able to see this kind of thing. I think that this is also partly related to the lateness of the decision making process. It may also be an issue about the capacity within the OBR that does not, for example, have its own tax and benefit model to run some of those changes and come up with independent views of the effects that they have to take. I think that sometimes they are somewhat on trust the numbers that are coming from the individual departments. As I said, I think that the key thing here is that it is quite surprising that the OBR is not in a position to talk collectively with officials from DWP and HMRC when the combined effects of the policy measures that are being taken obviously kind of depend on the interactions between those departments. Absolutely, and if Robert Chote was coming next week instead of having been here last week, we would certainly be asking about this, because obviously it is quite remarkable that they are not able to call on the expertise of the officials given the kind of role that they actually have. I would hope that that would be something that they would develop further, and certainly next time we speak to Robert, we will be asking about that. It is just a couple of points before I open up the session to colleagues. You have talked about new claimants receiving significantly lower benefits, and you would have done full July changes both in your paper and in your opening statement. You have gone on to say that £2.6 million working families being an average of £1,600 a year worse off than they would have been under the current system, while £1.9 million will be £1,400 a year better off. We are doing a quick calculation. The differential that I have worked out just on that is £2.9 billion, so does that effectively represent a £2.9 billion reduction? I cannot remember the exact number, but that is broadly right. There is a £2-3 billion cut in the universal credit spending relative to the spending that there would have been under the continued tax credit system. That is essentially precisely what the Chancellor was aiming for back in the July budget, and it is driven particularly by the reductions in the work allowances—in other words, the amount that you can earn before you start losing the benefits, as well, of course, as the reductions in what you can get if you have more than two children. Because universal credit is significantly differently structured from tax credits, there are also some deliberate changes here. The universal credit will, on average, be somewhat more generous to a group of people in rented accommodation, because of the way that the interaction with housing benefit works and, as a consequence of that, it would be particularly less generous to those who are on occupiers. The plan that I was wanting to touch on, which is housing benefit, is that there is one small but no longer and potentially important change made to housing benefit for social tenants—for new tenants—only housing benefit will be restricted to the covent private sector rate, saying that that will not bite much initially, saving £225 million by 2020, but had it been imposed on all tents immediately, it would have saved more than a billion pounds. I am just wondering if you can talk a wee bit through the Government's thinking on this and the impact on finances in the long-term. The context of that is that spending on housing benefit has continued to rise and rise really very strongly over the past five years, despite cuts in the generosity. The cuts in the generosity, while the so-called bedroom tax has had most of the publicity, most of the cuts have affected those in the private sector, in particular by reducing the limit to the 30th percentile of properties in a relatively broad area, and then only increasing that from, I think, 2012 in line with inflation, so that the amount of rent that you can get paid if you are a private sector tenant as a proportion of total rent is effectively falling over time. Now, what the proposal in the autumn statement suggested was essentially to limit for new tenants in housing associations sectors in the same way that it is limited for the private sector, because none of the rules that I have just described at the moment actually affect tenants in the social sector. Whilst most people in the social sector, including the housing association sector, are not above those private sector levels, an increasing fraction are particularly given, particularly if they have new tenancies that are set at a relatively high proportion of the private sector average rent, and a number of those will be above the 30th percentile of the 2012 indexed private rent. Our estimates are, as you say, about a billion pounds if imposed immediately on all tenants. The Government has decided only to do this for new tenancies and therefore the savings in the short run are very much smaller. At a minimum one would expect over time that to hit the billion pound mark as everyone kind of flows through the sector. More likely it will have a bigger effect than that because you would expect average rents in the social sector over time to rise more than inflation, which is the cap on the private sector housing benefit levels. In fact, over the next five years, one of the biggest announcements actually in the July budget was that social sector rents would be capped at 1% below inflation, so this won't rise over the next five years, but in the long run, certainly over the last 30 years, in 25 or something in the last 30 years, rents in the social sector or possibly even over the last 30 years, rents have risen more quickly than inflation, so you'd expect this to bite more going forward. Now, there's a final point on that. I think there is a question about exactly where private sector housing benefit policy is going to go. The moment, as I say, we have a world in which the amount of housing benefit I can claim depends on the 30th percentile rent in 2012 in the area that I live in. Now, is that still going to be the case in 2030? If it is, that would be a somewhat odd situation in which, in some parts of the country, I might be able to get most of all of my rent in other parts of the country, only a small fraction of it, depending on relative what's happened to relative rent levels. If that is something that happens, then housing benefit will have been almost completely disconnected from the actual rent that anybody's paying. Now, there are reasons for thinking that there are some reasons that might not be a bad idea, but it would be a very different situation of the situation that we've been used to. Centile changes to say 25 per cent or 35 per cent? Then again, obviously, that impacts in different directions. I'm now going to open out the session to colleagues around the table, and the first to ask questions is a remark to be followed by Gavin. Thank you very much, convener. Good morning, Mr Johnson. Obviously, last week, we had Mr Choke before the committee, and he was indicating then, I think, we referred to say that the vulnerabilities that surrounded the £27 billion uplift or money that was found down the back of the sofa, as he put it. You seem to have indicated as well that it wouldn't take a lot for that to start to ebb away, but one of the things that he mentioned during the evidence session was that the chancellor has effectively front-loaded the giveaways off the back of that uplift, with a view that the revenues will accrue later and smooth things over the five-year period. My question would be if that front-loading has occurred and then the reductions to that sum occur that you are indicating might well do, does that mean that, essentially, there isn't the ability to maybe skim off the top, if you will, in terms of the giveaways that have been announced, because they've already happened, and that would result in deeper cuts having to take place over their remaining period? I think it's two things to say. First of all, that £27 billion number, it's a number that annoys me because it's one of those numbers that's cumulated over, I can't remember if it's four or five years, so it's actually nowhere near as big as it sounds. In terms of the chancellor's target, he's looking at 2019-20, and I think the forecasting changes are about £4 billion in that year, so £27 billion isn't quite as big as it sounds. Secondly, as I was indicating, a £4 billion change in forecast four years out is almost neither here nor there, and it is slightly odd that the chancellor should be making big decisions about whether or not to protect the police on the basis of something that is going to shift around by more than £4 billion, probably at every subsequent fiscal event. Thirdly, you're right, in terms of looking at what was planned, particularly in terms of spending cuts, if you look at the implied profile of cuts, they have become much, much flatter, so that actually we're still aiming to get at much the same place as we always were in 2020. It's just that instead of going a sharp down and then a little bit of up, we're going on a very gentle glide path, so the protection relative to previous expectations is coming in those in those early years, with the implication that if we do need to do more in 2019, then any change between 2016 or 2017 or 2018 or 2019 will have to become sharper, so it becomes more difficult, as it were, to achieve steep spending cuts in a single year. That's one of the consequences of having such an inflexible, but also a stark fiscal rule that is become more stark as we get closer. It's opposing in 2018 forecast change significantly for 2019. You have to make changes really quite astonishingly quickly in order to meet your rule, and even one year out forecast change quite significantly. The long answer to your question is yes, I agree. The relative giveaways were in the early part of the Parliament. It will become more difficult if forecast change to make the sharp adjustment to meet the target in 2019. I'm presumably indicated that it becomes more difficult to make sharp cuts in a one-year period, presumably the only option that's left on the table for the Chancellor or the only two options left on the table for the Chancellor are either increased borrowing, which would interfere with his fiscal rule or increased taxes. That's the natural implication, yes. There are other things that you can do at the margins, such as sell off more stuff, but broadly speaking, yes. Is there a risk that we could be looking at in-year adjustments being made, or are we at a stage where it's too early to predict that? Obviously, for relevance to ourselves as a Parliament, we rely on the budget being set at the beginning of the year and that carrying through. If there were to be sharp in-year adjustments, that obviously would have been an impact on devolved services, as well as wider UK services, but particularly in terms of our ability to offset that, given that even if we were to take on board the powers that are coming, there would still be limitations to how much offsetting could be done. Of course, over the last Parliament, there were a number of in-year adjustments announced as late as the autumn statement quite often for the same year, which peered to reflect, I don't know how closely, views about the degrees of underspending that were going on in any case. Those in-year adjustments in a couple of years over the last Parliament were quite significant. The way that the fiscal rule is construed would mean that, for example, if in the autumn statement of 2018 you got a forecast for 2019-20, which had moved such that it looked like you were going to get a deficit in 2019-20, it wouldn't require an in-year adjustment in 2018-19, in other words, in the last four or five months of that year, but it would require at that very late date a change in the spending expected in the following year. I don't think that it would necessitate in-year adjustments, but it certainly might necessitate very close to year start adjustments and potentially quite big ones. I guess that it's difficult to predict with absolute certainty, but the likelihood would be looking at the current economic circumstances and the projected future economic circumstances. If there were to be those adjustments either in-year or late-year for the following year, you're probably looking at it being more likely to be unfavourable than favourable adjustments. Would that be a fair information? As I said earlier on, we've only got two more months information than we had back at the end of November, but most of that information has been bad, so I think that that has moved the risks in that direction. Where do we start? You gave a 45 per cent chance that the fiscal target will not be met according to the OBR. Is the IFS as bold as that in having an actual percentage of what they think or what is your own personal view? That calculation by the OBR is based on a methodology that we developed at the IFS, and that methodology is essentially to say—it's not terribly scientific in a way—to look back at what's happened over the last 30 years and in each of those 30 years, looking at forecast five years, hence how wrong have they been by how much and then assume that you're in a similar position now, looking five years, hence what's the likely error based on errors that we've had in the past. You might think that errors might be less because you've got an independent OBR, which might be doing a better job of and a more honest job of forecasting, or you might think that we're in a relatively stable growth path that isn't going to change dramatically, in which case you might put the confidence intervals tighter. Equally, you might think that we remain in a very much unknown territory in terms of the way that the economy is developing. There's all sorts of things going on externally and there's the chance of leaving the European Union, so there may be more uncertainty than usual, and actually the confidence intervals might be wider. Actually, I don't know which of those worlds we're in, which is why I think actually just basing this on sort of historic experience may just be the best that we can do, and so it's really historic experience, which is telling us that there is that degree of uncertainty, and I think that's probably the best shot one can give at putting a number on that. It kind of makes sense as well, 45 per cent. It's just better than evens, and that's because, in a sense, you're looking at a 10 billion surplus, which is 10 billion out of 800 billion, is pretty small, so you wouldn't expect for years out of it to be much, you know, very much better than an even's chance. Okay, thank you. Now, we've heard about some of the bad news that's come out recently, whether it's what's happened to the FTSE, whether it's concerns about China or so on. From what you're saying, though, are there potential positives and opportunities on the horizon as well that can help the 55 per cent more likely to be the one that happens? I mean, it's easy to predict or to look at things that we ought to be concerned about. Are there things that you can see on the horizon that you think actually there are a few things that might help us to do slightly better than projected? Well, I mean, there remains a lot of uncertainty about, in particular, the degree of unused capacity in the economy. There are certainly forecasters out there who think that the OBR is being unduly pessimistic about the level of unused capacity and therefore the capacity of the economy to grow, and that's really a judgment about how much continues to be dispute about how much capacity was lost following the financial crisis. Now, the consensus is moving towards the kind of place where the OBR is, but there are certainly some who think that there's significantly more capacity there, essentially don't believe that we could possibly have lost permanently as much as might appear since 2010, and that's reflected to some extent in, whilst unemployment is very low, there's still quite a lot of part-time work and self-employed workers might want to move into different roles, and there's still quite a lot of capacity for companies to invest, for example. Equally on the earnings and productivity side, it may be that there is some catch-up still to come, and they have done very poorly over the last five years. The OBR's judgments are essentially based on an assumption that the growth moves to a normal place and that everything that we've lost over the last five or six years is lost forever would only require us to get a bit of that back, again, to make a fairly significant difference to the forecast. I think that if earnings are 1 per cent a year more than is expected, then the forecast change is really quite significantly over the medium term. There are quite a lot of things to which those forecasts are sensitive and hence the uncertainty around them. There's a lot of uncertainty still in the direction of the economy because we are still in unknown territory, and some of that uncertainty will be on the upside as well as on the downside. Thank you. Just for clarity, I can use to explain again the £27 billion figure, which I think you said annoys you. It annoys you because is it effectively quadruple or quintuple counting or something like that? It's cumulated over several years, and so it's very difficult to make sense of it. If you cumulate over enough years, any number gets big. There's nothing special about cumulating over. I can't even remember whether it's four or