 Graf y cyfgweld hwn i'r 18r ac yn 2014 gynnwys Cyfnredin nhw. Rwy'r pethau dylwn iheithio i ddefnyddio arall i ddwyalt datblygu a chyfnodd rôl i'r ddefnyddio'r mesud wedi'i ddechrau eich cyfnoddau. Mae ymddirionedd i'r ysgol fathau cyfleidol yn ymddirionedd i'r 5rhaeth. Mae ydych chi i. Yna ydych chi'n ddefnyddio'r ysgol yma yn y teimladau ar gyfer y teimladau, am brwy, y troi producell ar y ddechrau. I therefore ask members to keep their questions fairly brief today, and I will endeavour to do so. Also, our second item of business is to take evidence on the Children and Young People Scotland's Act from the Cabinet Secretary for Education and Lifelong Learning. The Cabinet Secretary is accompanied today by Stuart Robb and Scott Mackay from the Scottish Government. I intend to allow an hour for this session, and I would like to welcome Mr Russell to the meeting and invite him to make a short opening statement. You may have noticed that I am not Aileen Campbell. I offer Aileen's apologies. She has unfortunately been taken ill. To the best of my ability, I look forward to answering your questions today. Thank you for the opportunity for us to give evidence on the additional capital costs associated with implementing the early learning and childhood commitments for additional two-year-olds relating to the supplementary financial memorandum for the Children and Young People Scotland Act. I would like to stress at the outset that my colleagues and I do appreciate the need to provide the Finance Committee with this information, and I know that Aileen Campbell would have liked to have got that to you sooner. Unfortunately, in the very short period between the new provisions being put forward and the date by which the supplementary financial memorandum was required, it was not possible to secure the essential information required for making a robust estimate, not even, I have to say, to provide a best estimate. We want to make sure that we get this right to properly inform parliamentary consideration and to deliver the policy properly. This has meant going through a complex process, which has required close engagement with local authorities, through COSLA, to produce what I believe is now a robust estimate. I want to start by saying that the Scottish Government is committed to fully funding the agreed costs of this policy. We have already committed more than a quarter of a billion pounds, £280 million in fact, to local authorities to support implementation of our early learning and childcare commitments. This includes significant capital funding, £59 million over the next two years in revenue costs for the expansion of two-year-olds and £3.5 million funding to strengthen the capacity and skills of staff. This demonstrates how seriously we take this policy and how committed we are to delivering it. In relation to capital costs, we have already made significant funding available. In the original financial memorandum, we provided £90 million in capital for the provision of additional capacity for three- and four-year-olds over three years. The Cabinet Secretary for Finance, Employment and Sustainable Growth reaffirmed that commitment with a further allocation of £31 million towards the capital funding requirement for local authorities over financial years 14, 15 and 15, 16, specifically in relation to the expansion of early learning and childcare to additional two-year-olds. The methodology for estimating the capital costs associated with those provisions is not straightforward and has required close engagement with COSLA and local authorities. We have analysed data from local authorities, which includes their estimate of the level of investment that is required, and recent examples of capital spent on the nursery estate for new builds or adaptations. The work has also been underpinned by data on location and numbers of eligible children, along with estimations of likely uptake rates, availability of existing capacity and distribution of children between local authorities and partner providers. This work has shown huge variation in the cost of being applied by local authorities and in the delivery models. We have not yet been able to reach a final agreement with COSLA on the figures that we intend to do so. However, we have produced the proposal, which is detailed in the paper that you have in front of you. That suggests that an overall capital cost of £61 million for the expansion in early learning and childcare to 27 per cent of two-year-olds. I believe that this represents a fair allocation, drawing on clear evidence and the data that is submitted by local authorities on costs of recent new build and adapted accommodation and linking the latest available statistical information and uptake rates on existing capacity. This has been a complex process, I think, of necessity. Although we have not been able to reach a final agreement with COSLA, we will continue to engage with it and with the local authorities, and we expect to reach that agreement. Of course, convener, I am happy to take questions on that basis. Thank you very much for that opening statement. As is normal in the Finance Committee, I will start with some opening questions and then open out the session to colleagues around the table. In paragraph 4 of your submission in Annex A, it says that 20 returns have been received and analysed by the Scottish Government. It then goes on to paragraph 6 that there has been a wide variation in costs per child being applied from £1,000 to £23,000. How are you able to get such a definitive figure of £61 million when it seems that the figure has not been based on all 32 local authorities? The answer to that, convener, is in the detailed information that we provided to you, particularly the metric that we applied in, specifically, paragraphs 14 to 16 on the table, indicate the overall calculations. The following paragraph shows how the metric was developed based on the local authority examples. If I could ask Scott Mackay just to expand on that, but I do think that this is based now on very firm information and on experience that exists, for example, through the work of the Scottish Futures Trust, which is well-advanced. In terms of the data that we received, not all local authorities sent us data on new build and estimates of future build. We analysed what was available to underpin an average that is generated in the metric that is displayed in the paper. One of the areas in which COSLA has raised concerns in its submission is the 6040 split of provision between the public and private sector, which is by far the most significant issue in that aspect that needs to be reconsidered. What I have said in paragraph 2 below that section is that private providers have been approached, but in the vast majority of councillories they are unable or unwilling to offer places for two-year-olds. They go on to say that two councils in the west of Scotland are needing to work on a 100 per cent local authority provision. With one of those councils finding that only one in 70 private providers is willing to place two-year-olds from families seeking work. Therefore, as an average, COSLA considers the true split of local authority provision will be 80 to 100 per cent, which means that the £61 million is somewhat optimistic. We do not believe so and I will tell you why, convener. The latest preschool statistics show that on average across Scotland early learning and childcare provision is delivered 60 per cent local authority, 40 per cent through partner providers. The preschool statistics already show that there are 5,700 two-year-olds receiving funding early learning and childcare, at which 50 per cent is delivered in local authority settings and 50 per cent by partner providers. Where that provision already exists, 60, 40 is a favourable split to local authorities. COSLA has given examples of a number of councils that are using up to 100 per cent local authority provision. I do not deny that, but we have seen a number of examples of councils that are using partner providers to deliver in excess of 60 per cent and in some cases 100 per cent. There is a variation in current practice and in plans around the use of partner providers we propose that the acceptable split needs to draw on current experience of what is happening, and that would lead us to the 60, 40 split. I am not saying that this cannot continue to be negotiated. Of course, in a negotiation, both partners take robust positions and then discuss it, but the evidence that we have is that the 60, 40 split is an accurate split and it is based on actual activity at this present time. Of course, we will continue to discuss it. Again, in a causal response, it says that the information obtained from councils has been shared with Scottish Government officials during our discussions. We agreed a process to seek further clarification of councils to help them to discussions with the metric. However, before this process could be completed, we received an updated copy of the metric, which basically said that the figure had been set at £61 million. How flexible are you in terms of that figure if negotiations are continuing with COSLA? There was an obligation for Aileen Campbell to come to this committee and to give further information. It was quite right that she did so. The metric that we have been working on is the information that you are required to have. That leads us to the £61 million figure. The COSLA figure is very substantially higher, but we have moved from early discussions of a lower figure. We will continue to discuss it, but we are confident in our robust calculations. Of course, there will be flexibility, but I think that the calculations that are laid out before you are very robust indeed in terms of our estimate of what is taking place. I just want to follow the question before I open out to colleagues around the table. We are talking about policy, which is going to have to start being delivered from August. There are still discussions on going with local authorities in COSLA. How confident are you therefore that we will be able to begin commencement of this policy from August as intended? I am entirely confident, but we are also operating as much help as we can possibly offer to the local authorities themselves. That is the right thing to do. I mean, from the very beginning of this—and I certainly do not question COSLA's commitment to this— from the very beginning of this, COSLA has shown a strong commitment to the policy. We in our term have said that we will fully fund this policy. There has been no question about that. Now we are talking about detail. Let us remember the numbers involved. The roll-out starts in August with essentially a comparative small number, and it rises over the next year and a bit. From the 15 per cent that is achieved at the end of the first year to the 27 per cent that is achieved at the end of the second year. In those circumstances, what requires to be spent now can be spent now, but there will be further discussion to be taken place. I am confident that authorities can deliver. I think that the area in which there is most difficulty in delivery and members will understand this will be in rural areas, where there is some difficulty in providing for small numbers, very small numbers. I represent a rural area myself, but we will give every assistance to COSLA and we are confident together as partners, and that is what we are trying to do to deliver this as partners that we can deliver. Thank you for that. The first colleague to ask questions. Will we join me to be followed by Gavin? Thank you. Cabinet Secretary, you could have chosen a different list of instruments other than the Children's Young People's Bill for this policy. You could have been a stand-alone bill, I suppose, but what might have been the effect of doing so? It would have delayed the implementation. I think that if you look at the timeline under which this decision was taken, then quite clearly what we were trying to do was to get as much as we could, as early as we could. It is quite important to consider that timeline and where we have got here. We lodged the bill on 17 April 2013. On 5 December 2013, the chancellor announced the autumn budget statement including consequential fundings. On 7 January, the First Minister said that we would use consequential funding to expand 15 per cent of two-year-olds, 14-15, rising to 27 and 15-16. That was just in January this year. We said, look, we will try and do this. There was a lot of parliamentary interest. We believed that it was something that we should try and do. 19 February was stage 3, and the final session you had on the financial memorandum. 19 March, the chancellor's UK budget included consequentials. On 1 April, John Swinney announced the use of those consequentials in their entirety, the capital consequentials £31 million, as a down payment to the capital costs, accepting that that would not be the final situation. If I can quote him, I think that it's quite important what he said on 1 April, we will continue to work with our partners at the Convention of Scottish Local Authorities to fully understand the capital cost implications of the expansion of childcare services, but the initial investment of £23.5 million in 2014-15 and £7.7 million in 2015-16 will emphasise our determination to properly resource our early learning and childcare services within the constraints of devolution. In actual fact, what we've done is move very quickly to deliver something that we thought was required and was desirable, but of course the negotiation is going to take longer than that. If we had not done that, then we wouldn't have been able to deliver it this year. We would have had to find a legislative vehicle to do so, either a special legislative vehicle or part of another bill. I think that the earliest that we could have probably done that would have been next year, so if it was next year and waiting for the bill to be passed, we might well have delayed not a single year, but possibly two years. We didn't want to do it. So the effect could have been that 15 per cent of two years wouldn't have been getting this by the end of 14-15. It could have been 16-17, maybe even later. You put it more succinctly than I did, but yes. The average estimate per child for the card costs is £6,900, which is lower than the metric used for schools for the future. Can you explain the difference? Is it down to the fact that the schools for the future programme is about entirely new-build, or does that involve a slightly different approach? Can I ask God to do that? This is a complex metric and it does involve both new-build reconstruction, other actions and also involved sessions, because we are calculating the cost per pupil, but in this thing it is actually cost per two pupils, because it is two sessions a day. Perhaps God would like to say something about the metric. The detail of the metric and the variation from the standard SFT metric is a result of the interaction with COSLA and the acknowledgement that different types of build had different costs. We factored in, based on the returns that we received, we factored in an adjustment for the cost of adaptations to existing provision. We obviously included a standard cost, which seems to be accepted as an approximation of the cost of a new build. We adjusted for a slightly higher cost for new-build extensions to existing build. When you factor all of those through, that comes to the revised figure that is included in the table. It was an attempt to reflect the information that we were receiving from COSLA on variations in cost depending on the type of provision that was needed in particular areas. Thank you for that. COSLA's paper set out that, meeting the point that you have made yourself, there have been a number of discussions with Scottish Government officials around the capital costs and the use of a metric that was first proposed by Scottish Government in early May. Through discussions, some of our concerns have been taken on board. Obviously this is COSLA's paper, but can you respond to that and set out in what way? I think that those officials have been involved in those discussions. I'm happy. The main shift that we've had is in terms of full-time equivalent place. We had a starting point of that. We've moved to two children per space. That's on the basis of local authorities delivering sessions in a morning and an afternoon. Our previous estimations had a slightly higher figure than that, so that's one of the areas where we've shifted to meet COSLA. Also, the point that Scott Mackay just talked about there in terms of the metric for the child, the cost per child, we have looked at the data that we got from local authorities. We had gone in originally thinking that original costings that were done for the capital expenditure that was highlighted in the original financial memorandum, we had gone on the same basis as that, but we've adjusted that based on the information that we've had from local authorities. We've increased the cost for extensions, as Scott pointed out, and we've adjusted the split between what local authorities are expecting to deliver in terms of adaptations, new build and extensions, and we've factored all of that into the calculations that have resulted in a higher figure. In the process of dialogue and negotiation that the Government has taken on board what COSLA is saying now. We'll continue to do so. This is a positive debate that we're having, but we do think that there's a robust metric in here, but of course we're listening. Thank you. Gavin, to be followed by Michael. Thank you. Cabinet Secretary, you explained in your opening statement why it wasn't possible to give capital costs at the time of the supplementary financial memorandum, given the date between 7 January and the end of January. Are you able to explain why it's taken almost five months, though, to get anything to the Finance Committee on capital costs? Well, because, as I think I tried to indicate to Mr Brown in the timeline, this has been a fast-moving process in terms of moving from the original build, which had no inclusion of two-year-olds at all, well, a very tiny inclusion of two-year-olds, to a major inclusion decided in January, to a money becoming of capital money being allocated in March, and then the process of discussion of the metric. John Swinney, when he announced on 1 April, and I think the reality of this is we should look at it from 1 April till now, which in my calculation makes it a matter of two months and a few days, the allocation of the money in April, there has been a complex series of discussions about how we took this forward with the down payment of the full amount of the consequentials, and then how we took that on. So I think we are at a position where this discussion is meaningful. We are not finished that debate. I suppose in a sense, and I speak, I think, for Aileen Campbell here, she would have preferred to have come here with a final agreement with Consola. We're not in that position, we are in a position to share what is substantial information and to show, if I may put it this way, to show the workings as well. Okay. Just on the narrow point of, you're saying we should only look at it from 1 April, but the policy was announced in January. The legislation was passed in February and the supplementary financial memorandum was at the end of January. So why are you saying we should only count from 1 April? I think that what we've got is a situation where, on 1 April, the first scoping of the money that would be made available was denounced by the Cabinet Secretary. I mean, I quoted his words. We had the 23.5 and 14.15, the 7.7 and 15.16. I think from then on it has been a matter of negotiation. Now, we are where we are. We are having a detailed discussion and I think that's useful. The alternative, I suppose, would be to say we couldn't do that this year. Let's put it away, let's not have the legislation, let's not put the money, et cetera. In which case, as Mr Hepburn has pointed out, we would have a delay in implementation and that would not benefit the children who are trying to benefit. The alternative would be doing the scoping before announcing the policy. Well, I think that the policy was something we would want to do and then when the money became available then we tried to find a way to do it. I think that's a positive thing, I think that's an ambitious thing which we've been trying to do and we're getting there. The SSI, the provision of early learning in childcare, specified Children's Scotland Order 2014. It was laid, I understand, on the 19th of May this year with the £31 million figure attached to that. How was the £31 million figure reached? I've just explained to you that it was the entire consequentials that were available from the budget, capital consequentials, just when he said specifically that we will continue to work with our partners at COSLA to fully understand the capital cost implication of the expansion, but the initial investment of £23.5 million in 2014-15, £7.7 million in 2015-16 will emphasise our determination to properly resource our early learning in childcare services within the constraints of devolution. It is shown as absolutely being that was what was available, that was what we were starting with, but I think it was the right thing then to have that discussion and debate with COSLA to see what the final figure would be. To be just to be clear, that was based on then what was available in consequentials as opposed to what you thought would be needed. I think it made, as John put it, it shows that it is an initial investment, but we were listening. I think we should be listening. We're continuing to listen and we're continuing to debate and discuss. Okay. In relation to COSLA, they're saying it's 100 and their estimate from what they call a bottom-up exercise is £114 million. You're saying it's going to be £61 million. You said earlier that both parties take a robust position and then discuss and negotiate. Is your £61 million basically you taking a robust position for discussion and negotiation? A £61 million, as you're aware, I'm sure you've read the paper, is based upon the metrics. That is a provable figure and that's the figure that we're discussing. Without sparing my officials' blushes, it's a well-worked-out set of calculations on what we believe is the right approach to this. I'm not going to indicate an inflexibility because there isn't an inflexibility. We're working as partners in this and we'll continue to work as partners. When we had evidence from the Scottish Government on 19 February, at that point they said that, we've shared our workings with COSLA and concerns have not been raised. That was us asking about the capital cost. At that point, workings had been shared and concerns hadn't been raised. How do you explain that statement with what COSLA has said in their written submissions to us where they are quite clearly raising and they describe the significant concerns? Considerable work has been done by them since then on both sides. No indication was given that there was an agreement and we've continued to try to do this in a very positive way. There was no final agreement. There wasn't even an interim agreement. There's been a lot of work done since then and we'll continue to be. Remains of the Scottish Government's position that there were no concerns from COSLA in February? Depends on the interpretation of no concerns. I think that there was a good mutual relationship and continues to be. There's clearly a discussion to be had about the fine detail of paying for something. Scott, do you want to say anything about that? I wasn't at a session. The statement was made in the expectation that we would continue to engage positively with COSLA until we achieved a resolution. You're saying that it's interpretation, but either at that stage they had raised concerns or they hadn't raised concerns? I think that the evidence that the official gives is the evidence that the official gives. They obviously have a good positive relationship with discussing it. We continue to discuss it and figures have been worked on and varied since that time. We're trying to deliver this in partnership in a way that benefits two-year-olds. I think that that's a positive approach from both sides. In relation to timescales, obviously the pace needs to accelerate somewhat if this is going to be delivered in 10 weeks' time or at least a portion of it. How many children as of August 2014 in the first cohort will be eligible? 