five years. It's cumulated over. In terms of what the Chancellor is aiming at, the number is £4 billion, which is the difference in the forecast for 2019 as a result of those forecasting changes. You've just provided my favourite quote this week. If you cumulate over enough years, any number gets big. I think that's fantastic. You've talked a little bit about the unprotected departments and the gearing effect. This time round, quite small changes because the gearing meant that the cuts were reduced substantially. As you said, if the opposite happens, if the next forecast—I mean, the next one is only a couple of months, but let's say the next autumn statement, which is obviously a bit further away—if we have movement of the same magnitude in the opposite direction, is the likelihood that the gearing effect could work in the opposite direction effectively? I do think that that is the big question about the next two or three years. The obvious arithmetic answer to your question is yes, that that's what would happen. The more realistic answer, so do I really believe that if that happened at the chance that he needed to find 10 billion of additional cuts, he would move back to whatever it would require 20% cut in police funding and an additional 10% on local government funding and so on? I don't know. I think it would be a strange world, as it were, in which what you thought was the appropriate funding of some of these core public services bounced around by a significant amount as a result of what are relatively small forecasting changes. I think that that would be an odd kind of world to be in. I think that the Chancellor would try to avoid doing that, either by raising taxes or by finding some other changes in the accounting or by putting his fiscal rule out further. If in a way this is what it appears to be, a residual, I will not put up taxes further and I'm absolutely committed to my fiscal rule and I will protect those departments, which I've said I've protected, then these unprotected departments are the residual and they are the things that would suffer. If the Chancellor found himself in that position, that would be some of the biggest political and economic choices he would have had to have made and I don't know quite how he would jump. But as I say, arathmetically, if those other things are fixed, then that's where the adjustment has to come. It's worth saying on the tax side, as I said, there have been some quite significant tax rises announced in July and in the autumn. Tax rises, most of which were not in the Conservative manifesto. We have seen, as it were, some willingness to raise taxes and maybe there will be further willingness to do that, I don't know. You just mentioned tax rises, so let's move on to one of them. One of them is obviously the supplementary charge on stamp duty land tax for secondary additional homes. Has the IFS done much work on looking at the potential behavioural impact of that? Could that have a market impact more widely than just on second homes? What work have you done on it? We've not tried to and I don't think we could estimate what the effect of that will be on house prices, for example. I think I'd say two things about it. One is the rationale given, I don't think, is a terribly good rationale, which is in a sense that those who are buying to let out are significantly better treated by the tax system than owner occupiers. Essentially, I just don't think that that's true. Owner occupation is still relatively favoured in the tax system. A much better rationale would be if we as a Government want to increase owner occupation rates for whatever reason. One of the things reducing owner occupation essentially is that there is a group of the population who are asset very rich, essentially people over the age of 50 who may have bought the house some time ago, paid off the mortgage, have done relatively well for occupational pensions and so on, may have inherited something and they are competing in the housing market because they want to buy second houses because actually they've seen that over the last 30 years this is a very good investment. That's pushing up prices more and generationally speaking is disadvantaging younger people who want to get into the housing market and for a sort of equity point of view we would rather how homeownership was spread out across that population and therefore we want to find some way of disincentivising or discouraging people from moving into the housing market as second owners. Now that seems to be a coherent argument. It's not the argument that the Government put but I think that would be a more coherent argument. The other thing I'd say here is that it feels slightly odd as it were to be protecting those who already second owners in this market so this is only going to be penalising effectively those who want to move into being second owners. It leaves those who have already benefited broadly speaking protected. In terms of behavioural impact you've not had the opportunity as you're not planning to do. No I think that would be quite difficult frankly. Okay and I'll finish with one other slightly difficult question. In your view when are interest rates going up? I don't know. I mean seriously it's not actually part of our remit to do that and we try not to make forecasts. Okay fair enough thank you. Jackie. Small question because most of it's already been covered. I wonder whether I might explore with you oil prices particularly because both the UBR and the Scottish Government's own oil and gas bulletin have overestimated the price of a barrel of oil and that's got significant consequence I would have thought for the economy and indeed the budget. Given that Morgan Stanley I think yesterday or the day before were predicting prices at $20 a barrel at what stage does the UBR actually reassess their estimates and how does that feed into the process? Well the estimates for direct revenues from the North Sea I think are pretty close to zero already aren't they so I don't think the immediate impact on those revenues of any changes will be great. The second question here is what I think is one of the big questions facing the Chancellor in March is is he going to take advantage of this to for example increase tax on petrol? The price of a litre is now at its lowest level in real terms for I can't remember some considerable period so it's you know and given given what I think policy statement was in 2011 or 2012 which was that you'd have a a balanced tax system whereby if prices were high you would not increase exercise duty but if prices were low that you would increase them that would trigger an increase in petrol taxation. Now I sort of wonder whether we might see that in the autumn statement we didn't and I'm now wondering whether we might see that in the budgets and I don't know whether we'll see that so I think that's that that is you've given the other things we've been saying about the uncertainty around the public finances and so on that is an obvious option at least for for the Chancellor but it's worth saying that for other parts of the economy this does provide something of a boost clearly if people are paying less for that you know spending less on petrol may well be spending more on other things so in terms of the you know in terms of the way the OBR looks at this for example if there was a there was a moment when people were saying well because you know because petrol prices have gone up and we're getting more VAT on petrol and so on that ought to be good for the public finance the OBR did come back quite firmly and say no that's not true because people are money people are spending on petrol they're now not spending on other things clearly the reverse is also the case the thing I think they didn't account for in that and I think it covers a surprise to quite a lot of people is that there seems to actually be a correlation quite a strong correlation between petrol price oil prices going down and poor performance in the stock market which you might actually have expected to go in the other direction and that appears to be associated with the drop in demand in China and some other countries which is itself which has created the fall in the oil prices and the fall in share prices for particular for oil exploring companies and so on and has had this kind of knock on effect negative knock on effect rather than what most models previously would have said which is it would have a positive knock on effect I'm curious if you were the chancellor would you think is the greatest risk you face you know I mean we've got oil prices we've got fluctuating markets you presented a bit of a doom and gloom picture almost to condition us for what's to come what's the greatest risky faces my guess is that the the the risky doesn't want to have to deal with would be leaving the european union I think the the uncertainty around the the impact of that on pretty much every aspect of the economy would be a would be a very tough thing for for the treasury for the treasury to deal with now what the long run if what the you know what the effect in 10 years might be I don't know but the effect in the in the short run would would be quite a lot of volatility in one direction or another I would have thought and you dealing with that risk within the current set of fiscal frameworks and given the current set of forecasts I think would be will be one that he wouldn't want to face thank you convener thank you john thanks convener we've obviously covered quite a lot of ground already just to go back to the 3% on well stamp duty land tax in UK land border transaction tax in scotland you know you said that was ill designed and Gavin brown asked you about it as well and the whole concept that you're protecting existing owners I mean what was the alternative to that then maybe say doubling council tax if you've got a second home or are there alternatives yes I think the the obvious again it depends what you're trying to achieve but if you wanted to increase taxation on owners or occupiers of second homes then the obvious thing to do would be to do something with council tax rather than with a transaction tax I think doing those to get as I say it does depend what you're trying to achieve I think what the chance is trying to achieve is what I tried to set out earlier which is actually about about changing the balance of power in the market between generations actually as much as anything else or certainly between those with substantial assets and those with less assets and so part of that all tied of thought to be increasing the the cost of owning it as well as the cost of buying it and the cost of owning it you can reflect most clearly in in council tax you might also think that that there was something more equitable about that in the sense of hitting those as it were who already you property wealthy as opposed to those who are you merely wanting to become property property wealthy but I but I do think the crucial thing here is is to be absolutely clear about what you're trying to achieve and my kind of problem as it were with the way that the way that this was described is that it does not achieve as it was described as achieving it does not it does not achieve some kind of balance in the tax treatment between owners of first properties and by to let landlords that's not what it's achieving it might achieve something else which you want to which you want to do but it doesn't achieve that kind of level leveling of the tax playing field I mean we've still to really explore this because what's only just kind of been announced and I think we'll be doing that later on this morning in fact but I mean one suggestion is that actually will be very easy for people to avoid this tax and it may raise very little at all because people will incorporate or they'll just say oh this is my next new home I'm going to sell the old one then they never do sell the old one so I mean would you be concerned about the amount of money it'll raise I'd certainly be concerned about the amount of complexity that it might create for exactly the reasons that you you describe I mean that you know certainly you know any kind of incorporation is is clearly is clearly benefited by this exactly as you say where the exactly where the line is between you know I'm buying this with a bridging loan whilst I'm selling my old house or I'm buying this a secondly it will create many pages of tax law and you know I'm sure you know I suspect the treasury and HMRC will find a way of raising a significant amount you know reasonable amount of money with it that's not quite as much as was intended but I think they will do that by imposing quite a lot of cost on people which is not not financial cost but just kind of bureaucratic cost okay that's helpful and the other area I wanted to touch on was just the last section on your comments was about covered devolution and not just Scotland but a kind of variety of that and you specifically mentioned the 12 and a half percent corporation tax rate that's expected in Northern Ireland in due course. I mean is there a risk is that just a minor interest to us in the rest of the UK because it lets them compete with the Republic of Ireland or I mean could that have an impact on the whole of the UK's taxation income because companies like Starbucks might go to Belfast in order to pay less tax? I think it might you know the clearly I mean I mean this will be a you know there's quite a big change in the UK tax system I mean there's always as you know we've had a single you know single corporate tax system and this will clearly provide incentives to be you know registered in Belfast as opposed to London or Edinburgh. Now again there will be reams of legislation around this to to try and control that kind of try and control that kind of behaviour an activity and there'll be very clever people trying to trying to get around it. So I think you know how it develops I think is I mean well you know HMRC and Treasury are worried about how it will develop and they'll be keeping a very close eye on it. It's worth also saying that this is you know if Northern Ireland goes down this route they will be taking a major gamble with their own budget because this will cost them something like a quarter of a billion pounds in the first instance. I'm pretty sure Treasury will make sure that they bear that cost and therefore how that you know there's first of all a question as to whether they will ever recoup it or when they recoup it and secondly how their budget responds in the meanwhile to cover that significant upfront cost from it. So I think that you know the way in which the way in which it might be implemented and how the devolved budget copes with that will be at least as interesting as how firms respond and how Treasury and HMRC try to stop them from responding. Thank you. You also mentioned in that kind of same section about fiscal framework and we still don't know how devolution to Scotland will work in practice and things like that. Does that have any impact on the UK's finances as a whole or is it purely a question of well maybe there's an extra hundred million to spend in Scotland and a hundred million extra to spend in Birmingham or that kind of thing it's a purely internal thing or is there any I mean you're mainly looking at things from a UK perspective. Does that these issues affect the UK as a whole? Yes they can because for two reasons. First of all the way that the block grant adjustment is made obviously if the way in which that is determined going forward is more or less generous to Scotland then definitionally it's more or less generous to the rest of the UK. Now obviously the gearing ratio means that it matters a lot more to Scotland because £1 billion in Scotland is a much bigger proportion of the budget than £1 billion in the rest of the UK but in some of the work that my colleague David Phillips and indeed David Bell here have done together on this they've suggested I mean their work suggests that reasonable alternatives could make a difference of £1 billion over a you know over a 10-year horizon so but that's a zero sum game that's that's that's a billion pounds that Scotland does or doesn't get which the rest of the UK would or wouldn't get so I think that's one one part of it so yes there is some of this as a zero sum game in terms of how much goes where. The second part I think is is is the more complex bit which is to do with how how how if at all that framework is designed to compensate or otherwise rest of the UK for changes made in Scotland so for example if you or indeed the other way around so if you were to make a change to income taxes which brought income or people from rest of the UK to Scotland would you need to compensate the rest of the UK for that or vice versa in terms of what the rest of the UK does now my guess is will end up with a framework which doesn't try to do that because that's just too hard but you know you might think that there might be elements of that in there and if there were then exactly how that's designed would make a difference I suspect the first thing that I said is more important though the actual way in which the block grant adjustment is indexed and you know David and David set out three different alternatives to that will result in different amounts of money being distributed between Scotland and the rest of the UK presumably long term if I mean if you know Scotland got a raw deal and we had more poverty here then that would impact the whole of the UK but but hopefully that wouldn't happen in the short term okay thanks so much okay jeane just to ask you about the I mean the I guess the policies that are set in order to have a reduction in the in the national debt and that everything seems to be geared towards that I mean is there what happens after that what is the what are the what is the thinking behind the kind of austerity policies that we see okay and the vision for at the end of you know it was going to be cleared by the end of the last government term and now there's an ambition to have it cleared and a lot of people are just thinking well you know we have to live through this because then something interesting is going to happen yeah but in the meantime you know there are three new food banks opening every day every week in Britain and who looks at the kind of devastation of that and earlier on you talked about the changes to the welfare system so it had to be delayed by a bit but actually I think it was you know stopped because of the extraordinary havoc that it would wreak on people at the very bottom end of the income bracket in this country so at what point do you have an opportunity to reflect on that and challenge the the chancellor to some of these policies um let me take the first part of that question first so anything is about what's happening to the deficit and the debt and what the the plans are so um so you're right the I mean the the original plan was to have the deficit broadly sorted by now it's now to get to balance in 2019 to be clear though the debt will still be something like 75 percent of national income by 2019 now the government's plan beyond that is to run a surplus each year in normal times after after 2019 now the the reason they would give for that is that even even on that basis even running a surplus at the level planned for 2019 every year through to the mid 2030s would only bring debt down to where it was just pre recession and that's even if there were no further recessions if there were one additional recession which frankly we might expect between now and the mid 2030s then debt would still be in the mid 50 percent even with a surplus in normal times by the mid by the mid 2030s so that would be that would be the um that would be the thinking behind getting to surplus and then trying to maintain surplus over that over that period and and you in addition it is important to be clear that you over the period even after the 2030s we will continue to be in a world in which demographic change is putting additional pressures on the public finances so so what we're not aiming for and what the government is not looking at is as it were um you know a wonderful period after 2020 in which the sort of floodgates can open and um you know public spending can start rising significantly and so on so this is not as I understand it a period of austerity to be followed by a period of plenty um of course huge amounts uncertainty overall of that but that's that I think is where is where the plan is and that's what and that's what underpins um why they're trying to achieve what they say they're trying to um what they say they're trying to achieve and you know and the reason they would say that's all terrible important is because I think the um you know if we were to enter another significant recession with debt at 70 or 80 percent of national income and then it would arise to 120 percent of national income as a result of that recession uh then the um the consequences of possibly losing access to the international financial markets or big increases in interest rates would be devastating now that's the you know that that's that's the defence um and I think the the issue is really kind of how much weight do you put on that potentially devastating outcome um it's not something that we've um you know we've never defaulted on debt but you know is in our lifetimes we have had to go to the IMF we have had to um uh we we have had our economic policy taken over by the IMF in the mid 1970s and that's something that they want to avoid I put a very small probability on that risk but the consequences are very very significant so that's kind of I think what they're trying to achieve and why they're why they're doing it as they're as they're doing it now the um there is clearly an alternative to achieve the same thing whilst not cutting well for another spending quite so much and that's to increase taxes um and we will have we have taxes about 36 and half percent of national income that is relatively low by European Union standards certainly by the standards of the EU 15 I think it's one of the it is one of the lowest from an economic point of view there's nothing to stop you having tax at 38 39 even 40 percent um of national income um that is a uh a big political and social decision uh and uh where we are on tax actually kind of where we've been for the last 20 years or so around 36 37 percent but my view is that the um the big political political economy debate really ought to be more around what we think is the sustainable size of the state and hence the sustainable level of taxation rather than you know can we be borrowing 30 40 billion a year every year going forward I mean I suspect there is significant risk associated with doing that into the uh into the long run uh now there are obviously costs associated with increasing tax and that's why I think the you know the trade-off there is so big and the trade-off is exactly as you describe those who are um suffering from cuts in public spending particularly on on I mean that there are those who are suffering particularly from cuts in in welfare and the universal credit system for a group of individuals will be significantly less generous than the tax credit system it's worth you know in in long and as I said right at the beginning in longer term context uh are spending on working age welfare will be at its lowest level for about 30 years I think by by 2020 though interestingly not um are spending on in work working age welfare so the universal credit system in 2020 will be still be very much more generous than the family credit system as it was back in 1997 and on average at least as generous as the tax credit system was in 2003 so it is important to be clear this is a a reversal of some of what the last Labour government did is by no means reversal of everything that the last Labour government did in terms of um tax credits just finally on the we recognise that there's benefit fraud but it is always a very small amount compared to the amount of tax fraud or tax avoidance what discussions are there around ensuring that companies registered in you know offshore tax havens or whatever how is there a frustration in the government that these these companies should be hauled back and that Britain should get the tax that it deserves well I think the um you know I think that's a very interesting question because I think we might learn quite a we might learn quite a lot more about that in the budget because the government will have to start responding to the OECD's base erosion profit shifting work which is which is specifically looking at this question of how to ensure that companies are paying tax in the places essentially where their real activities are now there are a series of as a series of issues there one is about how you define um uh permanently resident as it were from for the point of view of of companies and I think there will be some there are likely to be some changes that the government has indicated that it will want to change that in a way which is likely to mean that we get some more tax from some of these companies that uh that you'll be thinking about um the second really big question and probably the biggest question for the government will be how it treat decides to treat interest deductibility for corporation tax now this is one of those areas where the UK system is more generous than many other countries and significantly more generous than that which is recommended by the OECD but it will be a big policy change um and actually a reversal of what the Chancellor has said in the past if he were to limit that um tax uh deductibility so this may be one of those areas where we don't implement what the OECD says is is best practice and then there's a third set of questions around how we whether we adjust our patent box which is a lower rate of corporation tax on companies which can show that that comes from um something which involves a patent or whether we whether we adjust that particularly in terms of um uh evidence that the um the the activity that which got the patent actually occurred uh in this country so there are a number of questions within the framework of what the um what the OECD has been proposing which the Chancellor I hope will be responding to um in March um again it's important to be clear here there are areas here where other countries see the UK as a place where companies go to a pay lower tax than if they were in those in that country if you see what I mean because we have a quite a generous patent box regime we have quite a low corporation um tax rate so this is not all money that will be flowing to the UK there will be other countries who are wanting to repatriate that sort of as it were profits which are currently um booked in the UK to their country so the actual impact on UK corporation UK corporation tax revenues I think I don't even know which way which direction that would go in if all of this is implemented thank you just to follow on um that that's concluded questions from committee but I've got a few a few I want to ask just to follow on I mean um in terms of last question that you know that jeane asked surely there's an issue in terms of competitiveness if you're running a starbucks and I want to set up a another company in the similar market and you're no pain tax effectively but I am then you've obviously got a competitive advantage which clearly skews the market is it what is it is there taking into account you know discussions at wecd level which will load it drag on for a considerable period of time to stop the UK just deciding that any money that's generated in the UK by businesses has to be taxed by the UK I mean what is to in what's to stop them doing that you know now companies may then decide they don't want to so he's defining this word generate which is well I mean you know I think a lot of these places are actually fixed for example when a starbucks isn't going to move around is it it's actually in the high street you know and if it's generating a certain income which generates a profit which they deserve for subject to taxation how can it therefore you know how can the UK government what is preventing sorry the UK government from taxing them based on that profit generated in that particular you know area or within the UK itself or indeed I know I realise other companies it's more difficult perhaps but surely it's not beyond the work of governments even without an OECD agreement which clearly would be beneficial to do that now to an extent at least I'm part of the answer you I mean it's a sort of it was a serious response it depends what you mean by that word generated and that and that is what underpins the international tax treaty so you know I don't want to get specifically into Starbucks but what one of the things that's going on here is that you know they their profits are taxed elsewhere and in particular in the Netherlands because that's where the intellectual property is said to sit for the recipe or whatever it is and therefore you know as part of actually an international tax treaty legally binding international tax treaties we recognise that those profits are partly earned you know not generated here but generated there and the tax is paid there rather than here and so you know that there are there are genuine international I mean that there are internationally generated legal constraints on this which is what the OECD BEPS process is trying to adjust to some extent to achieve exactly what you're describing which is to ensure that the tax is paid more in countries where you know you and I might more reasonably think this is where this is where the profits being generated so I think part of the answer is you can't really do this entirely by yourself you have to do this as part of an international process because none of these companies are claiming there are no profits being generated anywhere but there are a set of international rules which determine where that generation is recognised and where that generation isn't recognised and that's not something that a country that like the UK could necessarily just tear up and do by itself it has to do it through those international processes. Much used word of reasonable this doesn't really come into play because I think the recipe for the coffee isn't too complex most of us can probably work it out. Jeane you want to come in with a supplementary here on this? Does the supplementary on that is do you think that that's going to be made easier or harder by the introduction of the transatlantic trade and investment partnership? I'm afraid I don't have a view on that at all. Sorry. Can I move on to something else? Oil prices were raised by Jackie. Obviously you talked about the possibility in the budget of potentially being an increase in terms of taxation but everyone across the globe pays an international agreed price for oil whatever that barrel price happens to be so would that have an impact on UK competitiveness because ultimately if there's a higher taxation level in terms of what is actually paid at the pump and for businesses in the UK relative to other countries would that have an impact because one of the benefits if you could say in terms of the oil price fall has been that although it's been quite damaging very damaging in the northeast of Scotland and very way around Scotland other industries have obviously benefited from that. Is there a sliding scale in terms of taxation of oil whereby a penny increase impacts in terms of x-thousand jobs? Is that a model that the chancellor has and uses? Whether the chancellor has a model, I don't know. We certainly don't. You could probably create something like that. I think your point is an important one. Clearly in general lower energy prices are good for economic performance. One of the consequences of increasing, I mean there are two consequences of increasing taxes on petrol. One is clearly households have to pay more. A second is that because this is also paid by lorry drivers and van drivers and so on businesses are paying more. Part of the cost of increased petrol prices is that I have to pay more for my food from the supermarket because Tesco has to pay more petrol tax as well. One would have to look at sort of input output tables to see how much of that was impacted, particularly taxes on petrol, how much of that impacts on international competitiveness. A lot of that will be domestic in the retail businesses and so on. Some of it will be in international business. I mean the much bigger effect is around other energy particularly electricity and the cost for heavy industry whether it be steel or cement where you're using an awful lot of energy in the production process. That's not really determined by petrol taxes but it is determined by other energy taxes and green taxes and so on. There you have to be, we clearly are increasing those taxes but we have a quite extensive regime of protection for heavy industry users which are internationally exposed. I think that you do have to be very careful because you clearly do risk driving industry offshore if you're not very careful about the way that you create those protections. I suspect that a few pence on petrol whilst it will have some effect is going to be pretty small relative to the effects you can have on those very energy intensive industries for other bits of the energy sector. Obviously the steel industry, the relative energy costs are actually having it and it being created is one of the reasons why. I think in reality that's not a big part of what it's doing yet. It was one of the ones that was actually quoted at the time. So basically if fuel duty goes up there will be an economic impact. Increasing taxes has an economic impact. Increasing attacks which is partly paid by business and petrol taxes are partly paid by business will have a somewhat direct effect on those businesses. That is one of the costs of, as I was answering one of the genes question earlier, you can have higher taxes across the economy. There are costs to higher taxes. The degree of that cost depends on how well you design those taxes and where you impose those taxes. Yeah but obviously this has some impact on disposable income etc if you put those kind of taxes. I'm just wondering one of the things that we've talked about in previous years but we've not really talked about today. It's not only your paper as productivity. What's your view in terms of where the UK is going in terms of productivity relative to our competitors? Well certainly where it's been has not been, I mean there's been a productivity problem across many OECD countries but since 2008 that's been a greater problem in the UK than it has been in many of its competitors following actually 25 years of really quite good productivity performance relative to our competitors. Now partly that is a sort of arithmetic effect of