3,400. That's the anticipated take-up. It's 3,400. How many will be eligible? The eligibility, that is 70 per cent of the total eligibility. If you make that up to 100 per cent, that's what it will be. The total eligibility is 8,000, roughly 8,000 of the 15 per cent. The anticipated take-up is 70 per cent. That would give you an anticipated take-up of the 15 per cent in the first year of 6,800. That breaks down into the phasing of this, which you're aware of, which is in the exact figures, and fortunately I now have them in front of me, the exact anticipated figures are 3,440, 2,293 and 1,147. That's 3,440 in August, 2,293 in January, and 1,147 in March. 3,440 is the estimate. That's cohort 1. For those then, because the time is tight, we're not weeks away, how do you know that all, assuming that it is 3,440, how do you know that they can definitely all be accommodated? I know that local authorities wish to ensure that that happens, and that is their intention. I'm sure that they will be able to make that provision. I would like to have this resolved as soon as possible, but they say that we would expect them to do so, we are continuing to work with each local authority to help them to do so, and we will go on doing that right up until the first day of term, which will not of course be a universal first day of term, that varies from place to place. I get that, but do you see what I'm driving at you? I do. I do see what you're driving at. They're saying, they're raising concerns about whether it can be delivered. I'm asking you, how do you know that it can be delivered? I believe that local authorities want to deliver it as much as the Scottish Government wants to deliver it because we're doing it for the benefit of these two-year-olds. It's a policy that we believe is right. It's been challenging from the beginning and we're going to continue to work together to deliver it. That is our firm intention, that's what we want to do and that's what we're working together to do. In 2014, how many will require some form of building work or adaptation to happen? I don't think that it's possible to say what that is the situation, because remember this is a formula to be applied, that in actual fact, COSLA works through applying a formula that is applied to COSLA, so I don't think it's possible to say precisely how many of those will require additional build places. Given that you can apply some logic to this, given that that is 140 of what the ultimate total will be when the 27,000 is in, is 12,971 minus the ones already in the system, so you're really talking about something like a quarter of the total, so I would have thought it would be much easier to accommodate those in existing space if that were required than it would, for example, to accommodate the total after the two-year process, so I think that the goodwill will be there to do so. I guess that's my question, but can they be accommodated in existing space? The local authorities wish to do so, we wish to do so, our intention is to do so. Mr Brown, I'm doing my very best to indicate to you that there is a strong commitment to this policy on both sides and we intend to deliver it. Okay, and Michael to be followed by Malcolm. Again, this comes down to some of the figures, Cabinet Secretary, that have been used and you've been specific in terms of the number that currently exists of 12,971 minus the 1,983. I suppose it's easy to be specific when you already know that those children exist and you can count them, so you then have to project ahead and the figures become a bit less clear and I do understand that. But in the financial memorandum, that figure that you used would suggest that an additional figure for two-year-olds from August 2014 would be 8,400 and that would rise to 15,400 from August 2015. There is a question then because no matter what way you do those sums, they don't come out to the same figure, so can you explain to... I was, myself, concerned with when I said that, I was concerned with the number of children that have been used and I was, myself, concerned with when I saw these figures, let me explain them to you because I had to ask for an explanation and if I fail to do it as adequately to you, I shall ask the person who told me, who was Mr Rob, who will let explain them to you. The figure of a total eligibility at the end of the second year, that is the 27%, equates to the 15,400. So that's the total eligibility at the end of year two. Now you assume a take-up rate. The assumed take-up rate in year two is 84%, which is higher than the 70% assumed in year one. That is because experience elsewhere tends to show that the take-up rate for the first group will be lower than the subsequent take-up rate. There is also a particular issue in the group who are eligible in the first take-up rate. Those are parents from work-less households who paradoxically may already have made some arrangements because they are themselves doing, often doing care. So the assumption in year two is 84%. It goes from 15% in year one to 27% in year two. The end of year two figure is the 15,400. The 84% take-up rate is, if I am correct, 12,971. You take off that, the children are ready in the system and you come to the 10,988. In year one, the figure is lower because you are doing the 15%. The 8,400 relates to the total entitlement in year one, which is lower. That total entitlement has an assumed take-up rate of 70%, which actually gets you down in the first year to the expectation that the figure will be around 6,800 in the first year. That is further subdivided by the phasing of the take-up. The first phase will be 3,400 and whatever it is. That is the phase that comes in this August. That builds up to the 15,400 figure at the end of year two. That is how it plays out. I have to say that I had to have that explained to me this morning. I hope I have explained it adequately to you now. You certainly have. The difficulty then comes if that was the answer. That answer must have been known at the time that the SFM was drawn up, so why couldn't you give us that answer and that explanation at the time? We wouldn't have then had to speculate about why these figures don't add up. What are some of the misunderstandings that have taken place between COSLA and yourselves about the affordability and deliverability? We didn't know those figures at that time. When the initial announcement was made I was based on annual statistics around the number of children and work-less households. We've had to work since then with COSLA, with DWP to try and identify what you have seen from the eligibility order that has been laid, so we had to identify the qualifying benefits that would allow us to identify the right number of children. That's taken a bit of time to get to that stage. We didn't know the exact numbers at that time. I understand that you might not have known the exact numbers, but there was a disparity between the financial memorandum and the supplementary financial memorandum and these figures were in the SFM. You didn't know those figures. What was missing was the explanation as to why there was a difference. I'm glad to have been able to provide it today, but I think that it would be right to say that it would have been better to provide it earlier. I'm welcome to be followed by John. If I can just look at the two basic reasons why COSLA is in disagreement with you, one of them has already been touched on by the convener, but if I can just ask further about that, your response to COSLA's objection to the 60-40 split was quoting current percentages. I suppose that the follow-up to that is are you confident that the composition of the two-year-old cohort as it were that's currently having childcare is going to be identical or even similar to the new cohort? I suppose many of the two-year-olds currently in private provision are getting provisioned because their parents are working, for example. Whereas, and I just quote one sentence from the COSLA submission, they say, I don't know if they're right or not, but it possibly makes some sense. They say that private providers can be reluctant to provide the service for two-year-old from workplace households due to the expectation that the parents would be unlikely to buy additional further hours from the provider. I suppose it's true to say that the majority of the new cohort of two-year-olds will not necessarily be from workplace households, who are not going to pay for extra hours for one reason or another. I wonder in that sense whether the percentages that you quoted are directly relevant to the new situation. I think it's a fair point, but I think we have not seen that evidence from COSLA. Equally, we do believe that there is also no evidence that local authority will have to provide all that provision itself, or that it would do so if there wasn't already some existing capacity. We've not been inflexible in that discussion, but there isn't any evidence that we have seen that suggests it. The evidence that I've quoted shows that there is provision for two-year-olds provided by private providers. There is no evidence that they are going to stop providing that. We're not inflexible in that discussion, and because this is a fully funded policy, and we've said that, the actual cost of meeting it in terms of the revenue cost more extensively upon local authorities would be reflected. I just don't think that we are seeing the evidence from COSLA that proves that point, and the evidence that we have, which I've quoted, shows that private providers will continue to play a major role. There is capacity question as to whether local authorities would be able to provide in that way without fairly major changes. I do think that we are having a reasonable set of assumptions on the Government's side in this. The second point, and there are only two major points that COSLA make, would appear to be more objectively provable because they're questioning the your estimate of the cost per square metre of new-build, and while they're saying that it shouldn't be an estimate because they're saying, for example, that the cost per metre for a new-build is £2,400, however, figures obtained by COSLA suggest that £2,800 per square metre is more realistic. You would think that that could be proved one way or the other. Mr Chisholm, I share your hope in physical fact, but I found having dealt with the position of Scottish Futures Trust funding for school buildings, it was often a huge debate that rages over a long period of time but, Scott, perhaps you could address that because it is a debate even in provision, especially in the provision of school buildings. We've drawn the figures on the basis of the data that was provided to us from individual local authorities. As I think the COSLA paper makes reference to, because of the timing of the commitment to appear before the committee, we had to submit this paper to you before we really had a chance to engage fully on the detail of that metric. I would expect to be able to resolve that with further discussion. We are perfectly willing to share the details of the information that we've based the figures on and how we've arrived at our figures and, hopefully, with that discussion we can arrive at some consensus. I don't know if Stuart Wood would stand something. I think of a bit of detail as to how we've reached the figure and how that's fed through into the calculations. The figure of 2,400 is based on the metric used for the Schools of the Future programme, which is a metric that we agreed with COSLA for the previous allocation of capital. For that reason we used that as a starting point. From the information submitted by local authorities, it's clear that the cost per square metre vary depending on the type of capital programmes being considered. For example, adaptations are cheaper than new-build and extensions are more expensive than new-build. Accordingly, and it's set out in table 2 of the proposal, we adjusted the cost per square metre to reflect the different kinds of capital costs that local authorities are telling us they're going to be doing. From a new-build figure of 2,400 pounds we're down to 1,700 pounds for adaptations to a cheaper level and 3,100 pounds for extensions. Based on local authority returns we've estimated a split of 30 per cent adaptations, 30 per cent new-build and 40 per cent extensions. Thanks, convener. Seeing that we're on square metres we'll stick in that. Are we clear as to that all the councils are playing on a level playing field where too much space is needed for each child? There's mention of 2.8 square metres up to 7.5 square metres but if I'm understanding it correctly that's because sometimes we're talking about just the area, the kind of play area or whatever that the kids are in most of the time and we're not including office space and changing space and folk rooms and all that kind of stuff. Is it all the same when you boil it down? It is from a perspective, a wider educational perspective on new-build and replacement of primary schools in questions of school closures as to what the space occupied by a child would be but I think that spirit is a better place to talk about it in this context as well but is a common problem in the negotiation that takes place about any educational establishment or building how you actually get an agreement on the total space occupied and how that space is used? Returns we've had from local authorities some of them have used the care inspectorate metrics which is around 2.3 to 2.8 square metres others have used a different measurement coming around about 5 others have used the schools for future programme which is 7.5 and others have used slightly different ones so on average we have come out with the figure of 7.5 square metres being the right one there's a huge variation in the returns from local authorities Would it be the case that some councils are either more optimistic or just want more space than others? You're right when you said that the lower cost metric just includes the place space and maybe that's what some authorities have costed that on others have done it including all the other facilities that are included and that's what's included in this metric so it's covering a wider area and that's the highest figure so we are making in the calculation we are making a full estimation of all the additional space required to support the provision It is quite significant that we have not accepted the lower figure and that's after some thought because we've seen the circumstances in other school building for example where lower figures are accepted it's not really what we are trying to aspire to That's health as long as that's all being looked into because I know with primary school buildings different councils have had different ideas as to what was required On this point of the private providers and I assume the word private providers includes both voluntary sector and what I would call private I mean are we convinced that the councils are actually supporting, helping approving the private providers because historically I've found that some councils have been a bit resistant to actually using the private providers and just want to do everything themselves and I just wonder if it is really are we convinced that the private providers are not willing or is it the councils who are not willing to use the private providers or not pay them properly I think it's we have to be very careful about our involvement in that issue the delivery of this policy is a delivery issue for local authorities they choose how they will deliver that and some of the local authorities believe it is best to deliver that substantially through their own efforts others believe it is better and more cost effective to deliver it through use of private providers as a mix between the two I don't think it is our position and should be our position to tell the local authority how to do that that is a decision rightly made by the local authority there are national standards that have to be met and we would expect those to be met and indeed those are enforceable but I wouldn't intrude upon that any further a local authority will have its own reasons and nobody would want us to second guess a local authority's decisions in those regards what we need to know is the balance of provision across Scotland and we think our estimate of that from what we know of the sector is correct both a family in one part of a council area had no provision near them but the council said they should travel to the other side of the council area to get the provision which the council could provide that would really be an issue between the family and the council it's not something the Government would get involved in my final point was just a clarification again I know we've touched on it already this figure of 61 million I think the suggestion was made that clearly when negotiations are going on one party starts at one end and one party starts at another end is the 61 million after there's been some movement towards the middle it's not the starting point it's not the starting point but we are in the process of negotiation we are talking about the 61 million not only because it's our obligation in terms of talking to the finance committee but because we believe it's robust and well-founded and we lay out our workings here and that's a strong position that we find ourselves in but it is a figure we are discussing that's about 113 million but we don't agree with that figure for reasons that we have also given to COSLA so that's a position we're in but you have already moved from a law figure was that what you're implying? I think we were at 41 million some time ago that's great and I'm absolutely not ruling out there being a different figure at the end of the day but I am saying we believe that 61 million figure is well-founded, well-established and the metric we're presenting to you is one that we stand by. That's great, thanks so much. That's concluded questions from the committee so before you charge off I've still got some questions I want to ask as is usual, I always have one or two wind-up questions. Just back to the private sector issue Cabinet Secretary because I've said in a quote the location of the private providers is usually not in the same location as the eligible children from work-less households targeted by the policy how is this policy going to be delivered in areas with a disproportionate number of children who have to go to private providers given the kind of issues that we've already touched upon already with some resistance apparently from the private sector and possible capacity issues in the public sector? That's a delivery issue for the local authorities it is rightly a delivery issue for the local authorities because the local authorities are charged with the responsibility in Scotland for the provision at all these levels so if a local authority believes that there isn't adequate provision in that area and there's an obligation to provide it it will have to find the way so to do I don't entirely accept the view that the provision doesn't exist in some of these areas I think that's a very broad brush approach to take the third sector is involved in delivering in a variety of places in Scotland they may well deliver in areas where there's a higher percentage of work-less households but we want to support local authorities to be able to deliver this in all the places where it is needed not just the places where demand is highest but where there is any demand at all that is the purpose of our negotiations both to provide the revenue support in its entirety that's required and to provide the capital support in its entirety of how this can be delivered local authorities in the end will make the delivery decisions themselves that's what they're charged to do You've obviously increased the number of capital in association 31 initially in first of able to £61 million in terms of the private sector if there's real issues about having to deliver because of these issues that we've touched on will there be additional funding potentially available to individual local authorities I wouldn't expect that to be the case when the allocation we're making is for local authorities to deliver it wouldn't be normal for local authorities then to fund private providers to expand their services but it would not be dealt with in this profession I wasn't clear there I was thinking of if the private sector is unable in a specific area and that means that the burden of payment falls on the local authority to a disproportionate level to what has already been estimated would there be additional funding for the local authority? There would be no disproportionate amount because a local authority should be aware of what it will take in its own area to implement this policy and the reason that education is delivered through local authorities is because they have the knowledge of their own area in which they can understand the best way to deliver education at every level and that is a system that we have in Scotland that applies right across from early years right through to education now we wouldn't second guess a local authority to say you must deliver in this way the only areas in which there is that sort of relationship are local closures and that is a more complex thing that is governed by special legislation in these circumstances the arrangement that we are in at the moment is that local authorities are going to deliver this they are keen on the policy they are being fully funded to deliver the policy but how they deliver that policy within that framework will be up to the local authorities I'm sorry to keep stressing that convener but that is absolutely the situation and we don't interfere in that way there are members of the Parliament members of this committee who might criticise us if we interfered in the rightful decisions of local authorities on how they deliver just one final point you have emphasised that this policy is going to be fully funded by the Scottish Government there is of course a disparity between what the Scottish Government says of course and what of course we have discussed throughout this session and there are still negotiations on going however if after a year the funding gap would the Scottish Government then ensure that that funding gap was effectively plugged through a reassessment of the figures? I've made that clear to COSLA we want to get this right we believe the best time to get it right is before we start or in the process of setting it up and that sort of discussions were taking place but if a local authority of COSLA came back in a year or 18 months time and said they discovered 10 things for two-year-olds then of course we would have a serious conversation because this is about making sure that two-year-olds progressively get the type of early years education that we hope ultimately to the powers of independence that I may make that point to deliver entirely for all two-year-olds across Scotland so this is a growing service and we wouldn't want it to be adversely affected we have a commitment to full funding but that doesn't mean that full funding has simply decided on by somebody saying this is a figure taken to leave it there has to be a negotiation based on robust fact and that's what we're trying to get to OK, well thank you very much just one final thing is there any other point you would like to bring to the committee? Thank you for the opportunity of doing it and I mean I hope we've clarified the issues that are required to be clarified OK, thank you very much and we'll have a change over witnesses not present correct so I shall reconvene this session Our next item of business is to take evidence from the third of the Scottish Government's nominees for appointment to the Scottish Fiscal Commission Professor Andrew Hughes-Hallot I intend to allow up to 30 minutes for this session Members have received copies of Professor Hughes-Hallot's CV and completed questionnaire so therefore I'd like to welcome Professor Hughes-Hallot and invite him to make a short introduction Thank you very much First I need to apologise for not having been here last week some of you may know this is due to a long standing commitment to what I might say my personal sustainability so I had to be somewhere else that's all OK so I thought I'd just set the context a little bit and perhaps you know all about this anyway so I apologise if I'm repeating things it's a matter of context there's been one among many other things on the use of fiscal policy councils commission in this case for quite a long time it's of interest to me looking back now because I started doing this for a European proposition 12 years ago so how would you do it at the EU level we debated it, this is interesting because we debated at that time a great length whether you'd want to do this at the EU level or the member state level we went for the EU level and of course many of those functions have migrated into the European Commission because we thought at that time which was 2002 we thought the stability pact would manage to restrain the member states and the real problem was likely to be at the EU level where fiscal policies get out of line and then there would be an undermining or conflict with the monetary policy for the European Central Bank and so that the commission at the euro level would then use the stability pact to bring member states back into line and of course we were wrong because the stability pact was not enforced, it wasn't back up, the stability pact was not designed the way I would have designed it so maybe it was a bit wrong in that sense but the key point was it wasn't enforced and also at the time it was made very clear to me there was no way you were going to persuade the member governments to have fiscal policy councils of course things move on, the financial crisis has changed the mind of the member states and you obviously need one at the member state level and so coming to this context without making any forecasts of the future at the regional government level as well to watch their fiscal policies the ones that are under their control so that was it and to monitor the stability and the quality of the forecasts sustainability I should say and the quality of the forecasts of the fiscal policies and so in that sense you can't avoid it, in another sense you can't avoid it because both the IMF and the European Union require that at the member state level most countries have now got them in some form or other though their form varies widely it's not required of regional governments but it's preferred and a number of places have done that so it's not a referendum it's what I'm really saying because it's necessary anyway with any degree of devolution we have no devolution of course it's another matter on the other hand having said all of that is a bit experimental because as you look around the fiscal policy councils elsewhere they vary quite a bit in the way they operate and so we need to feel our way through through that so the key features are it's looking at fiscal policies forward looking so that's the forecasting part that the council and the members of the commission should be independent and as a result they'll get to set the remit to some degree to start with that's rather a simple matter because there's two taxes to worry about later on it might be more complicated they get to set the mode of working the choice of forecasting models they use what assumptions and data they put into it the use of outside expertise if need be and I can foresee some cases later on not now where that might be the case I would suggest that it's subject to outside review is it performing well in some sense I mean this is not continuous this is whatever you want to say every five years every seven years and it's responsible and accountable to parliament rather than any specific government so it's a functional independence here which matters as much as in fact I should go further perhaps and say more than political and personal independence so it's a bit different from looking at the independence of the sake of argument the monetary policy committee in London for their monetary policy purposes having said that I think the key things is the commission does not have any decision role any executive authority can't tell people what to do and it doesn't advise in a proactive sense you should do this I think in a bad circumstances you can comment like that but you can't formally advise so it can't engage in any sense in policy advocacy and it must and this is important it must restrict itself to being within the targets and priorities set by the elected government of the time and it's not going to usurp your democracy in some sense so that's basically the background as I see it my statement with the questionnaire including all the typos I find this morning give some indication of my experience not in fiscal policy commissions I've never been on one but in general a policy advising sense where you're commenting on policy you're not telling people what to do but you're commenting on policy one or two of the cases have been slightly more direct than that but the commenting on policy in the European context for example it would be a good idea to have debt targets took the six years to persuade the European commission to take that on board mainly for difficulties of politics but that's not a case in which you're telling people how to do it what exactly it must be but this is a bit that's missing from the design of that particular currency union I could go further but I think if you've read also the submission I made to this committee last summer I think it was I've got a fairly well developed idea what I think the commission should be doing which you can take up by our means okay well thank you very much for that opening statement I mean I'm going to ask a couple of opening questions then and we'll open it out to colleagues around the table I mean you touched on it a bit in your opening statement I'm just wondering if you can talk us through how you see the Scottish Fiscal Commission evolving because obviously it's quite in terms of what it's going to be responsible for at the moment but given that the likelihood is that one would expect certainly in the years ahead at some point two of additional powers to this Parliament where do you see this Scottish Fiscal Commission going? Well I mean that's certainly true at the start where it'll be comparatively simple because there's just two taxes to look at and they're not enormously big taxes for you because they're rather specific the way you would forecast what you think the revenues will be from that it's not exactly the same as you'd do if you were looking at the next one down on the track which is going to be the whatever part of the income tax is devolved at that point so I think it will open up naturally when from that small beginnings where I think as a commission it would be important to think about how far you want to expand when it does come to expanding and on what cycle you want to have the various reports coming through so you're setting as it were the rules of the game in advance and from the experience of the two simple taxes you'll probably learn quite a lot of how best to do that but of course the real opening up will occur with the income tax component coming in the Scottish Income Tax component because of course a lot of other forces will come to impinge on that it's not just you know this is alpha times income levels because income levels are being affected by other events in the economy so one has to take a slightly wider view and I think the rules of the game will evolve quite rapidly at that point which will be useful because if there is further devolution beyond that point which is a possibility you'll have learnt a lot about how to operate for example and you've emphasised in terms of question 5 in your submission that you are a member of the council that advises on the condition that your independence will be protected as it has been when opinions differ and you made clear that you undertake to do this only if the independence of your analysis and advice can be honoured and guaranteed I agree with what I said I don't mean to be interstitious but it is important and in this context obviously it's important in other contexts it also has been important so you're quite right to ask the question if I were in your position I would be asking that question as well so this question of independence and I say functional independence is what I'm emphasising here if I'm on the commission and I need to look at the revenues from such and such attacks how they're going to develop in the future what's driving them what can make them fluctuate and whether they're going to be embarrassing in the sense that they're going to collapse just when you need the money coming in I want to be able to be free to be able to do that in any way I want so best practice and I'm happy to explain all the time this is how I've calculated it this is why I think that such and such a point is the key feature here and it's a bit of a talent to be able to explain that in the existing taxes it will probably not be very complicated but in some of the others it's going to be very complicated you can take the income tax one you have to explain if the income tax rate has changed whether the incentive to work more take leisure time income and substitution effects and technical language to explain that to the outside world this is why we think the following is going to happen the models that you're using which may be very simple they may be a bit more complicated have to be able to capture these things and so I need to be able to be free to use them I'm just skirting round an awkward thing because the OBR doesn't have quite the same freedom so these issues are important and so that's why the independence is very important and after that it's on a bit of a take it or leave it basis unless life is getting really serious which for two small taxes it won't but further on it might do you point these things out and the Government of the day can revise change ignore you know if they ignore and you think it's getting serious then you might be saying a lot more that's a bit awkward in one sense not as I say for the first few taxes but if you're controlling quite a few sorry I'm using a German phrase if you're monitoring a how batch of taxes you don't want to make incendiary statements if you go like this you'll be bankrupt by next week because you'll precipitate a financial crisis so you need to have the means to explain if need be first privately and then in public why it's important to adjust but all of these things require you to be able to be independent and having said all of that the real reason for the independence is apart from the one that you're thinking of is that the effectiveness of this commission depends on what should I say perceptions of credibility credibility thank you I was going to say the intellectual standing credibility and impartiality known to be and I'm not saying this for any particular personal reason it's done for genuine reasons and that's what gives it the effectiveness short of that you might find that you made very good statements but never paid any attention just one final point before we open out the session out to colleagues around the table initially there'll be a budget of only £20,000 do you feel that's sufficient and would you anticipate this budget having to grow if your remit grows? I'm not in a position to tell you what to do but in the initial phases that's fine but let us say in a year or a year and a half time as the full force of the Scotland Act comes on stream then I think we'll probably need to open it up a bit the three of us all of us have three people with other functions in life we don't have enough capacity to do a really large exercise if it becomes much more complicated so what would be the important thing to do then is to have a bit of budget which you can use to get some expertise from outside which will be technical expertise please run these sorts of forecasts we'll tell you what assumptions we want to put in turn the handle switch the computer on etc and then we will do the interpretation and recommendations such as they maybe from there I think a lot of the councils actually work like this they're relatively small and they use outside help on the technical aspects so the budget would be important for that point of view and it will expand at that stage I can cost it for you but I won't right now thank you very much for that colleagues asking questions the first one will be Jamie to be followed by Michael thank you I want to talk about the the way in which the fiscal commission should operate and you touched on the first point in your opening your remarks and in your paper you said the first step has already been taken the commission is accountable to the Scottish Parliament to the Scottish Government which you mentioned the first question is a new estimation why is that important and then you want to say that it was an interesting point the second step is the commission should operate and you said a lot more about that about the public record you could say what you mean by this Parliament rather than Government I think that's important it's in the track record of previous elsewhere fiscal councils some of them are responsible to the particular Government but of course that allows that particular Government to put much more pressure on to take a particular line perhaps in the worst case scenario there was for example the Swedish one which I think it runs very effectively it's one of the ones that I want to talk to I know the people on it but I want to talk to in terms of day-to-day experience later on they had a confrontation with the Government at one stage and they won the argument so that's important why you should be responsible to the Parliament rather than the Government because the Parliament represents the whole of Scotland whereas the Government may represent a rather more narrowly focused agenda you can't put the agenda on that Government you have to stay within the priorities that they set since they were the elected Government but at the same time you want to be responsible for trying to carry out the responsibilities the best you can to the Parliament as a whole and if there is any a difference of opinion then it's the opinion of the Parliament and the Government on that issue so that's that one comparative advantage, I'm afraid, is one of those things I keep throwing out a long argument with my wife when we got married that we did a comparative advantage I'm better at earning the money she's better at looking after the dogs so I mean the same here there's only three of us three people involved and so it's important that they bring their own expertise so you can capitalise on those expertise one of them is a modelling expert I'm a more general policy overview person and the chairman has which is crucial in this specific experience and feel for the business community, the financial markets and so on which will be ultimately important in your assessments and their responses and so on and indeed explaining to them the population as a whole as well but that's a slightly more open thing so that's why I was talking about comparative advantage and I think the setup in principle here is capturing that so that's quite sensible if in ten years time the thing has expanded you might be wanting to look more closely at that and say well we want some other expertise in the commission itself but that's a long time ahead so make no forecast okay you touched on it there in your answer about engaging with fiscal commissions it's when you put that in your paper you say it would be valuable to establish regular contact with such bodies again can you say why that's important and also I think crucially how such regular contact could be I'd rather imagine this to be much more on an individual level in the sense that you know people in the commission so you could another commission so you could talk to them about how they're operating have they learnt something about the operating procedures which we might benefit from in this commission secondly what's their assessment not within the domestic economy obviously but the outside conditions you know world conditions I can imagine that if you were going into the financial crisis of 2008 I would particularly want to know what some of the other commissions were thinking how they assessed it so those sorts of contacts I've had in mind when writing that down and it's easy because it's not a very big world you know people that sort of implies an informal contact but do you envisage some sort of formal? the obvious formal one which this is a personal opinion so it might not be adopted but the obvious formal contact is when I mentioned a review every five or seven years or whatever you use some people from those commissions who have no particular interest or access to grind in the Scottish case but nonetheless have experience of how these things run and what's successful and what's not and how you interpret the remit so has this commission then done what it should have done are the recommendations they could make of some different way of operating I think that that would be at a formal level that would be useful it's a kind of accountability I mean you obviously want to hold accountability sorry you as a committee but you don't have the direct experience so I think you might find it useful to call in a couple of people to do that I've done it not for a physical commission I've done it for the Dutch central bank for example called in to review the way of operating the way they use their research in their case because that was important and I think they found that outside view very very useful that was at a formal level I was going to ask if there was precedent for that I suppose you've kind of answered that there it wasn't a physical commission talking about monetary policy but the problem is you're looking at not 100 miles apart ok thank you Michael to follow by Gavin again this is coming back to question 3 how do you think the Scottish Fiscal Commission should operate in your fourth point you say that the financial crisis made clear that fiscal deficits and difficulties often arise from pressures the fiscal arena and that you want to have the commission taking a a watching brief over those factors you also say that you want to look at OBR forecasts do you hold great store by OBR forecasts that's a leading question they are better than they were does that answer the question when the OBR started off they were a bit off the map I don't have at the moment I've only been going on 3-4 years I don't at the moment have a track record of what they forecasted to compare against what actually had an out turn it went obviously they're not going to be right because all forecasts my definition are wrong is a question of how much they're wrong and whether there's a bias in them I know the treasury record before that was not stellar which is why the OBR was created so I think it would be helpful actually to know privately that the OBR is better than their treasury was but you can tell something so for example when they made the first forecast of what they thought the revenues from the Scottish income tax would be this is the publication they produced in 2012 I think I only know of two and this was the first one if you look at those forecasts and you work out on a very simple basis what it would have to have been that you put into the model to get those forecasts out it implied that they thought the Scottish economy was going to go 1% faster than the rest of the UK which I would be delighted to see but I wasn't entirely convinced that this was reasonable so I have to pass on the judgment because I'm not in a position really at the moment to judge but it's a good question and a good thing to look at which I might do in my spare time sometime so that's the OBR it's important because if the OBR's forecasting what's happening on the rest of the UK front it's going to have a lot of influence over what you would imagine will be the outcomes in Scotland and what the revenues generated in Scotland would be so it's important to know you might phone up and say you're sure that number is the right number but it's important to know so that's one of the inputs into a slightly wider than the two taxes we're talking about right now exercise for this commission the other thing is when I do these things to a public audience if I want to annoy them I will put up a little formula so they can't get away without any algebra but there is an identity which tells you that the savings investment gap will be the sum of the fiscal gap spending revenues and the current account on trade so those are two things at each end there the savings gap and the trade gap which will have an impact on the fiscal position so when I say having a watching brief on this you have to take note of what you think is happening there because they will have an impact on the landfill and stamp duty not a lot but it will have an effect on the stamp duty one because it will have an effect on interest rates it can do but it would be comparatively small I imagine but if you got on to income taxes again you would want to worry about these things so that's the conditions in the financial markets and conditions in the foreign trade sector and of course in Scotland whatever the small number of North Sea oil revenues may or may not be they're still there and that's going to matter at a future date doesn't at the moment have the taxes looking at but that's something which will come up so you want a watching brief on that and when I say watching brief it's some understanding of what you would use to make the forecast of revenues or changes in those sectors it's not really to take to pieces somebody else's forecast some sort of understanding as to how reliable they are moving so it's not for this commission to challenge that except for really bad circumstances you might do to make some commentary but it's to know what to think you should be expecting from those pressures on the fiscal balancing would it be possible given that there's only going to be three of you and as the convener says a budget of £20,000 would it be possible for you to see the fiscal commission being more robust in its analysis and therefore being a better model than they will be have I should like to think so it'd be very difficult it'd be very difficult to do it in detail I think you can get pretty robust forecasts comparatively simply the problem is to deal with I think I'm being facetious to know if you're right which means you've got to look a little bit more in more detail and a little more deeper and challenge your own what in those circumstances is fairly much a back of the envelope calculation so some of the numbers which appear in my evidence for the next session they're not forecasts they're back of the envelope calculations I reckon they're probably pretty good I'm not very sure I need to go in greater detail that's why I think where the problem comes so that's why I said you might want to in a more complicated circumstances you might want to buy in some expertise from outside helpful thank you thank you thank you thank you thank you thank you thank you thank you thank you thank you thank you thank you thank you thank you thank you thank you thank you thank you thank you thank you As I said to the convener's question on the same thing, it's right and important that you should ask that question. I don't myself see a particular conflict of interest in the sense that on the council you might discuss certain policy options in the general sense. You don't set a policy. We don't say that tax rates should be this. We don't even actually say that we should use this tax rather than that tax. We might say