the fact that our labour market has performed much better so we've got a lot more people but in less productive roles I kind of feel I'm probably repeating what I've said at previous sessions here. I still don't think we really understand exactly why that's happened and I don't think we know quite what's going to happen going forward. There does seem to be some evidence of improvement not least because we've, you know, evidence in the fact that real wages have been growing reasonably well over the last year, 18 months and the best projection suggests they will continue to do so which is probably good evidence that there is some underlying improvement in productivity going on as some of the effects of the long lasting effects of the recession and the financial crisis wear off but I wouldn't put much money on, you know, that maintaining it two to and a half per cent a year over the next four or five years. I mean, the Scottish Government have said that over the last decade Scottish productivity is risen four per cent relative to the rest of the UK so there's clearly a lot of potential for further productivity growth across the UK. There's certainly potential, I mean, the fact that we've had such poor performance over the last several years and, you know, we have increasing numbers of people in low paid, low productivity work is evidence of potential. The fact that our productivity is well behind the international leaders is, you know, very strong evidence that there is potential and we know some, you know, there are some things we could do to unlock some of that potential whether that be planning reform, whether that be infrastructure, particularly transport, projects, whether that be improving education and skills. I mean, all of those things we, you know, would be good for, would be good for productivity in the long run. The amount that government can do in the short run, in other words, what would improve productivity in the next year or two, I think, is probably much more limited. Yeah, in the long run, as he said, education, research, development, et cetera, infrastructure could lead to significant improvements. Yeah, and I think, you know, again, there are different elements of that. I mean, we know, I think, with a significant amount of certainty that, for example, building more roads or loosening planning rules would be good for productivity, but we know that there's a trade-off there as well. There's an environmental trade-off. There's a trade-off in terms of the impact on people living close to the additional building. We know that additional house building in growing areas would be good for productivity, and then there are things where, you know, we know it would be good for productivity, which is improving the education system, where I think we've actually probably just got less clarity about what the right thing to do is to make that work better. Indeed, and just one last thing. It's just about sterling. Where do you see sterling going over the next year or two? Because it's used to, I remember when I was growing up, there was always a mantra about the value of the pound, and it seems to be a become less of a kind of issue. I know that we had the euro crisis a few years ago, but over the past decade or so and beyond, there's been quite significant differences in terms of the value of sterling relative to, for example, the euro. In the 1980s, the dollar value went from $240 to $107 and bounced back up to $150 to $160, but it doesn't seem to be as much of an issue as it was in the past. Where do you see sterling fitting in over the next year in terms of the UK's economic objectives? Again, this is definitely not something that I'd want to make any kind of projection on. Obviously, a lot of this is going to depend on what happens elsewhere, not just what happens in the UK. Particularly what happens in the euro zone is going to be more important in terms of the sterling euro exchange rate than anything that happens in the UK. If the euro zone manages to remain stable, we avoid another Greek crisis, that's going to keep the euro doing a bit better. Significant additional quantitative easing in the euro zone may weaken the euro relative to the sterling, just as quantitative easing here in 2010 weakened sterling relative to other currencies. I wouldn't really want to say any much more than that, to be honest. Thank you very much. That's been a very interesting session, as always, Paul. Is there any further points that you want to raise or make to the committee at this point? No, I think that that was plenty. Fair enough. Thank you very much. I'm now going to call a recess until 10 past 11 to enable that change over witnesses and to give members a natural break. I shall now reconvene the session, or second day to my business today, to make evidence on the revenue side of the draft budget, 2016-17, from the Cabinet Secretary for Finance, Constitution and Economy. Mr Swinney is joined today by Sean Neil and Graham Owenson of the Scottish Government. That will be the first year in which the Scottish Government will have responsibility for setting the Scottish rate of income tax, in addition to having full responsibility for setting and collecting the devolved taxes. The committee and the Scottish Government are therefore agreed that, going forward, scrutiny of the draft budget will take place over two separate oral evidence sessions. This morning, we will consider the revenue side and, on Monday, we will take evidence on the expenditure side of the draft budget at our external meeting in Pitlochry. I would therefore like to welcome Mr Swinney to the meeting and invite him to make an opening statement. I welcome the opportunity to discuss with the committee the revenue measures that are associated with the 2016-17 draft budget as the first of our two sessions in the forthcoming days. In this budget, the Government is proposing a Scottish rate of income tax for the first time. I am grateful to all the individuals and representatives who have contributed to the discussions that have taken place here before the French Committee on the Scottish Rate over the recent months. From April 2016, the UK Government will reduce the income tax rates payable with Scottish taxpayers by £10, and the rate agreed by the Scottish Parliament will replace that. I am proposing a Scottish rate of income tax of 10 per cent. The decision to set the rate at 10 per cent has been influenced by the limited nature of the income tax power currently available to the Scottish Parliament. The current power only allows for a single rate to be set and then applied to all three income tax bands, basic, higher and additional. That means that any increase would have necessarily inflicted an additional tax burden on lower income taxpayers. I could not support this at a time when the same people are already being adversely affected by the austerity programme of the United Kingdom Government. For the Scottish taxpayer, the proposed 10 per cent rate is equivalent to the 10 per cent reduction to be applied by the UK Government. That means that the overall rate of income tax for Scottish taxpayers will remain the same as that paid by other UK taxpayers in 2016-17. The proposed 10 per cent rate is also revenue neutral for the Scottish Government's budget. The amount of tax raised by the Scottish rate of 10 per cent will be equal to the reduction in the Scottish block grant. During the transitional years for the Scottish rate, there will be no reconciliation of the actual amount of Scottish rate income tax collected against the OBR forecast. That is the second time that I have set out proposals for the devolved taxes in the draft budget. I plan to maintain the rates and bands of land and buildings transaction tax at existing levels in 2016-17. That will ensure that 93 per cent of home buyers will either pay less than under UK stamp duty land tax or pay no tax at all in the year ahead and ensure that Scotland remains an attractive and competitive location for business investment. In order to ensure that opportunities for first-time buyers to enter the market in Scotland are as strong as they possibly can be and to make certain that tax changes elsewhere in the UK do not make it harder for people to get on to the property ladder, I will be seeking Parliament's approval to introduce an LBTT supplement on additional homes. I welcome the committee's call for evidence on this measure and look forward to engaging further with the committee on the issues once the legislation is before Parliament. I also plan to increase the rates of Scottish landfill tax to £84.40 per ton at standard rate and £2.65 per ton at the lower rate. That ensures that the tax burden is increased in line with inflation and addresses potential concerns about waste tourism by maintaining parity with rates in the rest of the UK. The credit rate for the Scottish landfill communities fund will remain at 5.6 per cent in 2016-17. The Scottish and UK Governments have agreed a provisional one-year block grant adjustment for the devolved taxes in 2016-17 of £600 million. The Scottish Government's forecasts for the devolved taxes have again been independently reviewed and assessed as reasonable by the Scottish Fiscal Commission. In total, we forecast that the two devolved taxes will raise £671 million in 2016-17. For the first time, we have also published five-year revenue forecasts for the devolved taxes in order to provide transparency over a medium-term assessment of Scotland's devolved public finances. I welcome the challenge that the Fiscal Commission brings to bear on the Government's forecasts and we will respond by improving the robustness of our forecasting methodologies over the next year. On local taxation, we have provisionally set the non-domestic rates poundage at £48.4, which matches the £0.8 inflationary increase in the English rate. We have also provisionally set the large business supplement at 2.6 pence levied on properties having rateable value over £35,000. We also propose to limit renewable energy generation relief to schemes incorporating community ownership and to reduce levels of empty property relief. For empty industrial property, 100 per cent relief is retained for the first three months of the property being empty, after which time the level of relief is proposed is 10 per cent. For standard commercial property, 50 per cent relief is proposed for the first three months of the property being empty, after which the level of relief is 10 per cent. We have committed to reviewing the non-domestic rate system to ensure that it minimises the barrier to investment, is responsive to economic condition and supports long-term economic growth and investment. We will confirm further details in due course. I look forward to answering the committee's questions this morning. Thank you for that opening statement. The first thing that I will ask about will be the Scottish rate of income tax. The decision to take the Scottish Government in terms of taxation levels is broadly in line with the evidence that we have received, certainly from the majority of people who have given evidence to the committee. For example, the STC's view is that having been through an historically unprecedented collapse on new wages over the last five years, 2016-17, is not the moment in which to increase taxes on the lower paid, and they have also said that SRIT is clearly an aggressive tax. On that, if you look at the behavioural responses in terms of taxation, one of the issues that the committee deliberated on, particularly given the evidence from David Bell, was the impact of potential behavioural responses from taxpayers. Clearly, that is going to be an issue in the years ahead, but I am just wondering for this year in terms of the Scottish rate of income tax, has there been any analysis carried out by the Scottish Government of potential behavioural responses? The first thing to say, convener, is that it is important that when we consider tax measures that we do as much as is possible to develop our thinking and our methodology on behavioural responses, and that is a general observation in relation to the tax powers that we will now exercise. On the Scottish rate of income tax particularly, the analysis in this respect has been looked at by HMRC and the Office for Budget Responsibility, based on the fact that clearly behavioural analysis within the United Kingdom income tax system over which the UK Government has obviously had control over many years has been developed. We have had access to that material and have considered that material, although it would have to be said that the analysis of behavioural responses—obviously, behavioural responses, because the tax rate is the same—is negligible or non-existent. What I mean is that when you decided to set it to be the same as the UK, was the potential for behavioural response taking into account when you set that specific rate? Obviously, there will be no real behavioural response if it is going to be exactly the same, but what I am saying is that the potential behavioural response influence you because obviously 1 per cent of taxpayers pay 20 per cent of taxes, so that is going to be an issue as we go forward. Obviously, the point about SRIT is that the 10Ps across all band rates, but I am just wondering whether, in general, there was any consideration of behavioural responses before deciding where you would go with this. I think that if you include the consideration that I was very mindful of, my primary consideration about my decision on the Scottish rate of income tax was the fact that because the lock step existed, it would have to increase the tax burden on lower income individuals. That was my primary consideration. If your inquiry about behavioural response looks at what was appropriate to increase that burden on those individuals, I did not think that that was appropriate. Therefore, if that is included in behavioural response, clearly that was my primary consideration in coming to this decision. Clearly, in terms of the new taxes that will come in from April next year, you will be looking at taking it more at behavioural responses in terms of different kind of income groups because you will not obviously have the kind of lock step that you have talked about. You will have much more flexibility. I think that that is one area that I will be doing work on. You mentioned Professor David Bell. Professor David Bell published some material on behavioural responses already, and my officials are undertaking some of that work. Clearly, there is more flexibility inherent in the income tax variation powers that will come through the Scotland Bill 2015. It is important that, when Parliament makes its judgment on those questions, it is informed by as advanced behavioural analysis as we can possibly develop in that process. The reason that I am pushing this a wee bit is because, obviously, there has been all sorts of evidence that a 1 or 2 per cent difference, for example, might not make any real difference to behaviour. For example, if it is imposed on higher tax earners, a year from now, a higher amount may actually, and it is where that actually starts having an impact, I think that it is obviously of interest. On that same theme, has there been any impact to you, are you aware of, in terms of the identification of Scottish taxpayers? Because, while there is no change in the Scottish Government, I have made that clear for the year ahead, is there any evidence that people are identifying more than would be anticipated as Scottish taxpayers or less? For the minority that have that ability, you know, people who tend to be more mobile, is there anything at all that we have on that at this early stage? There is nothing really that is emerging. The expectation was that we would be dealing with about £2.5 million individual taxpayers, and that is roughly the number of letters that have been issued by HMRC. To identify Scottish taxpayers, I hope that members of Parliament have all received those letters. It was anxiously awaited in the Swinney household to see if the system was working properly, but it dutifully arrived. So, there is nothing that we are seeing so far that is suggesting that that is delivering any form of differential pattern. What was expected to come back has come back, and the level of HMRC where they were unclear, understandably, about what the dispatch of those letters would generate in terms of traffic and communication, but it has actually been significantly lower than it would have been anticipated, and really not a particularly significant amount of traffic has come back on it. In terms of the last information that I had heard about this, and I have not heard anything that is to change my view on that. Thank you for that. In terms of tax release, the Revenue Scotland and Tax Powers Act 2014 introduced a general anti-avoidance rule in respect to the devolved taxes, and the GAR is broader in scope than the UK general anti-abuse rule, as its focus is on tax avoidance, rather than abuse. However, as SRIT will not be fully devolved, the Scottish GAR will not apply to it. Is that a concern? The income tax power that we have is on non-savings, non-dividend income, so it is a much more tangible and identifiable level of income that has to be considered as part of this process. Income tax, non-savings, non-dividend income tax, is at the more difficult to avoid, more difficult to conjure up ways of