that we have the advantage to look at the possibility of using this tax more generally. The areas in which the conflicts might come up haven't come up. That's the way it's operating. The advice is advice in the sense of commenting on have you thought about this rather than anything prescriptive or proactive. I don't see a conflict in that sense. Secondly, because we're independent in that context and know we're independent and it's agreed that we're independent, it's on a take-it-leave-it basis. You say, have you thought about this? Have you thought about the possibility of supporting R&D in the high-tech sector or something, which is one of the ones that I was concerned with? We haven't said you must do it like this and so on. It's not that you're saying definitively this is, in our judgment, the policy you must follow. Secondly, I say you're independent. It's difficult to imagine how somebody independent can have a conflict of interest because you wouldn't then be independent. We're not beholden to anybody doing that, nor would I imagine or anyway I wouldn't want to be in the commission beholden to anybody in that sense. So there's that side of it. As I said, the fiscal commission is not and should not involve any policy advocacy either, so that's separate. So I regard them as much more complementary. It has to say that whether I'm in the Council of Economic Advisers or not, but somebody in the Economic Advisers needs to have the forecasts. If they're saying we advise that you need to think about the way in which the taxes are unfolding because if you go too far it'll get unsustainable or something of this kind, they need to have an understanding of the forecasts which have gone into that. So I would feel rather uncomfortable if I didn't think there were people on the Council of Economic Advisers who were able to do that or had that information with them. So it's not so much a conflict in which you feel that you might have to say one thing in one area and another thing in the Council and the commission. It's sequential. So that's what makes them complementary. So I see them as complementary. There have been cases where I've been involved in, not in the Scottish case, but in this kind of policy analysis framework in which there have been a conflict in which the independence has been challenged. The receiving party said, no, you must change something. This is on calculating the conversion factors for currencies going into the euro. Then it led to a parting of the ways. So if you got locked into a case in which there was a conflict, you have to decide which way you're going to go. You're going to keep one or keep the other or possibly not do either. I don't foresee that happening at all in this context, but that would be the outcome if it did. In your role on the Council of Economic Advisers, have you ever advised or discussed with the Government the setting up of the Scottish Fiscal Commission? Oh yeah, but that was a paper, if this is me, outlining what fiscal commissions and the rest of the world do and what I thought the framework should be. It's up to them to accept it or not. It's on a taker to leave it basis. In this case, since I'm here, they obviously took it. But what you're doing there is giving a sketch. In the same way as you ask a student, what is the problem? How would you solve it? What are the advantages? And an outline of how it might work. But it's entirely up to them as to whether they like that or not. It turns out that I think the model they have in mind is not exactly the same, but that's prerogative to do that. I'm just saying this is how you might imagine it might work, and here's a set of examples elsewhere how they work, which gives you a range of the possibilities you choose. Conflict suggests that there's an adversarial arrangement here. There isn't, and this is an evolution. I guess that's how it works. Can you see here there might be a perception, though, of a conflict between somebody advising government on economic levers and somebody having the challenge function on the application of those economic levers? The commission can challenge the forecasts that have been used, saying if you did the work properly, you would come up with different numbers, and we think you should take account of that. The policies you're going to pursue are the wrong policies for some reason. You ought to be pursuing other ones. The commission won't ever do that. As I say, there's no role for policy advocacy in this. That's the question of have you thought about. I don't find that conflicting with what the council of economic advisers might say because they might say, and the basis of that, there's a possibility that the economy will be damaged if you do this policy. Have you thought about these other possibilities, but it's up to them to take that up or reject it? I'll leave it at that. Thank you. You say the council of economic advisers doesn't set a policy, but were you not on the working group that came forward with the advice on monetary union? No, but there's a distinction between the policies and the framework. This is a framework issue. We're talking about institutions and, in that case, monetary arrangements. We're not in a position to say what they should adopt. On the basis of the analysis that we or most other people would do, this seems to be the most sensible option. You should think about doing that, but it's entirely up to them to take that or leave it. I'm really observing that your group is the primary source that's invoked when that policy is defended. Right, but you have to read carefully what we say. I take Mr Brown's point. Other people may think we say other things. I don't know if you've seen Bill Jameson's rather long article about this this morning, but he's talking about the two rules as running with the hare and hunting with the hounds, which I suppose is another way of expressing Gavin Brown's point. So there are obviously significant concerns about a conflict of interest. There's a perception in that. You have to be a little bit careful, I think, that you don't get into viewing this as Lenin would have done. Those who are not with us are against us, and in the current atmosphere that happens rather easily. My argument is that, before, it's not hare and hounds. It's complementary. One uses the information from the other, and each one of them is independent. They use it in the way that they think is best. I certainly don't want to be compared to Lenin. That wouldn't be very desirable. No, it's a perception. Your fundamental point was that its functioning independence were important than political or personal independence, but you can see why people might be concerned about the latter as well as the former. Sure, and I don't want to underplay that. When I say that, I'm doing it to emphasise the functional independence because that's the unusual part in this context. In another case, you put the emphasis on the personality of the political. It's not that it doesn't matter. It's just to make the point. Is Bill Jameson wrong to call you a prominent SNP sympathiser? I take no view. I should make clear on that particular issue. I hope that you might ask and you haven't, but you got close to it. I take no view. I just look at the economics and say, that's what the logic says. You would accept, while we're coming on to the main session in a moment, but you would accept that your views are rather more aligned with the SNP's views than with those who are opposed to independence. My views are a little bit more realistic than many others. We shall pursue further. I'm sure you will. Okay, thank you very much, Professor Hughes-Hart. Is there anything else you want to say just before we wind up this session? That's fine with me. Thank you very much. I'm going to call a five-minute suspension to allow a change of our witnesses a natural break before we go on to the next session. A lot to get through today, so our next item is to consider Further Scotland's finances post 2014. I'd therefore like to welcome to the committee, once again, Professor Andrew Hughes-Hallert, Jim Tetlow of the Institute of Fiscal Studies and Ben Thompson of Reform Scotland. Members have received copies of written submissions from each of our witnesses, so we will go straight to questions. As we fairly pressed for time this morning, I ask that each member including myself restricts his or her questions to no more than 15 minutes each, so I would hope that both questions and answers will be fairly brief. I'm going to try and be quite strict on this, as we still have sufficient time to discuss a draft report at item 5. If I ask a question specifically to, for example, Professor Hallert, Jim or Ben, once they have responded, the other witnesses can feel free to add their own comments if they so wish. Without further ado, let's go on and I'll ask the first question to Professor Hughes-Hallert. It's in terms of the first-page submission that you talk about currency. You say that the outcomes for Scotland in the absence of co-operation concessions or formal currency union would show considerable improvement in our current status quo position, whereas at our UK we'd inevitably suffer worse economic outcomes. You say that the only difference would be that Scotland gets to add tax powers to the existing monetary setup and would be unambiguously better off more policy instruments to serve the same targets, instruments that can now be designed to fit Scotland's specific needs rather than UK average. I just wonder if you can tell us how Scotland would benefit and colleagues can then comment as they so wish. That argument is based on the fact that if we're going to talk about just the currency union as such. I want to focus on issues relating to currency and get witnesses' views on the currency. I'll then move on to perhaps one or two other areas before opening it out to colleagues. I won't be able to cover all the areas in the short time, but I'm hoping that my colleagues will be able to pick up other areas, but specifically I'm asking for your views as to why your position is as it is in terms of currency. I'm making the distinction between a full currency union and a unilateral one, where you just take the currency but you're not in a currency union where you have some input into the monetary policy making. Obviously, if you have some input into the monetary policy making at the margin, the monetary policy will be a little bit more suitable for Scotland than it would otherwise be, so there's a gain there. Otherwise, the monetary policy will be exactly the same if you're sterlingized as it is now, because we're in a currency union now. It's just that it's unilateral and we don't have any input into that. The difference from the status quo is that, as an independent unit sterlingized, you would also have control of your taxes and you can make those taxes fit your circumstances rather than the UK average, which is now. So you must be better off, because the monetary policy is the same, but the fiscal policy is producing better results. The obverse of that for the RUK is that the monetary policy is the same as they have now, but they don't have as many tax revenues as they did before, because the Scottish bits have been taken out. They may find that the Scottish taxes have been set in such a way that is not so suitable for the rest of the UK as they have been in the past, so they're going to be worse off on that basis. Ben. I have said I think Andrew's, my apologies, I think you're confusing two things between taxation and monetary union here. I think there are some significant difficulties with sterlingization. The first one is that if you have sterlingization rather than being in part of a proper monetary union, you don't get the ability to print money. In fact, if the host nation that controls the currency prints money, all that new money is distributed into their own geographical area and no one else's area. The second is you don't have any control over interest rates, which is a large part of fiscal stimulus in terms of being able to set and control interest rates, which lies with the regulatory bank of the issuing currency zone. So the difference in sterlingization and being part of a proper monetary union is you don't have the influences through the Bank of England of being able to do what you can with your study. So I think there is a significant difference. And I think the second thing I disagree with Andrew on is that I think you can have separate tax policies within some degree of fiscal harmonization within a currency union. So I don't think that you have to be separate and you have to have sterlingization to have a completely different tax system. OK, now I'm going to let Professor Hallot back in, but not until Gemma has spoken if she so wishes. So, similar to Ben, I would also slightly disagree with Andrew Hughes Hallot's characterisation of the situation under sterlingization. At the moment, the UK is a single country, monetary policy is set for that country as a whole and fiscal transfers happen between regions to act as automatic stabilisers. As the economies of those regions evolve. Under a situation where we had a formal currency union of two separate countries or we had sterlingization of Scotland on an informal basis, the situation would be very different. Scotland would be a separate independent country with a very different economy from the UK. It would be a large oil producer and oil exporter compared to the UK, which would be a large oil importer. So an independent Scotland would be subject to different economic fluctuations and different fiscal positions to the UK as a whole. The UK would be setting monetary policy to suit its own circumstances. Scotland would lose the monetary policy lever because it would be pegging to the pound and therefore all adjustments to deal with economic shocks would have to come through fiscal policy. How able an independent Scotland was to do that would depend on the level of debt that it starts with. Would it be in a position to be able to do significant amounts of borrowing in years when oil revenues were low to try and smooth out those economic fluctuations? There would be cost to Scotland of having that sterlingization situation compared to the current position. I am not advocating any of those policies. I was just clarifying the issue that under a sterlingization I do not think is unambiguously true that Scotland would be at least as well off as it is at the moment. Professor Hughes-Hallert, I will let you wind up on that point. We could argue for hours and probably will, but to be quick, all the costs that are being mentioned are costs of not being in the full monetary union where you have an influence on policy. That is perfectly true. It is better. I am making a comparison between the status quo in which we cannot print money now. Can Scotland print money? No. Can it have its own interest rates? No. The lack of transfers gets replaced by having automatic stabilizers because you have control over your own fiscal policy in that regime. That is the sterlingization with fiscal powers. Otherwise, we have no influence over monetary policy. If you got into the full monetary union, it would be better. That is for sure, because you would have. That is why we recommended it from the working group. I am just pointing out that, by way of comparison, the sterlingization would leave Scotland better off if the RUK were soft. The weak point that nobody picked up, the weak point on the sterlingization is not having a central bank, which does not matter for itself. It does matter for liquidity provision of the banks and financial regulation. You would have to supplement that particular option by opting into another banking union if London said that you cannot be part of ours. That is in the sterlingization, but that is perfectly possible to do. You can go for the EU version. It is available. It is an opt-in. I am going to ask you about debt and quantity of easing, because your paper talks about Scotland's projections to having a higher burden on debt or a bigger fiscal gap, for example, if it was independent. I wish a view on Dr Jim Cuthbert's evidence before the committee who said that, I quote, it is not assumed that Scotland will be debt free. If we bring in the quantitative easing point and the defence point, the fiscal deficit is probably overstated by something like 2.3 or 2.5 per cent of GDP. I notice in the paper today that you assumed that Scotland's expenditure in Scotland on defence is exactly the share of the UK, where, for example, Professor Hallock points out that it is less than 6 per cent, so therefore the gap in terms of what could be spent and what is being spent is considerably higher. First of all, your question is quantity of easing. What you have said in your paper is that Scotland's defence expenditure would reduce from about £2.9 million to about £2.5 billion, being effectively about £400 million of expenditure. However, that assumes that Scotland is currently about £2.93 billion, being spent in Scotland at the moment. Is that not the case? Whereas Professor Hughes Hallock figures would suggest that only about £1.8 billion has been spent in defence, therefore more money would be freed up to either spend additionally on conventional weaponry or something completely different. Sorry that I should have separated the quantity of easing out from that, but I want you to focus on quantity of easing first. Your question on quantity of easing is that it is currently part of the gilts issued by the Treasury Government. Well, basically what Dr Cuthbert argued was the fact that it is not real debt in fact because it is recirculating within the Treasury and therefore to expect Scotland to accept that as a burden of debt post-independence through negotiations would be inappropriate because it is not real debt in terms of the UK's overall debt burden. So, as I understand it, the intention is that quantity of easing will at some point be unwound as the Bank of England thinks that tighter monetary policy is required. Therefore, although those gilts are currently held by the Bank of England, which is part of the public sector in the UK, at some point the intention is that those are sold back to the private sector. So, when they come up for redemption, they will have to be paid off, so at some point there is a commitment to pay those debts. Therefore, I think that similar to the rest of the UK debt, they would be considered alongside the existing stock of UK debt. It's obviously an open question what a negotiation would be between potentially independent Scotland and the rest of the UK. So, you're basically saying that Scotland should take its share of that quantity of easing debt. The whole point that Dr Cuthbert said was that that debt doesn't really exist, it's a kind of, you know, in terms of the UK's overall debt burden. As far as I understand the Bank of England's position, their intention is that quantity of easing will be unwound exactly when that happens remains to be seen. OK, Ben. I'm not sure I totally agree with the Bank of England statement. They said it might be unwound. I think everyone expects that there's quite a likelihood that quantity of easing won't. I mean they've printed about 40% of GDP in terms of quantity of easing, which then if you cancel the gilts will result in the same effect as printing money. I mean I know people don't like the word printing money, but effectively if you do that it's printing money. You can only do that interestingly if you have your own currency. So going forward unless Scotland has its own currency it can't do quantity of easing because you need to be part of your own currency to be able to actually physically do quantity of easing. I think you would assume that as part of any negotiation afterwards there will be a debate about all the liabilities that are currently held by the UK government which will include the physical level of debt, quantity of easing, pension liabilities, PFI and other contingent liabilities and there will need to be a debate and argument on each of those to say if there is a yes vote what should be Scotland's fair share of those going forward. And I suspect the debate about quantity of easing is that the likelihood is that it won't be ever repaid. This is printing money rather than letting the gilts come back out into the market again. Professor Hart? I'm not sure I want to enter this one very far. I agree with Ben in terms of you would expect Scotland to get its share or you can think of net debt rather than gross debt so you take the quantity of easing out of it before you negotiate. What the portion for Scotland would be, so in principle I understand all of that. I have no idea what I would make of the numbers and I know what people say but I don't know how big that would be. It's not actually true to say that you can't have quantity of easing unless you have your own currency. You can buy any assets you like in principle. What is wise is another matter but you can do it. Without a central bank it's a bit difficult to have a repository for it. You would have a debt management agency which could run surpluses. Australia used to do that, Hong Kong does that so it's not so important. If quantity of easing was taken out it would be 2.3 to 2.5 per cent Dr Cuthbert estimates of Scottish GDP so it would reduce the fiscal deficit by that amount would that be a reasonable ballpark figure do you think? To be honest I tend to agree with Ben that I think at the point of independence if it happens there would be a wide-ranging negotiation about the allocation of existing assets and debts between Independence Scotland and the UK and that would be one fairly small part of that picture but it would obviously depend on an awful lot of other negotiations. Okay on the second part which I kind of hand fistedly put into the quantity of easing question which was about defence, your estimates of defence. I'm just wondering if you can tell us how you come to the figures that you came to on that particular issue because my assumption from looking at your figures was that you just took a share of Scotland's share of the UK defence expenditure rather than what was actually spent in Scotland would that be right? The figures that we talked about the £2.9 billion in 2015 used the same methodology that the Scottish Government's expenditure in revenue Scotland uses which is to assume essentially that defence spending in the UK benefits every person in the UK by the same amount wherever that spending occurs. It's a difficult question to answer how much does each person across the UK value the defence that's provided. It's not unambiguously clear that only the defence spending that happens within Scotland is for the benefit of Scotland. Some defence spending that's happening elsewhere may also benefit Scotland because it secures the nation and ensures that you aren't ocean to other threats. It's a difficult question to answer. That one number is the £2.9 billion and we've compared that to the £2.5 billion that was outlined in the Scottish Government white paper last November. That's not the basis on which we set a ballpark figure for the saving from the white paper proposals was about £400 million. Professor Hughes-Hallot, you said in page 5 your submission that currently Scotland raises £3 billion for defence but only £1.8 billion is spent in Scotland. It's a spending £2.5 billion. We both saved half a billion pounds for spending elsewhere and increased Scottish defence efforts by 35 per cent. Is there anything fully you want to add to that? The saving is virtually the same number as Gemma just had, £400 against £500. That would be a lot on my bank account but in the context it's very small. You've given some detailed explanations here in terms of your figures of what you would suggest that how Scotland can benefit through devo plus in terms of taxation and borrowing. For the record, I wonder if you can just talk us through that and then allow the other witnesses to comment. The starting point, funny enough, I was at this committee four years ago where we were looking at how we could address the deficit which I think at the time and on our chart here in 09010 we were spending in the UK and in Scotland 30 per cent more than we were raising in taxes. The point was how we were going to address that problem which is a significant problem whether you're in Scotland or in the rest of the UK is spending 30 per cent more than you raise in taxes isn't a good position to be in. I said at the time that the Scottish government was tinkering with this. They were looking at how to make efficiencies of some £3 billion which in the grand scheme of things was not going to get you very far. At the time said that what we really need is a change of culture in the UK and in Scotland to make public services more efficient and more effective and to really recognise that perhaps things weren't working in the whole of the UK. Our proposals were that part of this lay in a very centralised process where Westminster at the time was responsible for raising over 90 per cent of all taxation but local government and devolved government was responsible for spending the majority of it, around about 60 per cent. And that we should look at a much more philosophy of spending at least the majority if not all of what you spend should be raised at each level of government and that forms the basic philosophy of Divo plus which is each level of government, whether it be local government, Hollywood or Westminster should be responsible for broadly raising what it spends and we think that that would create a real change of culture in our public services that might address the deficit which still remains at 20 per cent. 20 per cent were spending 20 per cent more than we raised but also give people greater accountability, it would also mean that taxes and welfare were better shaped to service the area and the local community and the local environment than having it done very centrally and bureaucratically. So we set up Divo plus which you can see here which broadly tried to match what is spent in Westminster with some Westminster taxes namely VAT and national insurance and just like they would reserve those taxes and devolved down most of the other taxes to Scotland which would then allow Scotland to on the current basis cover about 75 per cent of what it spends. We've highlighted the taxes here and don't necessarily want to go through them. The reason for keeping VAT and national insurance at a Westminster level was that VAT can't be changed anyway throughout a united European EU country and national insurance is that we believe that pensions and work benefits should remain as a UK expenditure and therefore is national insurance is supposedly linked even if it sometimes is a bit tenuous to pensions that that would be a sensible tax to leave at Westminster level but the ability for local government and devolved government to be able to change and vary taxes to suit their own local environment and track their own economies and to suit better the culture of the local area whether that was at a local council level or at a devolved level would actually create this change of culture. So I think I won't go through much more of the report I think that sets out the philosophy and very happy to take any questions on it. OK, well oil and gas weren't being included I take it that would remain with Westminster. What would be the impact on Scottish public expenditure if this was done? Well if you take the figures to start off with there's no change total public expenditure in Scotland is 65 billion it doesn't matter who spends it whether that's Westminster holiday it doesn't matter if we're independent or not I think everyone's working with the same figures that 65 billion is the total level of public expenditure last year within Scotland. It's just split at the moment where 38 billion is the responsibility of the Scottish Parliament through its budget with Barnett formula, council tax and business rates and the rest of the spending is Westminster spending. So basically what you're basically doing is just ensuring that there'd be greater responsibility and accountability at Scottish level? And local government level I think that's important we see this as not about nationalism we see this debate as being a new union between the different levels of government to make each level of government more effective and efficient which would be good for Scotland and the UK both of which are running considerable deficits which are not sustainable in the long run you can't run a country even at today's levels where you're spending 20% more than you raise in taxes. And how would you close that gap? Well I think the closing of the gap is the change of culture you've got to make each area feel responsible and and get engaged in solving the problem you can't at the moment the Treasury is is receiving everything and everyone else is incentivised to make sure that they spend budget as far as they can as fully as they can which which leads to the sort of like all the traffic codes traffic cone syndrome every March where you see local government trying to spend its budget and justify it. You might have the same level or more next year you've got to turn that culture round and create an environment where people are saying how do we provide the people in our local area with taxation in the most suitable way most effective way and to match that with the best possible public services that they want in that local area. And if we look at the Scandinavian model which I know a number of people rather like looking at the Scandinavian model it's not because it's got a higher level of public services it's because they take things right down to a community level and they have much more engagement at the local and community level that it works so well. So I think if you're going to use a model that is an example of how you can actually make better responsibility and accountability at local level and how that leads to better efficiencies right the way through the system. Would taxes have to go up for example or services have to be reduced to cause the gap? No I think obviously they have to be made more efficient if you're spending 20% more than you raise in taxes something has got to change. You've either got to grow the economy or you've got to raise taxes or you've got to decrease expenditure so that's what politicians are there for to make those hard choices. But at the moment they don't have the tools at each level of government to make those sorts of choices. Everything goes into a very centralized Westminster and then comes back out of it. And I think all the parties have recognized that. I think we've had commissions from Labour, Conservatives and Liberal Democrats now or advocating greater fiscal and welfare powers and the SNP and the Greens also advocate greater powers. So I think everyone recognizes that decentralization is a positive and unhealthy development both for Scotland and for the rest of the UK. OK, are the other panel members wish to comment at all? No? Yes. I've got another two hours. I don't disagree with what Ben says in principle at all. He's advocating decentralization as the last thing that came out of that makes perfect sense. As long as we're talking about the fiscal sector only that makes a great deal of sense so he and I will be separated only by degree. And in my case for strategic reasons which don't really come into it here, the only thing I would say is the numbers are very confusing on this. First of all I find very hard that a lot of things which are published on how big the underlying deficit gap would be often don't specify whether we're talking about the entire fiscal budget or the current spending part. And secondly they always do it in a percentage of GDP and it's very hard to run to earth exactly whether it's total GDP as you would calculate it for an independent country or an autonomous country, federalised in that case. So you know you get different numbers coming out. So by contrast with his 30% gap, he started with the 20% at the end of his comment. The alternative is that HMRC says that spending per head is 10% higher than... sorry the revenues raised in Scotland are 10% higher than spending per head. That sounds like a surplus to me. That's the same number of heads. But you can take that calculation and work out how that happens and you'll find that the revenues here include things like North Sea Oil. Now we can argue about the number but you know what the revenues that were at some point in the past you can take that number and you can re-calculate how much of that North Sea Oil which is coming into the Treasury in London, the revenues coming into London, is recycled to Scotland. The answer is typically around 60%, down to 40% goes to other things. So that's why you get a confusion of the numbers and the gap. That's a common accounting problem. My university in America has a real problem with that. What's coming into the university is their revenues. What they spend to keep a particular section, I mean a float is our costs and the result of that they don't want to close it down because they don't understand whether revenues and the costs are different. Or take another way around the identity of savings gap, fiscal gap, foreign trade gap that has to hold. Since the Moody's report was kind enough to give estimates of Scotland's trade gap and you put oil into that since it would all be exported either to RUK or other countries, you'll find that with the reported fiscal gap and the reported trade gap, we have savings of about 16.5% higher of GDP than investment. Now, one of two things is true. Either the numbers are wrong, which I suspect will be the case, that are being used in this context. You have to be very careful. Or we're being fleeced. One or the other. So I'm very doubtful about the numbers. The argument is fine. Ben, anything you want to see further on that point? I think the numbers are very clear to me, but I'm very happy to explain them to anyone who wants to explain them and set out in, I think we've now done 10 different reports on this particular subject in Reform Scotland and Evo Plus and anyone who has any question about the numbers, I'm more than happy to justify them. The 30% is a very simple number. It takes what the UK raises or raised in 09, 09, 10 in terms of revenue and divides it by the amount that it has as a deficit, which is published figures. It's not doing it on a GDP basis because the government is responsible for raising money and spending money. It's nothing to do with the underlying economy in that respect. I can explain the numbers. If anyone wants afterwards to go through them, I'm very happy to do that. That's my point about the university, that the university is doing the same. It's now a financial problem. I've already started to overrun my own time here, so I want to try and bring in colleagues and give them their opportunity and they may touch on some of these issues that we've already discussed. The first one would be Jamie to be followed by Michael. Thank you, convener. I want to pick up the issue of currency union again with a point that you've made in your paper. Professor Hughes Hallot in your paper, you say, after the referendum will be no incentive for either side not to agree a currency union as long as effective fiscal controls are in place on both sides to restrain the growth and public debt, which is a point that I think David Simpson also made that there would be restraints on both sides. You're going to say, since by all measures, the Scottish fiscal position will be stronger. You set out why. That's the case. This would not be hard to arrange. I wonder if you could expand on that a little bit. I'm certainly that the fiscal restraints are necessary, and they would be necessary in any context. You don't want to be running a system in which the fiscal authority is irresponsible, even if you're Greek. So, to have fiscal restraints makes sense. If you're in a currency union, it makes more sense in that if you have a currency union, because, as pointed out, the monetary policy will be a compromise of some kind. It won't be suitable necessarily in the very utmost optimal sense for each party. Therefore, you get more use of fiscal policies. That's why you need to restrain them in case they go unsustainable, and they're too ambitious. The only point that I'm making there is that it's on both sides. The reason I'm specifying it is that the rest of the UK could do far more damage to Scotland than Scotland could do to the rest of the UK, because Scotland's smaller is fairly obvious. I think it would be very difficult to persuade them, but it's necessary. I forgot your second point already. The second point is your point, actually. Putting these arrangements in place would not be hard to arrange. It would not be hard to arrange from the Scottish side, I would imagine. As I just said, it would be very hard to persuade the rest of the UK, at least in current circumstances, to abide by fiscal rules. What I'm stressing here is that it's one thing to have fiscal rules, it's another thing to enforce them. If you want to make a comparison with the Eurozone, the problem is the enforceability, or the lack of it, rather than the fiscal rules themselves. As I said earlier in the previous session, I would design them differently, but that said, the problem is that they've got to be enforced and be seen to be enforced. Otherwise, everybody is going to game the system, which is exactly what happened. If we have a yes vote and we have a monetary union put in place, we've got to set up a monetary union treaty. We like masquerade, it'll be a bureaucratic civil servants delight with all the lawyers in there. The treaty will have to set out how the monetary union works. It'll have to set out what we do about a central bank, how we control regulation of the banks, how a committee gets set up to look at the economy across both countries to determine interest rates and issuing new money, how that will then get divided. There are serious issues that one then has to sort out in a treaty, and there will then have to be in that treaty what happens if it doesn't work, what's the arbitration between the committee, and within that there will then have to be fiscal control. They'll probably use something like eventually Gordon Brown's Golden Rules, which was, you know, we shouldn't go over 40% borrowing over the long term, and we shouldn't run a deficit of more than 3%, and over the cycle we shouldn't have a deficit at all. And they're great aims to be, and that will have to be built into the treaty, exactly the same way as it was built into the monetary union treaty of Europe. So the question mark I have really about that is, is treaty the best way to do this compared to having democratic representation? And I think that debate is happening at Europe in the same way as happening here, which is, if you're going to be part of the Eurozone, is it easier to do that with a treaty with all the difficulties and adjustments that go alongside it, or is it easier to do it through political representation where everyone gives a bit of give and take, knowing that they have the ability to argue it through the ballot box at a certain stage. So I think that if that sets out your question, after a yes vote in monetary union, there will be a complicated treaty that will have to deal with all of these things, and it will be difficult to negotiate, but it is perfectly possible to negotiate. Chris Hughes-Hallot, you also, in your paper, you talk about the issue of start-up costs for government departments and agencies, and you fairly summarise the burach of the Her Majesty's treasuries attempts. In your paper, you are going to say that they are one-off costs and therefore not to be repeated in later budgets. They are also gross costs, not net, meaning that the current imputed payments to the UK government for those services must be subtracted off first, so the actual net cost would be quite small. Can you talk a little bit more about that? Yes. I think that's probably the difference between the Treasury numbers that they've talked about and the authors of the report saying what the real numbers should be, because they're doing it on a net basis. So, they've taken out the savings. If you set up a new ministry or agency to do something or other, to the extent to which it was done at the UK level already, you don't have to pay for that in an independent Scotland, so this is only in the independence case, not in the autonomy case. So, you take that out first, and obviously if the net expenditure is needed for these things, it will be less. That's why they come to somewhere, one of them is talking about £600 million, the other one is talking about £200 million, so somewhere in that range. There's obviously running costs as well, but we're paying running costs as well at the moment, so I assume that whatever it is that you can impute here, the population share, that remains the same. So, that's why the set-up cost is not repeated. So, my point mainly was that if you do that, and you're talking about these hundreds of millions, once again, as I say, these sound like large sums of money, but that's only because you think of it in terms of your own bank account in the grand scheme of things that's small. And it's actually very small, if you notice what I've written in there, that you could pay for it, as it were, this is in inverted commas because you wouldn't necessarily do this, but it's a way of framing it. It would cost you 1% off the growth rate, which currently we're being told is going to be 3%. To do the £600 million, I think it was for four months. It's not a cost to worry about. I mean, it's true, but it's comparatively small. A cup on something that you said there, I mean, in a nutshell, what you're saying is that the Treasury is essentially pretending that Scotland doesn't already contribute towards these services at a UK level. I would assume that that's what they're pretending. I wouldn't say what they put my words in their mouths. And it's not me that said that, by the way. It's the authors of the reports that they're using to justify that numbers. Professor East-Hallert is correct that this is a one-off cost and therefore what you want to think about is the annualised present value of this cost rather than the whole number. The running costs presumably are going to be similar of such organisations compared to the current spending allocation that is done for Scotland, which is to allocate some of those costs of running Whitehall departments to an independent Scotland. The running costs are probably not very much changed, but I think notwithstanding the great degree of public debate that happened around those precise numbers that were in the Treasury paper, that element of the cost of an independent Scotland that was in the Treasury paper was a really very small part of the bigger picture that that Treasury paper set out. So whichever number you believe, and I haven't read the underlying research in detail, that was quite a small part of the bigger issues that were being set out in that Treasury paper. I will presume all the people who wrote the underlying research on which they drew up on who have said that it was wrong would have been aware of their underlying research. Certainly they would have been aware of their underlying research and it was unfortunate if their numbers got used in an incorrect way. You could call it unfortunate, I suppose, yes. Also in terms of on-going costs, I can presuppose that nothing would change though, because again, Professor Hughes Hallert makes the point that tax collection in Orling, Finland costs 50 per cent less per unit of revenue raised adopting the procedures could save perhaps £400 million. So it's not necessarily logical to draw the conclusion that these services just because they were now being run in Scotland would cost exactly the same, is it? I know absolutely nothing about the way in which Norway collects its tax revenues. Clearly an option for independent Scotland may be to do things more efficiently than the UK does the whole and that would certainly be a benefit. I turn to your paper also to Mr Thompson. You both highlight an area where I think it would be fair to sum it up as you are essentially hinting at the limits of devolution in the IFS paper. You say under the present devolution settlement that the Scottish Government is bearing the cost of greater investment in social housing and lower rents, while some of the benefits of that spending accrue to the UK Government in the form of lower housing benefits payments. In your paper, Mr Thompson, you talk about tackling poverty here in Scotland. The ability of the Scottish Government to address that problem is seriously hampered, because the main levels by which to address it are held by Westminster, leaving the Scottish Government only able to think. Are you just wondering, clearly there are different issues, but you're both highlighting at the limit of devolution, wondering why you've raised these specific examples? Dealing with the poverty one, I think that goes absolutely centrally to what one of the key concerns should be of Government. Reform Scotland has always held out that alleviating poverty should start locally as much as anything else and that having local Government unable to have all the tools needed to create an environment that will alleviate poverty makes it hamstrung. We would see quite a lot of welfare benefits, if not most of welfare benefits, being passed down, not just to Holyrood, but on down to local Government where that is the point at which you can get alleviation of poverty. It means that local Government can then create schemes that get people back into work and create schemes that deal with poverty because they have the tools of both benefits and spending powers. Actually, more than that, they have a clarity of what services that they have so that local policing and local health and local education, all parts of the ingredients that you need to address these issues are all handled at the same level of Government. The problem is that a lot of these things are done at different levels of Government where welfare is split from fundraising, which is split from expenditure, which is done in different areas, which means that no one can create holistic solutions that are right for the particular area. That is what we are trying to address, to say, how do you actually get the right tools at the right level of Government to address these problems and particularly something like poverty? We believe that you want to start that at a community and local Government basis. I think that Ben's work covers this in a lot more detail than ours does, but it's certainly one potential benefit of independence would be that Scotland would have much greater flexibility to prioritise spending in a way that matches with the priorities of Scottish voters. Certainly, in the areas where Scotland has had power to decide its own spending in recent years, different decisions have been made and provision of social housing seems to be one of those areas where considerably more is spent in Scotland than in the rest of the UK. However, I don't think that this is purely an issue that affects devolution to local areas of Government. It also affects the division of spending across Government departments in Whitehall as well. For example, if the Department for Work and Pensions puts effort into getting people back into work, that reduces levels of benefit spending and increases tax revenues to the Treasury. However, the Department for Work and Pensions does not get any benefit to its budget from having done that that it could spend on its other priority areas. Those kinds of issues happen across Government spending areas and similar issues arise to what you are talking about elsewhere. It's not quite the same comparison as it is between Government departments or the one Government, and presumably the Department for Work and Pensions would be quite happy to see more people in worker reduction in the welfare bill that way and more taxes accrued. It's not quite the same comparison, as you would accept. It's different, but I think the same incentives. If