getting around end of the spectrum. I do not think that there is a particular difference that arises out of the fact that it will be UK legislation that will determine those points. Obviously, the block grant adjustment is of paramount importance. You have made it clear that index deduction per capita is the best way to proceed, and we would all agree that that seems to be the fairest method of taking significant evidence and discussing that at the committee. However, if we are looking at devolved taxes for the year ahead, you mentioned in your opening statement about the £600 million one-year agreement. I am curious as to how that has been reached, because the Scottish Government has forecast revenues of £671 million, again, as you mentioned in your opening statement, for land billings transaction tax and landfill tax, but the OBR has forecast £627 million. In the midpoint of those forecasts is £644 million. I am just wondering why how the adjustment of £620 million has been arrived at. It was arrived at in discussion between the chief secretary and the treasurer in myself. To fear the chief secretary, one of the issues that he was mindful of was that he did not want me to be in the position that I was in the previous year, whereby I essentially had to set a budget to Parliament without knowledge of the block grant adjustment. He was keen to agree a definitive number that would allow me to base a budget upon. I am grateful to him for that understanding. When it came to arriving at the agreement, I should stress that I do not have the exact wording in front of me, but it is a without prejudice. It will be reviewed in the light of outturned data after 16-17, but it enables us to set a budget with some confidence around that particular number. It was arrived at by looking at the different forecasts that had been produced at that time by the Office for Budget Responsibility and by looking at the block grant adjustment for 2015-16, which is £494 million. Clearly, that number had to be inflated or indexed, whichever word we want to use. We looked at different ways of doing that, either by increases in number of transactions or by values. In looking at a number of different options, we settled on £600 million as a without prejudice number to enable us to make progress on those questions. We obviously had the benefit of outturned data for 2014-15, which, if my recollection is correct, was at £580 million. We looked at different factors in that consideration and arrived at a number. I cannot present to the committee a scientific analysis of how we got to £600 million. It was a range of different numbers that were discussed. We agreed to enable me to make progress in setting the budget with a definitive block grant adjustment for that year, but it can be reviewed once the financial year is complete. The committee previously raised concerns about the lack of transparency regarding adjustments to the block grant arising from devolution of further powers. The Scottish Government consequently agreed a number of changes to that in agreement, saying that it would ensure that the finance committee has kept informed of progress on any agreement or change to exist in agreement with the UK Government on adjustments to the block grant arising from the devolution of further powers. I am not really sure that that has really happened in terms of that process. I acknowledge the issue and the agreement that was arrived at with the finance committee. As I have said, we begin to stray into territory here on the fiscal framework because the fiscal framework has to be considered by this Parliament and it has to be satisfied by its contents. I think that the agreement that you talked about is very much in my mind as to what will be implicit in the understanding that goes on to ensure that the committee is satisfied by the arrangements around future block grant adjustment. On this particular example, as with the one for 2015-16, there were one-off agreements around specific numbers. There was no real process put in place, but I would certainly take the view that, for the establishment of the fiscal framework, there is a process scrutiny that this Parliament has to go through that must involve the finance committee in some form. If that was to be revisited, I would stress that, at this stage in the proceedings, my preference would be for us to have a fiscal framework and a block grant adjustment mechanism that we are not constantly visiting to give us confidence and clarity about how it is operating. However, if that were to be the case, I think that the finance committee has to be closely involved and consulted about those issues. On land buildings transaction tax, it is quite clear that at the lower end, in terms of lower-priced houses, there has been significant growth in sales and a boost to that market. However, at the same time, the committee's budget adviser, Professor McEwen, stated that market data has shown a significant reaction to the introduction of LBTT also at the higher end, and that there has been a significant reduction in the higher end sales as a result. That has been reflected again in the evidence that the committee has taken from witnesses. While there has been a positive impact on middle and lower tiers of the market, with, I quote, a new lease of life under the new tax regime, with property sales in Scotland first-time buyers and home movers increasing three times faster than in the rest of the UK, the exact opposite appears to be getting mirrored in terms of the more expensive households. Obviously, that will have an impact not only on the market, making it more sluggish at that end, but also on the revenue impact for the Scottish Government. I wonder, therefore, whether or not the Scottish Government, why the Scottish Government is not reconsidering, albeit that the taxes have only been in, since April last year, a change in the tax level for the more expensive houses? I felt that the evidence is showing that, in general, the tax take that is going to come from the devolved taxes, I am confident, is going to fulfil the requirements of the budget. The shape of that, as things stand just now, looks to be different to what was envisaged, with more taxation being generated through non-residential land and buildings transaction tax and landfill tax than was predicted, and less emerging from residential transactions. The shortfall in residential transactions is broadly comparable at this stage to the level of forestalling that has been identified or suggested by the Office for Budget Responsibility. I accept that there has been an effect of forestalling. You cannot look at the data without seeing. There is a clear impact of forestalling, which my estimation came to a conclusion in August in relation to the impact on the market. That would be my explanation about the numbers overall. We are going to reach the revenue that is required to support the budget, and I suspect that we will exceed that total. Secondly, the mix will be different. Thirdly, the effect of forestalling is tangible within the figures on residential transactions. As to the final part of your question, convener, why did the Government not revisit those things? I looked at quite a bit of the evidence that the committee had taken itself, and it was helpful to have that evidence. My assessment of the evidence that the committee heard was that individuals in the sector were saying, let's just see what a year does, let's see what an overall year-long position does, and then we can revisit that. Given the fact that the forestalling effect is so tangible, it would be prudent to wait to see the completion of a full year and perhaps longer to see what a whole year looks like without any question of forestalling implicit in the system to come to those judgments. That is a fair assessment of the evidence. Most witnesses said that they weren't calling outright necessarily for a change at this point, but they certainly wanted it kept on the review, because there certainly were some alarm bells ringing, so perhaps a full year's data would be helpful. In terms of data, the Scottish Fiscal Commission raised some concerns about the available outturn data for 2015-16, not feeding into forecast for land billions transaction tax, but it does for landfill tax. The question arises as to why that would be the case, why you would look at outturn data for one or not the other. Specifically on landfill tax, our challenge with landfill tax is that we essentially have not had disaggregated data or any form of creating a particularly robust disaggregated data picture for landfill tax within Scotland as part of the UK landfill tax system, so we have had a particular deficiency there. I think that when I look at the numbers, we are a forecast for 2014-15. If you will give me a second convener while I just get the numbers in front of me, our number I think was about 117 million, and I think that we are heading for something around about 140 million. That is quite a significant difference. I would be the first to accept that we did not have a particularly aggregated base to arrive at that estimate. Therefore, seeing the pattern of experience suggests to me that we are prudent to take that forward for 2016-17. On land and buildings transaction tax, however, we have a model that has been built up from granular data within Scotland based on the property transactions that have been undertaken within the country over many years. That, I felt, was a much more robust empirical base of information that would enable us to form a judgment on those questions. The other point, convener, is that I think that I would be a loath to attach too much significance to the outturned position at this stage on 15-16, given what I have just said about the significant effect of forestalling. I think that that would give potentially a distorted picture of what the market would look like. Sorry, I had a further comment on that. On the LBTT, the SFC raised a number of issues. It says that there may be long-term behavioural responses to new taxes, which the current forecasting approach does not allow for. The behavioural factors should be included in forecasting methodologies as soon as practical. However, despite those concerns and methodologies, they still do not account for any behavioural response. I am committed to further development work on behavioural responses. We have published the forecasting methodology paper, which the committee will have seen. It goes through, in some detail, the modelling approach that we have undertaken and the approach that we have taken to behavioural questions. The section on page 11 of the document around land and buildings transaction tax explores some of the questions around behavioural response and for stalling. I am committed to enhancing the regime on the particular question of the LBTT supplement. I have applied very significant behavioural questions to the assessment of those particular tax. It is so much so that an analysis that would take no account of behavioural response suggested that the revenue generated could be between £45 million and £70 million in 2016-17. However, once the variety of behavioural responses are taken into account, a more appropriate range would be £17 million to £29 million. I have, of course, predicated what I have settled on the number of £23 million as what we could reasonably expect to be generated by that supplement. By that measure, a very significant account has been taken of behavioural factors in that analysis. Obviously, we are in a position in this financial year where the effect of for stalling is of some significance. I want to make sure that we do not provide un-dew significance to the data that comes out of this year, which might be influenced by the effect of for stalling. I do not want to get into that in any great depth, because we will be taking evidence specifically on it. On the LBTT supplement, Professor McEwen has provided the committee with a briefing that looks at the potential difficulties of realising even the £23 million that you have just mentioned due to a host of different measures that can be taken potentially to avoid that tax, for example by letting property through a company, because the supplement does not apply to companies. There are a whole number of areas that he has gone through. How concerned are you that what should be a fairly straightforward measure could, in fact, become fairly complex if the Scottish Government has to, in its legislation that should be brought in fairly quickly, has to bring in legislation to try and prevent such blatant avoidance? I do not think, convener, to be honest that, as I look more and more at tax questions, I do not think that there is anything that is simple about tax, to be honest. If that is the holy grail thereafter, I think that we will have a long search. I accept that there is a need for us to take care in trying to take forward what on the face of it looks like a simple proposition. We are engaging in consultation on those points and, obviously, the committee will exercise scrutiny, and, as always, I will be keen to hear the views of the committees and some of the analysis that you have before you from Professor McEwen will be important analysis for us to consider. We have to make sure that we design a proposition that can meet the purpose that is inherent in the legislation and that it can deliver the level of taxation that we envisage. We have to ensure that we do not inadvertently take steps that, in some way, could make that task more difficult. The point that I want to make to colleagues is that, in terms of the Scottish landfill tax, the Scottish community's land fund will remain at 5.6 per cent compared to the UK's rate of 4.2 per cent. What was your thinking behind that? I felt that I have always been impressed by a lot of the projects that are supported by this particular measure. I said that I would always set the Scottish landfill community's credit at 10 per cent above the UK rate. The UK obviously took theirs down. I just felt that it was reasonable for us to sustain the level of support that we are putting in place and to ensure that what are critical sums of money to a number of community projects were able to be sustained in the years to come. Thank you very much for that. Thanks, convener. Clearly, the Scottish Wraith of Income tax, and whether it is progressive or regressive, has been one of the issues that we have been looking at. I think that the conveners convinced that it is regressive and I think that I am convinced that it is progressive. I am glad to be here. There is such unity at the half of the SNP members of the committee. That is right. We are all independently minded here. Specifically, we were given a piece of evidence by one witness that, for example, if you compare somebody on 25,000 income per year and somebody on 125,000 per year, that is the one that is obviously earning five times the other. Adding one and a half pence on SRIT would mean that the one on the lower level paid £216 extra and the one on the higher £1875 extra, which is eight times. Although it is not very progressive, it means that when the income goes up five times, the tax paid goes up eight times, which strikes me as progressive. I wonder how you would respond to that kind of comment. I am very grateful to Mr Mason for inviting me to intrude into this private debate between himself and the convener. I am not sure, but I shall give my honest, straightforward answer, and I will not, which has to be the case at all times in committees, but I suspect that in Carlerath of the convener, I view the Scottish rate of income tax power as a progressive power, because, on the basis of the analysis that Mr Mason has put together—I do not have that particular example in front of me, but, clearly, people on higher incomes would pay comparatively more in taxation than people on lower incomes. The issue that was on my mind and the issue that I raised were the two issues that were on my mind, which influenced my decision in that respect. The first was that, because of the lock-step, it would involve increasing tax for people on low incomes, and I take the STUC view on that, that this is not the moment to do that. People are finding it hard enough. The second was that, if I had increased the Scottish rate of income tax beyond 10 pence, as a percentage of current income tax in the actual amount of income, the increase in individual's tax bill would have been disproportionately greater for those on lower incomes than people on higher incomes. On those two grounds, I just felt that it was not an appropriate step to take. I understand that, and I accept that the majority of witnesses took that view. However, NHS Scotland—Health Scotland, I should say—did argue that, even though it was taxing the people at the bottom end by using that money to really help people at the bottom end, both earning and not earning, that that could be compensatory and could be overall benefit? There is obviously an interesting and substantial debate to be had here. The issue that would trouble me about that is that that requires a very refined form of targeting to support incomes. I do not think that, at this stage today, we have the powers that would enable us to undertake such a refined impact on people's incomes. If I understand the rationale of that argument, it is an argument that is almost about compensating some individuals for a tax increase that