what we're saying is that decision makers at a more devolved level don't have the right incentives at the moment because they don't see the full benefits of the efforts that they put in, that kind of issue arises elsewhere. I think of reform Scotland, what you said today. I don't think I'm mischaracterising you and your organisation as being great supporters of substantial further devolution of powers to Scotland. Then you've got ideas about how that could further devolve down to a more localised level. Do you not, in the context of a no vote, there is absolutely no guarantee that there will be further devolution? There's no guarantee of anything in life for age, I wish there were. As you know, we have been campaigning over the last five years to have substantially greater amounts of devolution passed down because we think decentralisation is a good thing. We set up Divo Plus to try and convince the three unionist parties that it was sensible to have greater devolved powers. We suggested having the Glasgow agreement which was trying to bring these parties together in a consensus. I'm delighted to say that yesterday I thought that was a really good step that the Conservatives made in actually going as far as the Liberal Democrats have done in terms of pushing more fiscal powers down and some elements of welfare. I think that's a step in the right direction. I don't think there are any promises but what I am delighted about is that I think if we do get a no vote, as you said, I think that it will be hard now not to see there being some substantial and real changes happening. Obviously we will be pushing for a lot more than has been offered but I think that that is certainly now looks as though it will be hard to reverse after a no vote. You say it will be hard to reverse but the bottom line is though that there's no guarantee, there is no Glasgow agreement, there's no coherent programme but there's no guarantee whatsoever is there? I still work my hardest at it. But there is no guarantee is there? As we all do. I'm just saying as a matter of fact I work my hardest at it but there isn't anything yet and there are no guarantees in life. Thank you. And it's Michael, to be followed by Malcolm. Thank you. Thank you, convener. I want to ask any of the panellistic guarantee, the growth rate that Scotland will have if it was independent but growth rate is important to a lot of what is being looked at in terms of how we move forward. And specifically I want to look at welfare spending according to the IFS document which I think might have been added to this morning because the welfare expert group has produced its report and has suggested I think the figure given by Martin Evans this morning was that an additional benefit bill of about £280 million if the issues that they want to see addressed are taken forward that would be an additional welfare spend of about £280 million. The Scottish Government have said that this will all be found from additional growth. They don't want to increase taxation, they want to cut certain taxes but they want to increase welfare spending. So how credible do each of the panellists believe that the desirable, nobody is disputing the desirable improvements in welfare spending would be if we can't guarantee the growth rates that the Scottish Government says it requires in order to achieve that desired outcome without increasing taxes? I'll start with Gemma Tertlund and give her a quote to the IFS. There are a number of issues here. The first thing to say is that at the point of potential independence in 2016-17, assuming negotiations take about 18 months to come through, using the OBR's latest projections for the UK public finances, our estimate for an independent Scotland is that there would be a deficit of about 5.5 per cent of GDP. That level of deficit would not be sustainable for any significant period. It wouldn't be sustainable for the UK as a whole, it's unlikely to be sustainable for an independent Scotland that would be a small country with no track record of borrowing from international markets. Therefore, if that turned out to be the case, we'd probably be in a situation of needing to find further spending cuts or tax increases at the point of independence. If that was the case, then the package of measures that were set out in the white paper plus the £280 million that you're talking about here would amount to a net fiscal giveaway, at least in the short term, and things like higher growth would take some time to feed through and to produce benefits to the public finances. That's the background against which we need to think about any pledges that are made for spending commitments or tax changes after independence. However, it's not exclusive to Scottish independence, this tendency to focus on giveaways. We're seeing very much the same thing amongst the main political parties in Westminster as we approach the election next year. There's much more discussion of the giveaways that people want to achieve rather than the takeaways. That's just a fact of political life, I think. Exactly how quickly any fiscal tightening might be needed in independent Scotland is very sensitive to two particular things. One is what decision is made on the allocation of debt between Scotland and the rest of the UK. In our papers that we published today, we show the sensitivity between a population share versus zero debt. Even with zero debt, Scotland would be running a primary deficit in the first year of independence. In other words, even just to cover spending on other areas, Scotland would need to issue further debt. The other great sensitivity is to the level of revenues from North Sea oil and gas. The 5.5% deficit is on the basis of the OBR's projections. Obviously, the Scottish Government has set out a range of other scenarios using industry projections, particularly for production and some alternative price scenarios. If revenues from oil and gas were substantially higher than the OBR suggests, that would ease the pressure for immediate spending cuts and tax increases because the fiscal position would be much stronger. However, if we look further forward, as the Treasury paper did last week and as some of our analysis did at the end of last year, the pressures that start to build up are twofold or threefold. First, we have demographic change. The populations of the UK and Scotland are ageing, which tend to put pressure on pensions and healthcare spending in particular. That pressure that is faced by the UK would also be faced by an independent Scotland. More importantly for an independent Scotland than for the UK as a whole, presumably over the longer term, reserves of oil and gas in the North Sea will start to deplete and that source of revenue will start to decline at some point, exactly when and exactly how quickly remains to be seen. That would be a much more challenging thing for an independent Scotland to deal with than for the UK as a whole to deal with. Oil and gas revenues are a relatively small part of revenues to the UK exchequer. They would represent a very large share of current revenues to the Scottish exchequer. At the moment, the higher level of per capita spending in Scotland is being just about paid for by that higher level of oil revenues if allocated on a geographic basis. That would not be the case looking further forward. Over certainly decades or more horizon, we would be in a position where the Government of Independent Scotland, just as the Government of the UK, will be faced with needing to make some decisions about how to reduce the fiscal deficit by either finding savings on spending or increases in taxation. The first one about increases in GDP, frankly I don't think politicians can influence GDP particularly directly and may promise us about what's going to happen in GDP yet met one who's done it particularly accurately, I think GDP can go up and down. What I do say is as a general optimist, since I've lived in Scotland which is now over 30 years, we've seen five of our top industries when I came up to Scotland, five of our top industries are now no longer there and we've found ways to replace that and still manage to grow the economy. We can always talk about things going wrong and all the rest but we have an educated workforce that will create an economy that will grow over time in a certain way. I'm a born optimist that we will continue to see growth in the Scottish economy going forward because we have a people that will go out there and grow businesses and develop technologies and to keep pushing. So in terms of a GDP point, we can all talk about what we might lose or not but we'll find ways to replace that over time. There may be areas where we have times where we have difficulties and times where we don't but I'm a great believer that we will continue to grow the economy over time. Personally I think when looking at this we do spend far too much time on inputs and possibly even outputs rather than outcomes. Your real question was about welfare and how we address the welfare issue. I think we need a real change of culture and it's not about as an extra 100 million of spending here or 50 million of there or how you do tax cuts. It's about making local communities and people feel really responsible and engaged for having a community that works. And that means actually again and I come back to it. I don't particularly want to reiterate the point but it means making in my view local communities and local government much more giving them the tools and the confidence and the encouragement to go out and find ways that they want to address welfare. And I think that starts both on a community level and also right from the word go. So from the very youngest of our people and population needs to be, we need to focus on how we develop that person right the way through. So it starts with how can local communities encourage and development the youngest of children when they start at nursery school and even pre nursery school all the way through the education all the way on. And unless we can get that change of culture we can talk forever about you know a little bit of tax cut here and a little bit of more welfare here. We're never going to get to address the real problems that we have for the bottom 10% of society which hasn't really changed over the last 15 years. We're still seeing an even widening differential between the haves and haves nots and you know an example of that would be attainment levels at school where people on free school meals are actually getting worse attainments relative to the remaining 90% over the last 15 years. And that's a demonstration that this isn't working. So if it's not working why can't we see a real change of culture that changes the outcomes and stop worrying so much about you know the small amounts of incomes about whether tax should be tiny bit higher or tiny bit lower. That isn't simply is not going to fix or address this particular problem. Yes, I'll be quick on that. Rapid calculation which is probably not exactly right. You mentioned 280 million. That was the figure that happened every year. Do you need 0.15% on the growth rate for a year? Tiny. It's tiny in comparison to what they announced this morning but the IFS had looked at other figures and had produced calculations that in 2018-19 rather than 0.8% per working age person, benefit spending in Scotland would actually be 1.4%. So you're talking about an increase that might be quite small in actual terms but the deficit would increase and the point I was making was that all of the basis on which the Scottish Government has said that they will increase public spending is based on what the First Minister has guaranteed would be growth levels in excess of what you said earlier. There will be our predictions to be at the present time. That's essentially my question. There are commitments made by the Scottish Government in its white paper that they will increase public spending based on an increase in the growth rate. That's a wider portfolio of things they might do. I'm not going to question any of that. I was just saying that that particular thing is probably fairly easy. I agree with Ben that politicians don't usually increase the growth rate. We've had that argument and I pointed out that the growth rate actually increased as soon as the council of economic advisers was appointed. It can be done but not necessarily by then. The deficit figures again, I'm going to have a problem with those figures because those are figures for projecting forward the economies that now is, a status quo. The rules of the game which now apply, there's not necessarily what would happen if Scotland were independent if we're talking about that. It also would not necessarily if there was a great deal more devolution. To capture Ben's last argument, the last, the end of your previous question, decentralisation is generally helpful. The big thing, so you want to decentralise as he says as much as you can. There's a judgement matter where you stop when you get diseconomies of small scale. At some point it becomes inefficient to do it anymore and that's more difficult to calculate. The demographic changes, yes. If they happen as projected, that's a problem. I find those figures further distinctly unsafe but that's another argument. The oil revenues indeed, they may be smaller but this and they will run out eventually or something will run out. So there's an argument for diversifying away from dependence on oil which you would imagine was a sensible policy, general strategic policy to follow. The problem is you can't do it unless you have some decentralisation. How would you create that to happen? The market may, obviously if the oil is running out, the markets will go and the firms will go and look to do something different. If you want to kick start that through policy, you can't do it without some decentralisation. On another point, I could be answered fairly quickly but again it comes back to IFS calculations based on the white paper and it's in relation to the childcare commitment. You have seriously questioned the validity of the assertions made by the Scottish Government. Do you want to take the opportunity to explain to us why you consider those calculations? We don't know. We've asked the Scottish Government for the modelling and it's not been forthcoming. You must have done some form of modelling which, at least if you could explain to us why you find such difficulty with the white paper's prediction because I think it would be important. Despite the fact that both the Scottish Government and many of the main parties in Westminster seem to be very keen on further subsidies for childcare, the evidence that general subsidies for childcare produce benefits in terms of increased female labour force participation or child outcomes is surprisingly limited. We surveyed this in our green budget earlier in the year and there is relatively little robust evidence that those types of policies do pay for themselves or have significant effects. There is evidence that targeted policies for disadvantaged children do have positive benefits but it's not clear that any of the parties either in Westminster or in Holyrood are talking about those kind of things. In terms of the specific numbers that were in the Scottish Government's analysis of the potential impact of childcare policies, I believe that they have stated that the kinds of scenarios that they set out for increases in employment rates, given the policies that were implemented, were not an attempt to model what effect they might have. They were simply some indicative scenarios of if you get this kind of response, how much this policy would pay for itself. What our analysis suggests is that the higher of those two indicative scenarios imply really very strong responses to these policies in terms of employment rates. In particular, the top two estimates of the three imply not only every single non-working mother who is directly affected by this policy entering work but also a number of other women who are not directly affected by the childcare subsidies also moving into work as a result of the policy reform. I'm not sure how helpful it is to the public debate to demonstrate such optimistic scenarios for the kind of response. To the initial quote that the convener used, because it is fairly fundamental to Andrew Hughes Hallott's paper, nothing would change, she says, for Scottish Mounch policy of London where she refused to share sterling, she would be unambiguously better off. Now you did go and say in oral evidence that there would be a disadvantage in relation to liquidity provision of the banks, which you solved through opting into the EU's regulatory and banking union as Denmark has done. But Denmark is in ERM 2 with its currency pegged to the euro, Scotland surely would not be in that position. Denmark is not in ERM 2, it has pegged. I checked this with the legal people in Brussels. It's open to any EU member to opt in. It doesn't have the currency. The guarantee on the currency is from the ECB, not from the… You go on to say that in this situation some banks or financial firms may feel safer and better cared for if they moved into Scotland in the event of independence, which is the opposite of what many of your colleagues are saying. If that's the case, why are they not going to Frankfurt now? That's a good question, because the restaurants aren't quite so good. In terms of no advantages for the status quo… The answer is your question, as they do, not from Britain particularly. We're talking about the rest of the UK in your paper. You say that there are no advantages in the status quo, but surely if Scotland had been independent of the time of the crash and using sterling outside the currency union, we would have been in the same position. The same position as Ireland, as far as the banks are concerned. Yes, and that's what happened. Being in the union is what happened. We did have a big advantage being part of the United Kingdom at that time. I'm not saying that there are no advantages in being in the UK banking union. The banking union didn't help. They had to do it through nationalisation. The same propositions were available in the EU banking union. They may or may not have decided to use them, but the opportunity is there. The only difference is that the EU's resources are rather larger. If we could get into that, yes. The main disagreement between your paper and, certainly, the German title is in relation to this issue. I won't talk about the distant future, but the situation that would face us under independence in the immediate aftermath of independence. You talk about the whole list of things. The return of subsidies is currently made to our UK pensions. The return or part return of debt interest payments is currently made to the UK treasury. I don't know whether that means ones that have already been made, which seems rather astonishing. You have another list that leads to you saying that there would be a small budgetary surplus. That is contrary to, I would say, all the evidence, as far as I am aware of, that we have heard. The Institute of Fiscal Studies obviously has a radically different view. In fact, in two independence debates, I have quoted Gemma Tetlow's paper with her colleague Rowena Crawford, where she said that Scotland faces a tougher fiscal challenge. That is robust to a variety of alternative sensible assumptions. I wouldn't like you to be unpleasant to Professor Hughes Hallot to Gemma Tetlow any more than I want to be, but do you think that some of the assumptions that he makes are sensible? I have to say that I read Professor Hughes Hallot's evidence, and I'm afraid I don't follow the arguments that he was making around the changes to pension flows and other spending flows. I would very much welcome some greater clarity from him about exactly what he means there. In terms of the other point that you quoted from our previous paper about tougher fiscal challenges for Scotland, that was in the context of thinking about the next few decades rather than the next five years, and our central point in that paper was obviously there's considerable amounts of uncertainty about what's going to happen over the next 50 years, and I wouldn't pretend that the kind of projections that we or others are doing are going to turn out to be correct. However, the broad conclusion that we came to that the fiscal challenges for Scotland look to be tougher than those facing the UK as a whole was robust to a range of different assumptions around some of the key factors that have been raised in the debate here, so in particular around growth rates of productivity, inward migration into Scotland, and the level of debt that an independent Scotland might start with. Even allowing for a range of possible assumptions around those things, we came to a broadly similar conclusion, although the exact magnitude of the differences is obviously very sensitive to those. Do you want to comment on the assumptions that you've made there? The list of things is okay. It's the numbers that matter. If you have different numbers, you'll come to different conclusions, so it's a question of where you get the numbers from. So these are, as I explained in the previous session, back of the envelope numbers, not in any case mine but other people's. There are other people who are saying the same thing. So it depends what you assume. One of them, for example, is the amount of debt interest payments you have to make, depending on how much debt you inherit or take on from the UK after separation. If you assume that the deal is done on which all the debt has taken on, then the debt interest payments will go down slightly because the amount of debt that Scotland would take under that thing is slightly less as a percentage of Scottish GDP than the UK one. So it would be slightly smaller, but it would not make a big difference. That will change the numbers in the calculations that I've used. On the other hand, they might take no debt in which case, and it depends what comes out of the negotiations, in which case there will be very much improvement on the deficit. So it depends what you think is going to come out of that. I've taken the middle one. That's on the historical, roughly speaking, the historical debt ratio figure and so on with these different things. It depends what you think the oil revenues would be in the next five years. I've not used the Scottish Government numbers. I've not used the BR numbers. They have that going down. The Scottish Government has that going up. I'm somewhere in the middle at a slight improvement over the last year's number, which you can put in. I'm illustrating the unrobustness of the statement that Scotland will have a deficit of such and such a size. I want to come back to that in a minute, but can I ask Ben Thompson, because the first of your list is the return of subsidies currently made to our UK pensions, which I don't recognise, but I know Ben Thompson has a particular instance in pensions and particularly with reference to your scheme for the devil plus, you do think that our advantages in state pensions remaining at the UK level. So could you give your thinking on that and perhaps relate it to this strange statement about subsidies made to our UK pensions? I think in terms of pensions, which we see as a somewhat separate issue, but we've just done a paper on pensions, which actually points out that the real problem with pensions in the UK is that they are, by and large, unfunded in the public sector. In other words, we're not creating a fund building up to be able to pay pensions. Our national insurance that we pay actually goes to pay current pensioners rather than creates what was originally intended, which was a pension spot, which means that no politician can really give any certainty about how much or when you're likely to be able to receive a pension. So for most of us, that decision will be determined by people who may not have even been born yet. And they can't say whether we're going to retire at 70, 75, 80. And I think that's a very unsatisfactory position to be in. And lastly, between the two sets of pensions, both public sector pensions and the state pensions in Scotland, it comes to about £15 billion worth of expenditure split roughly 50-50 between the two. The size of the pension population between now and 2025 is going to grow by just over 25%. So this isn't a sustainable position to be, particularly on top of the deficit that we've already got. So I come back to this. We need to do something completely different. We can't just fiddle around at the edges. And I think actually the pensions minister in the UK recognises this. So we have to address whether we are an independent Scotland or not, whether we're part of the union. We have to address what has become a serious problem for how to, as an outcome, look after people when they get to their old age. And what we propose in our paper is that looking long term at a model such as the one that has now been adopted in Australia where people have to contribute to a mandatory pot over their life, whether they're in the public sector or in the private sector. And that builds up from about 8% and eventually it will have to go up towards 15% of people's salaries. Is the way that people can then have their own assets that they can look after in the way that they want to into their old age. And so it's trying to create a change of culture in this. In terms of your specific point, which is whether pensions should lie at a UK level or a Scottish level, we think probably at the moment it's simpler for them to be at the UK level because they are there and there's a standardisation of that and there will be a huge amount of chaos if they change. Theoretically there is nothing wrong with Scotland over that matter, the whole of the European Union creating a pensions pot. We think that probably it's simpler and more straightforward to have it at a UK level but there's no theoretical reason why it can't be at any other level of government and actually our aim is over time that we eliminate most of the pensions being controlled by the public sector and that they become personal pots that people look after. And then all public sectors looking after is how you alleviate poverty in old age which is then we see as clearly the responsibility of government. So for my last question if I could go back to the issue of debt which is fundamental to what the actual fiscal position of Scotland would be in 2016. My question to Gemma Tetlow is thanks for the long-term view but what's your assessment of the 2016 fiscal situation but my question on debt to Andrew Hughes Hallett is you seem to be implying that we could voluntarily assume some debt but it's not required. I suppose my question would be why do you think we don't have an obligation to take our share of debt but secondly if we did voluntarily as it were decide not to have anything to do with the debt would that not have a punitive effect on interest rates in terms of future Scottish borrowing? I think that Geoffrey's Bank a week or two ago said there would be a 5 percentage point premium if that was the case. So anyway I think there will be some premium you may not agree with the five points but I think that's for many people in Scotland I suppose that's the key question because people think what's it going to be like in the immediate aftermath of independence and it seems to me it's absolutely critical that we get a view on that and we're not going to get agreement because there's a massive divergence on the panel but I suppose we try and find out what the consensus view is. Is that much disagreement on the panel? We haven't had our post coffee discussion on that yet but why voluntarily because the UK has acknowledged that it has the legal title. So from then on in it's negotiation and you set your red lines on the negotiation that's why it's voluntary and you set red lines where you want to set them so that's it. Supposing you just said these negotiations are not favourable we're not going to take any at all interest rates after independence there is going to be an initial period in which interest rates will have some kind of premium what I usually hear I don't know about five percent but I usually hear from the city is between half a percent and one and a half percent but the question is how long does that last? That's anyway this is what they were coaching for is if we walked away from the debt that's when you get the big premium they were arguing. Yeah but I mean certain countries walk away from that debt periodically what you see from that is that there's a spike in the interest rates afterwards and very very soon they're back in the markets so to take the case of interest Arlan didn't walk away from his debt but it was in receivership for some time when they went back to the markets it took them only two months to get an interest rate lower on issuing new debt than Sweden the best performing economy in the EU. So I don't want to make a prediction what's going to happen there would be some risk premium on the interest rates after independence will be anyway as you say I wouldn't reckon on being particularly high and I wouldn't reckon on staying there for very long in fact I have an argument with the papers which calculate what these things are because they use the wrong variables to calculate them but that's not I think the main driving force the mechanics of who has responsibility for that debt ultimately is understood and the reason for that UK statement was because they wanted to quiet the markets down it will get paid for that and then the risk premium we were talking about is not going to be because you walked away from the debt it's going to be because the Scottish government will be untried at that point as a person as an institution issuing debt. Once it's smoothed in my guess is that the interest rate the risk premium will get small. I can just comment briefly on that because my 15 minutes are almost up on the 2016 comparison between Scotland and the UK and I know that Ben Thompson had his hand up so perhaps he wants to comment on that as well but I don't want to overstay my welcome. So in terms of the position in 1617 I think there's broad agreement that something so the government expansion revenues Scotland and HMRC numbers suggests broadly similar levels of onshore revenue raising per person in Scotland and the rest of the UK attempting to allocate onshore revenues I think there's broad agreement about that fact I think there's also reasonably broad agreement about allocating public spending between Scotland and the rest of the UK to attempt to come up with a number for the Scottish fiscal balance so those two numbers underlie are estimates of the fiscal balance in 1617 where I think there's uncertainty is firstly around the level of debt interest payments that would have to be met by an independent Scotland which Professor Hughes Hallett has talked about and clearly that would be a subject for negotiation there is also uncertainty and some disagreement about the revenues that would be raised from offshore production I think those are the two places where there's less consensus around what the correct estimate of the fiscal balance of Scotland in 1617 would be that the 5.5% number assumes a population share of debt and assumes that the OBR is correct about its forecast for oil revenues if Scotland took a smaller share of debt and or if oil revenues were stronger in that year then the fiscal deficit for Scotland would be smaller than that one assumes if there is a yes vote and one all hopes that following a yes vote there would be a constructive and positive and cooperative set of agreements in the following eight months to reach independence if you don't assume that then it's hard to put forward what the case will be if it's an unconstructive set of negotiations under constructive set of negotiations I think one has to accept that morally Scotland will have to stand up to taking its percentage share of the debt and the structural have to be devised that is on the basis that the obligations that it takes are solvent going forward and it's not going to default because it's neither in the rest of the UK's interest or Scotland's interest to have defaulted obligations from day one because that will increase costs so I think one has to assume in the negotiations that these will be done in a rational positive way yes you're absolutely right that a smaller country particularly a new country will have greater uncertainty and there will be some certain costs in that as there will be set up costs in this and those are part of the downsides of voting for independence one has to balance that with some of the positives and I think that there are some positives in terms of this as well as some negatives so the basis of your argument is as I understood it is if Scotland gets a high level of debt that it then has to subsequently default on there will be very high interest rates going forward or it doesn't honour its obligations I see that only happening in the short term if there has been a very unconstructive, unpositive and a negative set of negotiations between UK government and Scotland and I'd like to believe that politicians after a yes or no vote will accept the will of the people and get on and do a good job for the public so that that won't happen I would like to go back if I may to the reform of Scotland paper and Mr Thompson's earlier comments about decentralisation and I wonder in these deliberations and when you were putting that paper together at what point do you stop? I fundamentally agree with you that when people are responsible for spending the money that they have to raise or they're responsible for raising the tax on spending it then they might have a very different view as to how it's spent or how it's maintained and so on and if we accept that you like that what areas of reserve matters would you leave out? What should we not be responsible for? I think that we have tended to look at the wrong end of the telescope which is all about how much powers should be passed down I start from the basis actually that and reform Scotland's basis is that as many powers should be as close to where the public service is provided and then if it makes sense to have it at a higher level of government for reasons of it works better then it should be pushed up now there are obvious areas that I believe should be pushed up regulation of the banks monetary policy defence foreign affairs environmental controls they don't work in a global world if you have them at a very localised level and I think if I may draw an analogy at this point if you look back 20 years ago before the internet people were quite happy to use centralised systems we all used our travel booking by using travel agents and things like that I'm sure Hollywood had one whereas now actually because of the worldwide web global language which is controlled globally so that element of it has gone globally which allows us all to speak but at the same time we do most of the functions very locally we book our own travel ourselves and I think if you apply the same analogy to the public sector I can see that certain things become more and more global so we can't control corporation tax in a local area because businesses are now global so that has to move to a more global basis we can't control banking so that is becoming increasingly more international and global at a local level it has to be done globally we can't control the environment or fishing controls at a local level because if you do it and someone else doesn't it doesn't work so those things have to move globally we can't create a safe defence in a very small unit that makes sense to become globally and you're seeing that this is not only happening at a Westminster level actually NATO and the European Union and the UN are constantly evolving and adapting to cope with some of these global issues I come back and I think I said this at the economics committee a few weeks ago I come back to one of the businesses that I'm chairman of a small business that is publishes books for dyslexic children 10 years ago we were all Scottish everything we did was Scottish sales were basically in the UK now all our books are published in China we have a website that's printed in five different languages we have distribution throughout the world even little businesses with only very small amounts of revenue are now becoming global businesses and you need to address as a public sector politicians that the world is changing it is changing into a world where you have very globalised things that need a level of co-operation globally and those are the ones that I think should be at higher levels of government and the ability to do a lot of this ourselves because of we have that global infrastructure which is about local issues so I think as a general philosophy local issues and local services we should be given the tolls at a local level to do it and that other things that are global should actually go to a more and more global level I couldn't disagree with you more about quite a lot of your statement particularly if you're are we going to be borders free one world order, where does it stop and do you not agree that the spending or the policies of these issues that you're leaving to a bigger government not quite sure what size or what area that will be will that be Europe wide, will that include America and your defence policy, how will that work surely all of the decisions that you make about these policies will affect your control of local decision making powers over other things, such as welfare or house building or general wellbeing of a population we are becoming more borders free quite frankly, I mean if you look at trade trade has increased eight times since one of the small countries who are the size of Scotland are asking for their borders to be taken away so that they can actually have a joint policy with other nations they may have joint policies with other nations but they maintain their independence as a nation state would you not agree? You can work with other countries without actually sharing policy with other countries Are you putting words into my mouth or do you want me to? I'm just suggesting as you are that I think you have to accept that the concept of nations is starting to change the next generation doesn't see this really strong affiliation with nationhood in the way that we do in the same way that we slightly find ridiculous the idea of empire that our grandparents might have they are far more the next generation used to European concepts of supporting and looking at football teams around Europe or supporting the Ryder Cup or looking at things on a global basis and therefore I think this idea that we are stuck between a border where nothing happens is a very antiquated one if you look at the way the commerce is working trade is happening far more freely and I come back to the point I was made before and being interrupted the trade has gone up eight times although GDP has only gone up by 100% since 1985 and that has been because there has been a huge opening up of borders across the world so when you say borders are as closed as they were that is I don't think a right looking at the statistics and analysis I didn't say they were closed I meant that there are still nation states not arguing not to be nation states Ireland is not seeing an advantage to come to be part of the United Kingdom again it's not making that case on the basis of commerce or trade or globalization or any of the points that you raised but I would like to move on to the point that you make about demographics and possibly this for the IFS as well that we've never had to my certain knowledge any prediction that was correct in terms of population forecasting do you agree with that? I'm certainly no expert on demographic forecasting and I couldn't possibly comment on past projections anything that you're trying to project over the next several decades is likely to prove to be wrong however I think what we do know is that the demographic structure of the UK population is a bulge of people who are born in the immediate post war period who are now transitioning out of the labour force into retirement and they're not being matched by any other explosion in population of the working age and that's largely what's underlying the demographic challenge which is that a greater share of our population is now aged over 65 than under 65 coupled with the fact that people are living longer and longer actually that somewhat hides some of the opportunities as well of those challenges because there's a tendency to think of 65 in particular as a cut-off between working and retirement actually we're seeing very strong trends towards rising employment rates of older people both because of active government policies and just other trends that are going on so perhaps we don't need to be so negative about this challenge it's more a case of what's the economic dependency and that's not particularly age-based that whole number of other factors affect that as well How do you account for the dramatic difference between the growth rate of the population in the rest of the United Kingdom compared to the very small increase in demographic change or increase in population in Scotland so none of the work we've done is based on our own demographic projections we were using the official estimates from the Office for National Statistics and in particular for the UK we were focusing on the low migration scenario which the OBR argues is most in line with current UK government policy for limiting inward migration so I wouldn't like to comment on the specific differences that the ONS projections have Can I come in on that I had a high opinion of the OBR's forecasting and this is a case in point as you will see from my submission there it's not easily explained it's not even easily explained why their forecasts correspond to a scenario in which the Scottish population is growing sorry, the UK population is growing six times faster not faster, I disagree with that six times You could ask questions of that kind of which I did so I put in some eye-catching numbers I hope they were eye-catching on the specifics of how this might be happening what you can see from the table from their forecasts is that there's a big fall in the working population and a rise in the 65 plus so full disclosure I have a certain interest in that but of course that's a cohort and passing through it will go away so there's not something which is going to last this is a particular event that's one thing there could of course be differences in the immigration and immigration in general is something which is difficult to talk about nowadays but it's not clear to me why the immigration is very much lower especially as the current information that you have is that the immigration percentage wise proportion is rather similar so why suddenly is there no immigration I don't know particularly it could be because there's a lot of immigration in the 65 upwards bracket which you might call the Florida syndrome that's what happens in Florida but in that case you have to put into the calculation that these people are bringing money with them they don't come here and die from starvation so I think the calculations are highly unsafe could I just add to that there clearly are very different projections for the population size and structure under alternative assumptions particularly about inward migration however just to clarify something that was in Professor Hughes Hallott's evidence about these longer run projections for the fiscal position for Scotland and the UK it is not the case that all of the messages around those long run projections are solely on the basis of assuming this low migration scenario from the ONS actually many of the main messages as we showed in our report at the end of last year remain even if you assume the ONS high migration scenario so that's assuming net inward migration to Scotland of 25,000 a year compared to 9,000 per year in a low migration scenario so actually it changes a bit but doesn't fundamentally change a lot of the messages that come out of these sorts of longer run projections okay would you agree that a country that was in charge of its own immigration policy could actually do as earlier administrations in the Scottish Government did target particular people to come and live in their country if they were in control of their own affairs I certainly wouldn't want to suggest that there wouldn't be positive benefits to Scotland having greater control and being able to operate different policies than what's currently happening in the UK and that could have a very different effect on the financial outturn of the nation's wealth it certainly could I haven't without specific details it's hard to know well even with specific details it would be hard to know quite how that would play out over several decades and just finally I would like to ask if you feel that all of the figures that we're presented with are based on the status quo of the United Kingdom and that in fact those of us who believe that independence for Scotland is the right thing actually would seek to do quite a lot of these things very differently and that's what the ambition would be so that it's well a lot of the figures you've said have either come from somewhere else or can't be qualified that there is a different scenario that could actually be much more positive than appears in the in your paper so perhaps I can try and clarify what the kinds of models that we've set out in the past do and the kinds of models that the OBR constructs in their physical sustainability report and certainly there are limitations to these kinds of models they essentially build from a basis of assuming that tax take per person of a particular age and sex and spending on different items such as health, pensions, education per person of a given age and sex stays at essentially the same level going forward growing often in line with growth in average earnings in the economy is broadly how these models work in that context one can try and characterise alternative policy frameworks by varying assumptions about for example productivity growth perhaps if you think a more efficient tax regime could boost productivity in the country or by varying migration assumptions if you think alternative policies on migration might change the structure of your population so to that extent I don't think it's fair to characterise all of those projections being on unchanged policy you can build in alternative assumptions about economic growth and population size that might reflect some of those alternative policies although exactly how you would generate those different outcomes isn't entirely built into the model so I think to that extent those models can try and capture alternative policy scenarios a factor that is quite sensitive in those assumptions is that for example if you have higher productivity growth and higher earnings growth in Scotland that would be the outcome of policies under independence one key question about how that feeds through into the fiscal balance is whether you think that public spending would also grow in line with that growth in the economy if you assume that you can hold down the growth of public spending while the economy is growing significantly which is essentially what the scenarios presented in the Scottish Government paper last week assumed that implies the state shrinking as a share of GDP going forward and therefore you end up with a stronger fiscal position because you spend less of GDP on health and education and the benefits in future now my only caution around a scenario like that is that we've never seen that happen in the UK we've had periods of robust economic growth and often it's led through into pressure to increase public spending in line with that growth in the economy obviously if the economy is bigger and you're spending the same share of GDP publicly then the kinds of public services and the kind of level of benefits that your population are getting are better so certainly that is a better outcome for the people in the population to necessarily feed through into a stronger fiscal position unless you choose