all individuals have taken. I would not be confident that we have the powers to put in place such a refined mechanism. If we look at the tax credit debate, it is in a sense an example of the type of devices that you can take forward to try to get to that refined proposition. That power is not with us today. I do not see anything in our range of powers. I think that I may have discussed with the committee before the challenges that I faced about dealing with the reduction in the council tax benefit payments that were put in place by the United Kingdom Government, because the minute I went anywhere near the B word—the benefit word—I was in territory that I was not permitted to go into, which is why we ended up with a council tax reduction scheme, because I am perfectly entitled if Parliament authorises it to reduce people's council tax. To get to a refined mechanism of almost compensating certain individuals—crucially, it is certain individuals, not all individuals—I do not think that we would have the legislative competence to do that. On the Scottish rate of income tax, there have been questions about the behavioural response, I suspect that you will get more. Professor Bell suggested that we call canny and be careful even in two years down the line when we have the powers. If you get any feeling as to what we could safely increase, hopefully, income tax by 2 per cent, that would not really have much of a behavioural response, or would you not be prepared to commit to a figure? When you look, convener, at some of the analysis that has been undertaken by HMRC to inform this discussion based on the—admitally, this is about strit, this is not about the Smith powers—the behavioural effects do not appear to me to be particularly significant of the variation in the rate, even if the extent of 2 per cent does not look like it would be particularly significant. You explore different questions, and Professor Bell explores different questions in his paper about some of the other opportunities and possibilities that exist with the wider Smith commission powers, which is why, before we come to exercise those powers, we have to do some further work on the potential behavioural response to make sure that we come to properly informed conclusions. I totally agree that we should do work and come to conclusions, but it has been raised with us that what is the point of having all those powers if—at the moment, I realise that we are in early days, but at the moment we seem to be doing the same as the UK on landability transaction tax, on landfill tax and on income tax. I take a different view. On landability transaction tax, we are now at the stage where the convener is feeding me lines. That is very encouraging, but the convener is absolutely correct. We undertook a very significant reform of landability transaction tax when it was implemented, and the UK Government went to a similar system. I have taken steps in the supplement for particular reasons to try to avoid a situation in which the market in Scotland was not distorted by a change that took place south of the border. My rationale for the Scottish rate of income tax has not been because I want to keep it the same as the rest of the UK. My rationale is that I am concerned about, in the exercise of the power in that respect, that it would impose a burden on people that I do not think are in a strong position to pay at this stage, and that we do not have the fine-tuned measures to try to take account of that. On landability transaction tax, we have a 3 per cent extra for second homes, etc. Can you tell me where there is a £40,000 minimum and why that figure was chosen rather than say nil or some other figure? On the basis that there are very few properties below £40,000 that are selling on the market. Secondly, I wanted it to apply across all transactions, which is why the £40,000 level was in my view an appropriate one to set out. Would nil not have worked just as well? I suppose that there is an argument for that, but we can consider that as part of legislation. You said that you are consulting about all of this as we go forward, and there is obviously going to be a separate legislation on it. Are you consulting with Westminster, because they are doing something similar? Is there going to be any kind of joined-up approach, or will we do entirely separate from what they do? We will take our own set of decisions. The Westminster Government has produced a consultation document that sets out some of their thinking. I will continue to consider that and other issues, but we will take our decisions relevant here. On the more general tax, we have had various witnesses and I have to say quite a few representing, in my opinion, the property sector and people at the higher end of the property sector who seem to think that it was a bad thing that there might be fewer transactions over a million pounds. My feeling is that if there were no transactions over a million pounds, that would be a good thing, because that would show that society was fairer and more equal. I accept that, at the same time, that means that you would get less tax, at least in the short term. In one sense, I think that if the top end is being squeezed and the bottom end is being helped, that is good, and I think that that is what the tax was meant to do. However, how do you balance that up against actually seeing the revenues coming in? That is where we have to make a considered judgment in the round. I am very pleased with the effect of the land and buildings transaction tax on the lower and middle ends of the market. I think that those are very encouraging trends that have developed and have provided new opportunities for people in Scotland, and that is helping the volume of transactions. Indeed, in the most recent quarter, July to September 2015, house sales reached the highest volume for any quarters since April to June 2008. There is real movement in the housing market in Scotland of a level that we have not seen since the financial crash. That is a very helpful indicator. We have seen a situation in which, in the first six months of LBTT, more than 5,700 additional house properties have been taken out of tax. All that has taken place in a context in which I believe that the tax that I estimated would be raised and the budget that underpins the budget will be raised. The housing market is stimulated. Transactions are out of tax that were not previously out of tax, so people have not had to pay that to help them into the market. We have managed to raise the necessary tax to support public services and public finances. That is a pretty encouraging start to the exercise of the powers around land and buildings transaction tax. I have already considered that there was a very clear effect of forestalling in the first few months of this year and in the last quarter of 2014-15. From January 2015 to August, there has been a significant effect of forestalling on the higher end of the market. I cannot escape that conclusion. We now need to see what is going on for forestalling and what is the effect on the market. We will begin to see that in the course of the next period that lies ahead. If nothing else was changing, we would be able to look back and see that in itself, but we will now get the 3 per cent coming in, which will presumably also be forestalling for the 3 per cent. Will they start getting mixed up with each other? I am not so worried about the forestalling on the LBTT supplement because we will get the benefit of that. It will be harder to measure because even now, if that is happening— I am trying to recall the volume of transactions. I do not think that I have got the precise number at the front of my head, but I am pretty sure that, and I can be correct if I have got this wrong, that the 3 per cent transactions involved in the LBTT supplement, transactions of that type represent less than 10 per cent of the market. I think that it is a bit—I think that I should not give you that number, but it is not fundamental. We will also get the benefit of that. We were meant to get refunded by Westminster because, with the previous forestalling, they were getting extra tax in what, 14, 15, that we have lost in 15, 16. When will the figure be agreed and when will they pay it? Those issues are tied up in the whole discussion around block grant. The comment that was made by the Scottish Fiscal Commission about landfill tax that the target equals the forecast. Our target is to get landfill waste down over a period, and that is the same as the forecast. I think that they were just questioning should the target in the forecast be different at all, or are you totally convinced that the target is going to be achieved? I think that those are two different questions. I think that it is right to link the revenue to be raised with the achievement of the targets, because if we did not do that, we could have an expectation of higher tax being generated. If we indexed the tax rate to go up, our objective for landfill tax is to have the volume of landfill coming down. As the committee will see from the forward estimates, our forward estimates are for landfill tax to go from £142 million in 2014 to £142 million where, if the first two quarters are replicated for the remainder of the year, as we will end up, down to £94 million in 2020-21. If we did not have a relationship between the tax to be generated and the exercise of the landfill tax policy, we could end up expecting more tax than we could have any reasonable expectation of it being generated. If we are expecting a reduction every year, that could vary 1 per cent, 2 per cent more or less. That is undeniable. However, what we now have is better data and information on which to predict what we are generating in landfill tax much more visibly in Scotland. We can also get more detailed information on the volume of landfill activity in and around Scotland. If we apply the right estimations of the pattern of landfill reduction, we should be able to get a better picture of what that involves. On the block grant adjustment, you have already been asked about that. Just for clarification, you said that the 1617 adjustment, which I am right, is £600 million. It can be reviewed afterwards, but I take it that it will not be changed afterwards. If that turns out to be different, that will affect the future year's adjustment. It will not go back and change 1617. We have agreed a provisional number to enable me to settle the budget. I have to accept that, in a provisional number, there is the opportunity for that to be reviewed, and that would be reviewed with the benefit of outturned data for 14, 15, 15, 16 and 1617. If we did better in 1617 for land builders' action tax than we are budgeting, that could be taken back off us? The interaction between the tax-raised and the level of the block grant adjustment depends on whether it could be taken back off us. It is difficult, because we have a provisional block grant adjustment number, a provisional tax expectation number and we have agreed that those numbers can be reconciled with outturned data once we see the pattern of the performance on tax. There is the potential for those numbers to be revisited. That would be informed by the outcome of the fiscal framework negotiations. Our hope in the long term is that there is a fixed agreement and that it would not be changed retrospectively. Those comments apply only to the £600 million figure for 2016-17. My hope is that we have a fiscal framework that operates and operates in a mechanical fashion. It is just for that one year. My final point was that we had a good session last week with the Scottish Fiscal Commission and it appears to me quite challenging to the Government in some of the discussions that have gone on over the year. For example, one of the things that they said was that the progress in developing the forecasting methodologies has been slower than the commission has hoped. Leaving aside the substance of that, it strikes me that it has been good that they have been asking those questions and challenging that. My final point would be if the Scottish Fiscal Commission was doing the forecasts, who would challenge them in that way? My first point is that I think that anyone who is reading the material that has been published by the Fiscal Commission and looking at the interaction cannot come to any conclusion other than that this has been a very vigorous process of challenge. I am admittedly shouldered more by my officials than by me, but it has been a challenge and there has been sustained challenge by the Fiscal Commission. That is what we have set them up to do and I think that they have served Scotland well in exercising that degree of challenge. That is exactly what they are designed to do. I think that there is an issue raised by Mr Mason about whether, if the Fiscal Commission were producing the forecasts, who would challenge them and who would challenge them as effectively as I think the Government has been challenged by the Fiscal Commission. Lady Rice made that comment to the committee and Professor Hughes-Hallant made that comment to the committee. I think that those are real issues. Can I start out of curiosity where John Mason left off with the Scottish rate of income tax? Cabinet Secretary, you said that you did not have those kind of finessed powers to compensate people. Given the example that you gave of the council tax reduction scheme, but we could have landed on the bedroom tax, is it not the case, just for my curiosity, that local government could have a set of powers that you might have sought to utilise? I do not think that to give that degree of… The point that John Mason was raising was about if I take the numbers involved… For the sums of income involved, I think that to try to compensate people requires a very fine level of accuracy and precision. If the policy objective is to directly compensate, to make that possible and practical, and the two schemes that Jackie Baillie cites, there are eligibility criteria that drive those issues. On the council tax reduction scheme, we have essentially had to mirror the arrangements on council tax benefit, but in almost a flipside fashion to enable us to do that. That has been a helpful navigation through this issue to make sure that we broadly got council tax reduction to the people that required to get that. In this particular income measure, we would have found it more difficult to reach. You also have to have a statutory basis for paying it. The statutory basis exists on discretionary housing payments for bedroom tax. It exists on council tax reduction because we have lots of competence over the council tax. Incompensation outwith a provision such as the Scottish welfare fund, for example, I would be interested to hear how we could do that, but it would strike me as being something that would be really quite difficult for us to find a practical way that was within legislative competence to enable us to do. I would interpret that as maybe not so much that there is no power but that there is not a sufficiently finessed power. Would that be fair? I am not sure that there is much difference between the two, but the point that I am making is that to address the challenge that John Mason has set, you have to put forward a proposition that is very individually focused and targeted, and I do not think that the powers exist to enable us to do that at this stage. I turn to LBTT, but focus on the residential element, because that is where there is concern. It appears to be performing reasonably well, indeed better than forecast and the non-residential. I am pleased that OBR has revised the four stalling figures. That will benefit the Scottish Government financially, but there is nevertheless a shortfall forecast to the end of the year. I have sat here with you before and you have accused the OBR of being incredibly optimistic in some of its forecasting. With some justification, I now sit here and look at page 16 of the spice briefing that you may have had an opportunity to see. I would recommend it to you, where we have a complete reversal and the OBR is much less optimistic than the Scottish Government. Indeed, for 2016-17, they estimate that there will be 40 million less in residential transactions, and as you take that table—helpfully, the Scottish Government is in blue, OBR is in pink—the difference by the time you get to 2020-21 is over 70 million. Let me put that in the context of your own modelling on page 9, table 7, where you forecast the annual growth in volume of residential transactions, although positive overall is declining. We go from 5% this year to 1% in 2021. I am trying to understand whether the OBR has become suddenly much more pessimistic and on what basis. Why is the Scottish Government, given what we know about likely shortfalls this year, become so optimistic in the face of the evidence that you present about declining volume of sales? The first thing that I should say is that I do not expect there to be any shortfall in revenue this year over the devolved taxes that underpin the budget of the Scottish Government. Our budget is underpinned by 498 million pound in revenue to be raised, and I am confident that that will be exceeded. Therefore, I foresee no shortfall in the devolved tax revenues for 2015-16. That is what you were all like. That is what I said about my question in relation to residential LBTT. It is just for the sake of clarity that I do not envisage any shortfall in 2015-16. On residential tax, we are currently about £31 million adrift on residential LBTT. The estimate of forstalling has now been revised up by the OBR to between £20 million and £40 million and a mid-range of £30 million. In a sense, the estimates that we have put in place while taking into account the issue of forstalling are in the right scope. When I looked with interest at the contribution that Robert Chote made to the committee last week, it was an interesting discussion. Mr Chote said that although there were differences between the forecast—I should also point out before I get to Mr Chote's comments—that the estimate for 2015-16 from the OBR at the autumn budget revision was substantially revised down from the position that it had in July and much more in line with the forecast that we have been making, which has been validated and is reasonable by the Scottish Fiscal Commission. All those changes are welcome that we have seen that happening. On the forward revenue forecast over the next five years, Mr Chote said that he has ascribed the difference to the Scottish Government, assuming slightly more rapid increases in house prices over this period and also a higher assessment of the increase in the number of transactions over the period. The number of transactions point is essentially us assuming that we will return to the average of number of house transactions in Scotland, which we have seen over some years. On the whole, the way in which Mr Chote characterised the difference between the OBR forecast and the Scottish Government's forecast over the course of the next five years, I cannot remember exactly what he said. I would not regard the difference between the two as being large in comparison to the uncertainty that lies around either of the forecast in isolation, which puts that into its proper context. The final point is that the OBR forecast is the first time that we have done a forward forecast for five years, although the OBR has done one before. The most recent one was a substantial revision downwards of the figures that it had and was much more willing to align with our expectations. I would have observed that Mr Chote certainly was very diplomatic and acknowledged that there were different forecasting models that were deployed. I think that it is interesting for us as anoracts to consider, which is the more accurate as we move forward. Obviously, trying to estimate yield is something that I would assume in the Government that we would want to get as near perfect as possible. I accept that. I accept that there is being absolutely precise about all of those figures that are incredibly difficult in terms of predictions, particularly when we start going out five years hence. That is very difficult indeed. However, the evidence that I would marshal around our plans around 2015-16, where I would summarise things are just now, our residential forecasts have been undermined by forestalling, our non-residential estimates have been exceeded by performance, and our landfill tax expectations have been exceeded by performance as well. In the round, we are going to satisfy, generate the amount of revenue that is required to support public services in Scotland. For a first year of estimating and predicting tax, that is an encouraging position to be in. My question is related to residential transactions, because that is where there is a differential that I think is worth exploring. I just want to question something that you said. I think that you said that the estimate was based on returning to average volume of house sales, was that correct? My concern about the data in your own forecasting methodology shows that forecast volume of sales is set to decline. We are still remaining positive, which is good news. The assumption is from 5.43 per cent this year to 1.25 per cent, and that must have an impact on the forecast revenue that the Government is assuming. That is about a growth rate. I am assuming that Jackie Baill has seen the forecasting methodology paper. What that shows is how the Government estimates by the growth that takes place over the next number of years, we end up in a position of where we return to the average annual growth in volume of residential transactions. If I look at the table on page 9 of the forecasting methodology, Jackie Baill is absolutely correct that there is a slowing up in the growth rate of transactions, but it is a slowing up of a growth rate that gets us to the average of residential transactions. Can you tell me what the average is? It says 6 per cent. That will get us to that, because that is not evident from the table. On page 9 of the Government's forecasting methodology in figure 1 and table 7, the detail is shown graphically in figure 1, and the detail is underpinned in table 7. That is taken from Registers of Scotland and the SAC's register. I think that it is quite optimistic, given where we are, but it is interesting to have that response. If I go back to the point that I discussed with Mr Mason a second ago, the Scottish Fiscal Commission has put the Government through the ringer, if I could put it that way, so that we all understand what I mean. We have been put through the ringer, and the Scottish Fiscal Commission has judged our forecasts to be reasonable. It is all due respect also judged that it had not had an adequate response two years running to the additional request to model the behavioural response to LBTT. When you consider the action plan that was presented late in the day, I do not want to put words in their mouth, but the suggestion that they were quite annoyed that so little progress had been made on such an important item, I thought, was evident from the dialogue that we had with them last week. I think that if we look at the modelling paper that was put out by the Government, an extensive amount of detail on behavioural analysis that is here. I am not, for a moment, trying to suggest that this is the end of the story. I am accepting that we must continue to refine our approach to behavioural analysis. I do not want, in any way, to suggest that we are not continuing to do that, but I do think that we have a reason for that. The Fiscal Commission is quite right to say to us that we have to do more, and I accept that, and we will do more. I think that there was a sense of urgency about it, rather than something that is considered in the long term. If you are reflecting that urgency, that is very welcome indeed. Can I move on to borrowing? You have committed in your budget to using the limit of your borrowing powers, which is £316 million in 2016-17. I understand that the figure for this year was about £320 million, give or take, and £304 million. There you go. Thank you, Cabinet Secretary. None of that has yet been drawn down, and I am not sure whether you have established the mechanism by which you would do so yet. Is that caught up in the fiscal framework discussions? Do you intend to draw it down? If so, when and what are you likely to spend it on? Let me take the questions in reverse order. I hope that we spend it on what will be our capital programme. Essentially, the borrowing facility is there to fund our capital programme, but the amount of borrowing that we draw down will be dependent on the amount of funds that we require to support capital projects within a year. Jackie Baill will understand that I will not borrow any money that I do not require to use. For example, if I had capital projects that were not going to require to be paid this year, there would be no sense in me borrowing the money. There would be no sense in me borrowing £304 million if I do not need to spend £304 million because the wet weather has slowed up a project, so we do not have that much money going out the door on a particular project or whatever it happens to be. The issues are not tied up in the fiscal framework. None whatsoever. The arrangements are in place. We will borrow at the cheapest rate, so whatever route we take will be the cheapest one in terms of repayments. We will borrow the amount of money that we require to support our plans between now and the end of the financial year. I will update the Parliament about the steps that we take in that respect. At what stage will you arrive at a conclusion, given that we are well into the budget business? That is a very active issue on my agenda, and I am looking at it on an almost daily basis. The Government response would be soon. Oh, no. I know what the Government response of soon means. It is much earlier than that. Oh, that is even better. Soonest. There we go. Can I explore a borrowing power that you currently have for revenue? I listened carefully to what you said, because that power gives you the ability to borrow revenue up to £200 million in a given year if your receipts are less than anticipated. Are you confident that, in all areas, your receipts are going to exceed expectations overall? Yes, I am. You have no concerns about non-domestic rates or, indeed, LBTT residential elements? I can only use that resource borrowing facility for devolved taxes. I cannot use it for non-domestic rates. That is fine. Can I move to non-domestic rates now? There is a forecast falling revenue of 2.8 per cent in real terms. That is, obviously, quite substantial. It is the first time, I think, that it has been estimated for 2016-17. Is that the influence of the Fiscal Commission saying that your buoyancy estimates were too optimistic, or is there something else going on in there that has led to that? There are two things that are affecting the non-domestic rates pool. First of all, it is the effect of inflation. Inflation is much lower than was predicted when we made our estimates of non-domestic rates. For example, the inflation forecast for 2015 was reduced from 3.3 per cent to 2.1 per cent. That has quite a substantial effect on the degree of non-domestic rates that we could expect to come forward. Inflation has been a factor. Secondly, the buoyancy estimates, which Jackie Baillie will recall, the Fiscal Commission suggests that they were over-automatic, so we reduced them. The buoyancy estimate for 2014-15 was 1.55 per cent, and it actually translated as 0.82 per cent, which has an effect on our estimates. I would characterise it more as the effect of those factors rather than the estimation. You have set a large business supplement at 2.6 pence, which is double my understanding of the similar rate in the UK for similar-sized properties. Given that you have kept quite a close correlation between the UK and Scotland on income tax, on LBTT, on landfill tax, why differently on non-domestic rates? Can I add something to that? I am assuming that you are collecting in totality the same amount, but you are placing the burden in different places. Roughly the same amount, yes. In some respects, there are similarities in the approach that we have taken with the rest of the United Kingdom, but in others we have taken dramatically different approaches. We have taken a dramatically different approach on small business bonus, small business scheme support, for example, where our scheme has been significantly more generous than the rest of the United Kingdom. We were on the more generous end of the spectrum in that respect. On that issue, I have faced difficult choices. I came to the conclusion that I would have to take steps to strengthen the volume of revenue raised by non-domestic rates, and I decided to apply a higher business supplement for the large business properties. What that translates into is a total increase in the rates bill for a company that is paying the large business supplement combined with its core business rate of 3.4 per cent, compared with the annual increase in 2015-16 of 2.3 per cent. If we look back over the past few years, in 2011-12 the increase in the rates bill for a company paying the large business supplement was 4.6 per cent, and in 2012-13 it was 5.8 per cent. So, 3.4 per cent set in that context, particularly where we have had pretty low levels of business rate increase because inflation has been reducing those increases. I think that this is a not unreasonable charge that we are making. I think that businesses would maybe take a slightly different view, and I have certainly had a letter from Asda indicating that they would pay 2.6 per cent higher in Scotland than in the rest of the UK. I think that the reference made by businesses is the commitment given by yourself and the First Minister to ensure that the rates regime is the same, both north and south of the border, because you would want to not create any disincentives that you would want that to be kept in line with the rest of the UK. Genuine concerns from the investment decisions that they will make on the back of that. I understand those concerns, and I do understand them, and I don't in any way dismiss them. I would say that our commitment has never been to have the same business rate regime as England, because, as I have already explained in the small business bonus scheme, we have had a significantly more generous scheme in place. Our commitment has been to maintain the uniform business rate that we have maintained at £48.4, but the large business supplement took a decision that it was possible to increase that to strengthen the non-domestic rates pool. A lot of ground has been covered already, so I have only got a couple of questions. I mentioned, cabinet secretary, the impact of forestalling in that forming part of the discussions that are taking place with Treasury ministers in relation to block grant adjustments. I wondered if the Treasury has given any indication of their numbers in terms of where they have seen the impact of forestalling, particularly in their march figures. We have had some figures put before us that have shown a substantial forestalling in terms of million-pound-plus properties in the march period, which I imagine has led to quite a boon for the Treasury in that period as well. Has there been any indication from the Treasury around that? Not from the Treasury. Obviously, the OBR forecast has increased, which is an independent validation of all those questions. The data on the number of transactions must be available to us. I am just looking at it. In the Regers and Scotland's statistical release for July to September, there must be a—whether it goes down to the degree of detail in the price bracket that Mr MacDonald is asking about, I do not think that it does in this publication, but I am pretty sure that Regers and Scotland— It will be helpful, cabinet secretary. The numbers that we had put before us were from a YourMoveAcadata examination of house price of transactions, which indicated in terms of sales that were in 1 million-pound-plus sales that indicated that 90 took place in March and none in April, according to the numbers that they had. I have accepted that there was an impact of forestalling where transactions took place between January and March, and that will have had an effect on the market. I have made no attempt to avoid that point. I was merely asking whether the Treasury had given you a look at what data it had in terms of the impact on stamp duty land tax during that period, but that is helpful in that respect. Secondly, on the issue around SRIT and the on-going budget discussions that are taking place, I know that one of the things that you have always said at budget time is that if other parties in the Parliament have alternative approaches or would wish to see something different being done, that your door is open to listening to that. Leaving aside the deputy convener on this, have you received any other opinions or views on what you should be doing in relation to SRIT at this stage? I think that it is LIDs. Finally, on wrapping up on the issue around forstalling and behavioural response, etc. Of course, there is a contrast with the approach that was taken at Westminster on the issues where the chancellor stands at the dispatch box and says that I am announcing a change and that it is effective as of midnight in a bid to prevent the kind of forstalling effect. Obviously, there is a different approach that has been taken here, which I think is a legacy of the parliamentary approach to budget scrutiny and something that I know that you are very keen to ensure that you respect the views and wishes of Parliament in regards to that. Do you take a view as we get more powers coming in over areas of taxation and the likelihood of behavioural response to pre-announcement of changes before they come into effect? Do you have a view as to whether there would be a more helpful approach that could be taken? I think that it raises some issues for Parliament to consider about how we organise ourselves in this respect. I am happy to engage in discussion with the committee about those points. The ability of the chancellor to change stamp duty rates that night creates a difficulty for us and we can see the effect of that. It is heading for around £30 million worth of a problem for us. It is a tangible issue. I think that when I look at what I am doing on the 3 per cent supplement, that is requiring primary legislation. We are going to have to move at some pace, as the committee may have noticed. He says delicately. We believe that we need to require primary legislation to do that. The advantage that we have here is that we are not at risk. If there is a forestalling issue, we will get it, unless people in England decide to buy holiday homes in Scotland or second homes or buy to let properties in Scotland to avoid the George Osborne proposition in the window between January and March. It is somehow to avoid the 3 per cent and then potentially to avoid an LBTT charge here. For a property that would attract an LBTT charge here, that might happen. I do not think that that is going to be of the £30 million variety. There is an issue to be explored here, but our process is as to whether we need to look at having a slightly more nimble process for changing some of those questions. However, I stress that. I am happy to engage him with the committee. Following on from that, the chancellor is not necessarily restricted in terms of when he brings in those changes. As we saw with the stamp duty change, he did not have to announce it as part of a specific point in the calendar year. He did not have to stand up and announce that. Is that again something that you are reflecting on or you think that Parliament itself should reflect on in terms of the flexibilities that exist within the parliamentary structures to allow for such an approach from a Scottish Government in the future? Should it choose to make changes? I note withstanding the requirement for us in certain circumstances to respond promptly and swiftly to certain circumstances. I generally take the view that it is a good thing to do all those things as part of a budget process to set it, as I did in December, albeit late in the year, the whole picture of tax and revenue and expenditure, and to do it all in one go and to allow Parliament to consider those issues. Cabinet Secretary, you said in answer to Jackie Baillie that you thought that in terms of devolve taxes for 15-16, you would come in ahead of projections. If that happens, was the block grant adjustment for 15-16 without prejudice as well, and could that spark a review of that? Or was that slightly different from 16-17? Was that absolutely fixed for that year? My recollection is that that was absolutely fixed. For 16-17, it is to use this term that you have used without prejudice. I think that that is perhaps to do with the fact that we have had to arrive at a second year of a one-off block grant adjustment, which I don't think that anybody wanted to do, but it's because we haven't got the fiscal framework agreed. There are two different categories, and I'm not complaining about any part of it. It's where we are. I suppose that the reason that I asked is that, if you've reached 16 million, if the OBR projection is something like 627 million and your projection is 671 million, is it not then almost certain that the 600 million—if the 600 million is a good bit below both of those estimates, are we not almost then certainly to have some kind of adjustment later? We'll see. And as a father of new minister's children, Mr Brennan will know what we'll see means. We could spend the rest of the day discussing that, and so in that case I'll move on. Okay, I suspect that we won't get much more clarity. In terms of income tax, my recollection—or recollection could be wrong. I'm just going from the statement that you gave to Parliament, which I haven't reread in advance of today. My recollection is that you set the 10-pence rate for 16-17, and I'm 50 per cent sure that you said that the Government will set out its medium-term intentions in the early part of the year. Obviously, there's an election coming up in May, so it depends who is running the country after that. Is it your intention to set out the Government's medium-term intentions for income tax over the next month or two? I'd like to get to the point in my statement where I could quote exactly what I said, but I'm going to struggle to find it without keeping the committee here long. Essentially, what I said was that, subject to securing agreement around a fiscal framework, I would set out our medium-term approach to tax. From 2017-18, the Parliament will have more flexibility in setting income tax rates, however that will depend on reaching agreement on a new fiscal framework and final passage of the Scotland Bill. I can confirm that, subject to achieving these outcomes, the Government will set out our longer-term intentions with regard to income tax ahead of the dissolution of Parliament at the end of March. Essentially, it's making the simple point that we won't be able to set out our position if we don't have a fiscal framework, because we will not be having the Scotland Bill. However, if we get a fiscal framework, then, agreed by 12 February, I will set out my position to Parliament. We've talked a little bit about non-domestic rates already. When I look at page 95 of the budget, non-domestic rates seem to go down, not just in real terms, but they appear to go down in cash terms by around about £30 million from 1516 to 1617. I'm assuming that included in the figure for 1617 is the £130 million or so that you anticipate being collected. Like for like, they're down by £160 million potentially, so even with an increase in the poundage of not 0.8 per cent taking to £48.4, and the increase in the large business supplement up to £2.6, even with those increases, we're still down in cash terms by £30 million. Obviously, growth for the economy as a whole over that year is projected to increase, so I guess I might have lost to try and understand why we're going down in cash terms when we've increased the taxes and overall economic growth is still projected to be in the region of 2 per cent. I'm exploring the very same questions, because if I add also into that the pattern of non-residential LBTT transactions, which are very encouraging, I'm not fascinated, but I'm determined to understand the relationship between all of those things. I think that the growth rate is 0.1 per cent, where 1.7 per cent annualise growth, which is a reasonably healthy growth. UK is 2.1 per cent by comparison, so there is growth in the economy. Non-residential transactions are performing very well, much better than we anticipated. I don't know if they're performing better because we had an estimate that wasn't good or wasn't effective informed by data as it might have been or whether the economy is doing well. Some of the analysis that I look at about availability of property is looking tight again in certain parts of the country, so there are a whole variety of factors that make the non-domestic rates position look a little bit out of kilter. I'm exploring that issue, and it's a reasonable issue that Mr Breff reads. I might not have a full answer to that, but for the 15-16 figure, which is most of the way through the year, are we on track for the 15-16 figure for non-domestic rates, or has 15-16 been a little bit optimistic and there's an adjustment into 16-17, or are you, as far as you're aware, on track? We'll take some effect in 15-16 because of the reduction in inflation, so some of those factors will begin to play in and some of the effect of buoyancy will begin to play in as well. Some of those factors will be apparent in 15-16 as well, and that will affect the non-domestic rates pool. As far as you're aware, do you think that we're slightly behind schedule for 15-16, or is it too difficult to say? I think that it's difficult to be precise about that, but we will have a better idea as the remainder of the year goes on. Large business supplement, you've had a couple of questions on that already. Has there been a business and regulatory impact assessment carried out for that, and if not, will there be one carried out? We're at consultation now on those questions, and it's in that context that I will look at the issues that are relevant to a business regulatory impact assessment. Lanin buildings, transaction, tax—again, I want to focus on the residential aspect of it. You've had various comments about the behavioural impact, and there does appear to be a bit of a disagreement. Given that you said at the start of proceedings here to the convener words of the effective that you believed is a general proposition, it's extremely important to look at the behavioural impact, and it's something that you need to work on year by year. That was your general proposition. For the LBT supplementary charge, you appear to put those words into practice, and you appear to have done, I think, a pretty high degree of work in terms of trying to work out the behavioural impact. The bit where I'm then lost is the fiscal commission saying that they've been there concluding remarks, and they've reiterated it again here last week. Page 37 of their report, paragraph 8.3. Last year, they recommended behavioural response being looked at for LBT. Now that they're using the expression, in particular, we're increasingly concerned about the residential LBT forecast, which still assumes no behavioural responses. They've expressed it pretty strongly over the piece. They've used the term increasingly concerned here. What will it take from them for you to look at a behavioural response on residential LBT? That work is being undertaken now in the light of the fiscal commission's recommendations. It will have an effect on any forward projections that we arrive at, which will have to be tested by the fiscal commission. On LBT, it's raised by the Fiscal Commission. You've said out, I think, helpfully, I have to say, your projections over the period, instead of just doing single your projections. When we get to £545 million worth of residential LBT, according to the Fiscal Commission, your assumption is that out of the £545 million, £188 million worth of it will come from fiscal drag. They've raised some questions about how viable that is. Is it your position, and again, this is a medium to long-term thing, depending upon the outcome of the election, is it the Government's intention that there are no changes to the thresholds at all over that five-year period? In the forecast that we have published, the answer to that question is that there are no changes to the assumptions. That is a rolling forward of the existing policy position on LBT. I, of course, must reserve the Government's position, if the Government is fortunate enough to be re-elected, to change those provisions if it decides to do so, but there is no—I would not want the committee to read into those estimates that those are definitive predictions. Those are a prediction in 2020 to take that as an example of the application of the current policy framework and the variables that will get us to that point. I discussed with Jackie Baillie some of the issues around the number of transactions, assumptions about price, and Mr Cho discussed some of those issues with the committee into the bargain. That is where we have to be careful about the five-year forecasts. The five-year forecasts are just a setting out of what would happen if we did not change anything. We may well change things. That will be for the Government to decide in due course. Crucially, we are setting out a proposition here for 2016-17 that underpins a proportion of the budget, so that one is really critical in setting that out. First of all, I have an observation. I am sure that everybody received a letter from Asda about the large business supplement. Before the Scottish Parliament existed, the difference between rates and rateable value in Scotland and England was dramatic and not in Scotland's favour. It was only when the rateable value per pound was adjusted that we started to see our rates become anywhere close to being equal with England. It is worth noting that the Asda's of this world and others are only beginning to see rates comparable with England and non-domestic rates comparable with England. In the interests of fairness and accuracy, the previous Government, the Scottish Executive, took steps in its latter days. I think that it probably happened in 2005-06 or 2007? I think that it might have been in 2007-07. In 2007, it took steps to get to a position where it was the same pound. What was previous—Gene Durkirk is right, absolutely at this point—that for many years, the poundage rate in Scotland was higher than the poundage rate in England. They were equalised, I think, in about 2006-07. Obviously, the Government has sustained that since then, just to be fair. I am very happy to be fair, cabinet secretary. What I wanted to ask was about the timelines. At the beginning of the meeting, the Scottish Parliament must be satisfied with the fiscal framework, and there would be opportunity for scrutiny. Given that the Parliament will cease to be on 20 March, and that you are hoping to reach agreement with something that you can come and present to Parliament on 12 February, are you hoping to see that complete scrutiny work and inviting the Scottish Parliament to approve the agreement before the Scottish election? I have been clear about this to Parliament and to the United Kingdom Government. We will not put a legislative consent motion on the Scotland Bill to Parliament unless we have a fiscal framework that we can recommend to Parliament. Therefore, the timetable dictates that we have to have that fiscal framework agreement in place for us to lodge a motion on the acceptable parliamentary timetable for legislative consent by 12 February. If we get to that point, I will recommend a fiscal framework to Parliament that I have negotiated and I am going into that negotiation in good faith to secure an agreement that implements what was required of us by the Smith commission. There is a possibility that I will not be able to get such an agreement that satisfies me that it is consistent with the Smith commission, so I will not be coming to Parliament with such a recommendation because I am unable to get such an agreement. I hope not to be in that position because I want us to be able to exercise the powers under the Smith commission, but that is how the sequence of events works. I accept that the committee is not able to see an early draft of it, a midd draft, a late draft or any draft, because there is not such a draft because we do not have an agreement yet and that has been worked through to get to that point. However, I will only come to Parliament with a legislative consent motion if I am satisfied with the detail of the fiscal framework that we have before us. This might just be my own ignorance of procedures, but there would be no, this would not be a situation where there is consultation, public consultation at all. What opportunity would there be? I mean, there are a number of economists who know who are very anxious about that. I think that the issues about the fiscal framework have been pretty well aired in the wider media, and indeed the committee has taken evidence from a range of different experts on this question. I think that those issues are out there, and the way that I am looking at it—I appreciate that this is not ideal, but I have tried throughout this, I have taken part in parliamentary debates, I have taken part in the committee's inquiries, I have appeared here on a number of occasions to give evidence. I have tried to inform the discussion as much as I can about the issues that are at stake, but what I cannot tell the committee today is the detail of the agreement because it is not agreed—not because I am keeping it to myself, it is not agreed—but I am clear in my mind what has to be in that agreement because the Smith commission essentially set it out, and if that is not what is in the agreement, then the legislative consent motion will not be coming to Parliament. That appears to have concluded questions from the committee. I have just got one or two questions to follow up on non-domestic rates. What is a buoyancy rate for 2016 and 2017, and how does that compare with 2015-16? 0.97 is the rate for 2016-17, and if you give me one second, convener, the buoyancy rate for 2015-16 is 1.25. I want to follow up to a question that Mark asked. He talked about treasuries not having a discussion of the treasier regarding forstalling. Was that not part of the discussions in terms of block grant adjustment? The question that Mr McDonnell asked me was about the number of £1 million properties that we have talked about forstalling. It was about the impact that forstalling had had in terms of the treasier's revenues, if they had given any indication as to what they had seen from their own revenues, but I think that the cabinet secretary indicated that that was not the case. On a point about SRIT, whether it is regressive or not, clearly the STC has said that it is regressive. The reason for that is that, if taxes go from £20 to £22, that is a marginal rate of 10 per cent, whereas for higher tax payers from £45 to £47, that is a marginal rate of 4.4 per cent. That is one of the reasons why they have said that it is regressive in terms of their evidence. Those factors are absolutely correct, convener, but I cannot deny that the school's rate of income tax as it currently stands is progressive. You have to be careful in the decisions that you take that you maintain that progressivity. On that point, is there anything further that you would wish to add before we wind up the session? I look forward to meeting the committee in my constituency on Monday. I am profoundly grateful to the committee for enabling me to welcome you to Pitlockery. As you know, it is a key marginal. We are trying to do all the time to assist you with the election only a few months away. I would like to wind up the session for today. I thank everyone for their questions and contributions.