to really constrain public spending at the same time Ben wants to call I was just going to call it myself but Ben did you call? I welcome what you say which is I think it looked at from decentralisation that difference is a good thing and that if you push powers down people will do things in a different way that will produce a different result and that's actually why we've certainly encouraged much more devolution of powers both to a Hollywood level which I know you would support but also to a local level I think it was a hugely retrograde step to centralise local policing for instance because again local policing in one area can be done in an entirely different way as you point out as local policing in another area so decentralisation does lead to greater divergence of ways of doing things and we can learn from others about how things get done so totally agree with you on the point Pure police officer to deliver the service Gavin to be followed by John I'll start with Ben Thompson then just to get you which picks up on his last point Mr Thompson you gave a very clear picture on what you'd like to see happen to taxation in terms of devolve everything except personal insurance and VAT let's assume for a moment you are successful and you win your arguments there if that were to happen what would you then devolve downwards to local government from a taxation point of view and would you go a step further than that in devolving some taxation powers from local government to whether it's community councils or something else would you go a step further than local government so first of all we would definitely prepare first of all let's be clear there's a huge difference between powers and then what you do with them so this is a separate argument and this goes beyond what happens with powers there is then a debate about what you then do with those powers in terms of local government we would see certainly removing the freeze on the council tax cap if council tax want to spend what they want to spend and giving them back the business rates and then allowing them to look at other ways of raising income including other taxes council tax and business rates is about I think 6 billion roughly speaking depending on whether you include health in local government or not it's still a very small part of local government expenditure and we would like to see at least the majority of local government expenditure covered by local government tax raise and I think what's very interesting I've just seen a very good chart which I can certainly send you of all the different ways that state taxes are raised in the united states and what's quite interesting about it is just how varied different states use their taxation powers to create an environment for their state which works best for them it's not a race for the bottom to raise taxes to provide public services but you get some states like Washington which have nearly all sales tax and very low income tax in other states where 50% is raised through a local income tax so it creates a real sense as Jeane was talking earlier about of diversity and choice of systems which we think is a good thing very full thank you next question to if I can the IFS did modelling over a 50 year period for what you thought would be the fiscal position for Scotland with various scenarios in relation to immigration productivity growth and so on what assumptions did you make in that modelling for the percentage annual increase in public spending so up to end of the medium term forecast horizon which at the time we were publishing our report was 2017 we essentially assumed that an independent Scotland would follow the same fiscal squeeze that was penciled in by the UK Government so that implied freezing total spending and cutting public service spending over the further two years beyond the point of independence in April 2016 beyond that horizon I just explained our modelling essentially assumes that each area of public spending per person of a given age and sex grows in most cases in line with average earnings growth in the economy so there would be positive real terms growth in most areas of spending the extent to which that aggregates up to a total level of spending for the economy depends on how the number of people in each age group varies so for example education spending tend to be growing less quickly in our model because the number of kids is low I suppose that the reason I asked was just to check the Scottish Government paper last week made an assumption or at least had a preference for a 3% increase in public spending whereas I think they described the current UK one as a 1% increase so if you fed in a 3% increase instead of the current UK spending projections what impact does that have on the size of the deficit so in the paper that we published today if you assume that spending grows roughly in line with GDP growth for the three years 2016 to 2018 rather than continuing with the fiscal squeeze that's penciled in by the UK Government so that would be roughly 2.5% a year annual growth so a little bit lower than the 3% that the Scottish Government suggested is that the fiscal deficit for Scotland would stabilise at around about the 5.5% of GDP figure that we talked about earlier if the deficit in 2016-17 was somewhat lower than that 5.5% it would still be the case that roughly 3% to 1.5% real-terms growth in public spending would mean that you would stabilise your deficit rather than cutting it further which is what's penciled into the UK Government's plans next question then Professor Hughes-Hallot page no, it's page 5 of my document but I think it's actually page 4 of your submission you're saying here it would be reasonable to expect North Sea revenues to rise to 4.5 to 5 billion between 2016-20 on the basis of the industry's own forecasts therefore can you just expand on your I suppose your workings or how you concluded that it would go to 4.5 to 5 billion over that time? The particular number comes from the change not the levels but the change expected revenues as done by oil and gas UK the reason why you would expect it to increase as is in the earlier sentences is because they've been there are reasons why it's been depressed one of these you're coming out of a world recession so demand has been done so you'd expect after a time that they would come up and secondly because there have been a so-charged tax which has now been lifted so in the centre of the firms to produce when the higher tax is there they would rather wait so there have been some reasons why production has been delayed and once those constraints come off then you would expect the output to start to rise and on top of that I mean it's also reasonable to suppose that the industries expect the output to rise and their revenues I don't mean the tax revenues but their actual revenues to rise because they've been investing a lot and they don't invest for no reason I understand that there are other reasons like some of the fields have been shut down for various technical reasons so you can imagine that this is likely to happen so I'm not making any outrageous statements and see this is basically in line with what the industry would think so I'm using that number to illustrate how the deficit position could there's not a forecast it's a reason why it might change and that's actually comparatively small on top of what's predicted it adds one and a half billion or something which is again not a huge number in this context but if you were being reasonable then and you were let's just say for the sake of argument you were in charge of budgeting over that period 20 to 16-20 is it your view that budgeting for four and a half billion to five billion a year over that time period is reasonable? That's why I use the word reasonable yes it's reasonable in that sense it's a peculiar feature as you notice of oil that you don't actually have to pump in or you can store it by not pumping it so it's very easy to do that so there's a natural incentive for the firms to behave like that when the position improves so they'll pump it a bit faster so what I would do if I was so lucky to be running the budget I would have that perhaps as a central projection and then one or two each side Okay that's very, that's extremely helpful thank you you talked about or you were asked to think by Jamie Hepburn about transition costs earlier on you could have some questions on that already so I won't dwell on it for long I'll end to say between the UK Government and the Scottish Government and what they might be do you think it would be advisable to have either both Governments or somebody independent of both Governments produce some idea of what the transition costs might look like that's also a leading question in the sense that I put in the in the other discussion about the fiscal policy commission the possibility that the Scottish Parliament might think about in the future this one I guess because it won't be in the future by then but think about whether the specific problems that they would like the commission to investigate for particular reasons and this would be a case in point if the commission were in place so I think that that would be quite a sensible example to take okay that's helpful and one just final question again because you've been asked this partly the comment in your paper about the idea that some banks might feel it would be safer for a better to move north or Scotland to be independent that's your view but have any banks or financial institutions or companies said that either, I've not seen many publicly but have they said that to you privately that that would be I have no contact with the banks so they wouldn't be able to say it some banks have moved of course but not the retail banks not the big ones okay that's all, that's all thank you John to follow on that point that was made about transition costs I mean some would inevitably be starting day one but presumably there'd be others I mean if we were going to start redo the income tax system presumably would there be flexibility about how you know we could either do that over two years, five years, ten years and therefore spread the transition costs as we could afford them John you don't want to do everything all at once but apart from the cost also brain power you want to focus on one thing at a time so it could be and I'm sure it would be spread spread out the workload of the finance committee as well just to go back to some of the stuff that was mentioned earlier quantitative easing for example and some of the discussion I think was yourself Mr Thompson about printing money the phrase was used and which has been used traditionally I mean we had a witness previously that said one of the temptations for a country that's got a lot of debt is to allow inflation to erode that debt I mean do you think that is a risk for the UK going forward that at some stage in the future we might get a UK government that does allow high inflation to erode the debt well when you say high inflation most governments don't allow it it's something that that they can't control at some stage the UK is going to have to deal with the debt that it's got in the system and there are only a limited number of ways that you can deal with the debt you can either grow your economy which I don't think really is in the hands of most politicians you can hope for it but growing your economy is one way to get you out of it the second way that you can do it is increase your your taxation revenues but that tends to impede growing your economy so it's quite a difficult balance to get right the third is by decreasing your public sector expenditure but the short term hit on that again is it hits your economy because the public sector is about 40% of the economy the fourth way is going bust and reneging on your debt Greece has done it four times in the last 100 years UK has done it once in the last 100 years we shouldn't forget that they defaulted on war debts after the loan so I mean it's perfectly possible to go down that route and it does have a higher cost lack of credibility but you come back from it and the last way is through quantity of easing and that will result in an increase in the volume of supply of money so when velocity of money starts to increase either circulation of money you will then tend to get much higher inflation which will obviously hit savers and reduce your real debt and if you compare the UK and the United States to a very similar period in the 1930s where we'd had the same level of banking problems and Roosevelt came in in 1934 he used all five of those techniques to to get us there we're using all of them at the moment we haven't gone quite as far as Roosevelt on most of them and therefore I fully expect that there will be quite a bit more quantity of easing to come and in the end that will result because he's increased the volume of money as soon as velocity of money and people start spending and it gets turned around and banks start lending again that will create inflation which will then hit obviously savers but be beneficial to borrowers including government borrowing and reduce the real size of the debt it's one of the ways that governments have in their armory to control to control that makes sense that's useful then going back to what you also previously mentioned about having some kind of treaty or agreement as to which would cover that kind of stuff so what I'm wondering is would a treaty or call it some other name be a good discipline actually not just for Scotland but for the UK as a whole because it would actually restrict that kind of what any government could do in that scenario it is the argument we're looking at it in Europe is can you run monetary union better within a treaty or within a democratic process the treaty tends to have the advantages that it's clearly set out and there can be advantages of that but also tends to have the disadvantages it can be very bureaucratic and that if people have sovereign rights they can always break the treaty as they have done in monetary union have been broken by nearly all the countries that are within them an elected representative system for monetary union where you all join some federation like the United States there you get your say by the ballot box deciding which way you want to do it so there are pros and cons of both okay thank you did either of you want to comment on that at all on the treaty point it's useful because it's transparent it's a point of reference it can be pointed to you break it if you choose as Ben says in Europe they didn't keep with the treaties underline the stability pack that's because they discovered it wasn't going to be enforced you could get away with it in purely strategic terms the Greeks very nearly got it right they could break the treaty and get ratios of extreme levels and somebody would bail them out the only thing they forgot is that the bailout comes with a cost which they found uncomfortable afterwards but at the time they didn't reckon with that so that's why I said earlier that the important point with those treaty arrangements is that they must be seen to be enforceable in some simple way and I can enlarge on that at a great length another time if you like the question whether you inflate away the possibility of easing or by conventional means that temptation is always there on the other hand it has has been points out significant costs partly economic and partly political you don't want to be the people who are accused of creating inflation which is why in the American case they put a lot of emphasis on the exit strategy which is a technical way of unwinding the position without causing the inflation so I would imagine the only of the different solutions the only one which you can actually make some progress without getting into all these civil diseases through growth, through structural reform so making the economy work more efficiently in some way which is why it's being talked about a lot in Europe the problem is it doesn't get done a lot of the time it doesn't get done in Germany it got done very effectively in some of the Scandinavian countries as well but it's not an easy path okay thank you did you want that one Ms Tettler you're okay on that I'll move on to a question for yourself in your paper now it's page 14 I think it might be about page 4 in your presentation but you're talking a little about well it's under the heading fiscal sustainability of an independent Scotland and you talk about even under the most optimistic scenario and then you go on to say some of the optimistic things that you think might happen for example or could happen high migration and then it says take a share of the debt equal to 40% of Scottish national income pays the same 5% interest rate in the debt as assumed in the UK I mean these two in particular do not strike me as most optimistic I mean we have had a witness here who suggested actually that rather than taking a share of the debt Scotland should get a lump sum compensation exploitation or whatever the word might be so I mean the most optimistic would actually be either no debt or start off with a lump sum presumably we've also had the suggestion other small countries pay lower interest rates so I would have thought the most optimistic would be that we have a lower rate of interest in the UK even if not on day one at least on day 2, 3, 4 so did you just not look at these kind of optimistic things at all so we didn't look at a scenario in which Scotland took no debt although that clearly is one possible point on the scale in terms of the interest rate I haven't actually seen any analysis that suggests Scotland would face a lower interest rate presumably relative to the UK it would be a country that had no record with market players and therefore might face a slightly higher interest rate although obviously that would be very much dependent on the level of debt that Scotland would have because that would affect the riskiness of loaning more money to Scotland that was the most optimistic scenario that we considered in our publication and some of those assumptions are quite a lot more optimistic than what you might think of as a baseline case of current UK Government policy in particular the levels of migration and the productivity growth assumption because that applies to the whole Scottish economy including the size of the current offshore economy that does imply quite high levels of productivity growth onshore if you think that production offshore is going to start declining over the next few decades so I'm afraid I don't know what the answer would be if you started with zero one factor that feeds in and I think it would still play out in a zero debt scenario is that the whilst the level of debt would be very much affected by starting with zero rather than starting with 40% the trajectory that the Scottish fiscal position would be on becomes slightly different from the UK's and the sense of deficits start to accumulate more quickly in Scotland as a result of some of the aging pressures and the declining levels of revenues from the North Sea so in a sense it's the trajectory that you're on and that might be of concern to people lending Scottish Government money as much as the exact level that you're at at that point in time Although the trajectory started with no interest payments that would in itself change the trajectory wouldn't it? It certainly would and certainly that could be true for several decades I do accept your point I think we've discussed earlier that on day one you would expect because we don't have a history of borrowing although I think we're getting borrowing powers quite soon that we wouldn't have a debt record and I suppose if I look at it in a personal way I don't have any debt so if I go to a bank they've got nothing to look at the convener might have huge amount of debt so at least they know him so I do follow that logic but then once it's settled down presumably after a while they're going to look at the whole package they're going to look at how we manage the debt how much debt we've got how we've been repaying and presumably that's how a country like Austria which is quite small I understand has got a lower interest than the UK That may well be the case and I would suggest you talk to people better qualified than me to comment on that Can I just say that it's tied to the US dollars as if it was in a common currency area and it has lower interest rates and it's precisely because it manages its debt better so I think it's an important point and I would do a difference and so on and I would expect that to be the case for Scotland as well Okay and I think it's just a final point because I think people are ready to go I mean just on the whole question of accuracy of forecasts I mean you're all experts most of us are going to lay people I mean how much faith should we put in forecasts I've got a rule of thumb that always add 3% plus or minus but I accept that's not always the case I mean I think the OBR and Lady Susan Rice referred to it last week is She Likes Fan Charts which tends to emphasise the uncertainty of it all but I think I mean I'd be interested in all your comments but I mean I think particularly in Institute of Physical Studies your forecasts are definite lines presumably you're accepting there's a bit of uncertainty in there so in general I entirely agree with you that something like a fan chart around a central projection is an extremely useful way of highlighting the extent to which there is great uncertainty and actually the OBR now do produce fan charts around their projections using a methodology that we actually pioneered at the IFS so that's actually something that they've taken on over the I think forecasts for the next five years are difficult to do projections looking 50 years forward are even more uncertain and in a sense in our report although we didn't put fan charts the reason we presented a number of scenarios and we studiously avoided using any term like a central forecast was to highlight the fact that there are a range of uncertainties here and the value of trying to do those longer run projections is not that you believe any one central number it's simply that it allows you to pull together all the different factors that might be important and highlight where there are things that ought to be of concern to policy makers who inherently do have to make some judgement about the stance of fiscal policy both in the short term and in the longer term and those kind of risks and pressures are something that politicians need to take into account and having some sort of projection is a way of basically making those clearer to people it's not that you believe the precise number it's simply that it's a way of clarifying some of the issues I could like to use fan charts they can be embarrassing because if the fan spreads out too much you'll lose credibility except for an immediate future where it's still quite narrow but nonetheless it's important what I would add to that however is that it's crucial at least for the point of view of me and some I suppose policy people is to understand what's causing that uncertainty what drives the width of the fan chart because it won't be entirely random some of it will be random but almost certainly it's uncertainty about some other factor which is feeding into the forecast so and one way to present it is a central forecast plus a few strategic alternatives saying if this were to happen then you'd be up here if that were to happen you'd be done there if you're clever you'll say with such and such a probability but it's a good way of going OK thank you very much that's concluded the questions from the committee of risk at one final question to ask and it's just because we've focused really more or less on the independent scenario but of course there could be the scenario of a no vote of course and I was just going to say to Gemma Tettlow that IFS director Paul Johnson gave evidence as you know in the 5th of March and I asked him basically about the financial projections for Scotland in terms of our current devolved budget I said to him even with the chances muted 12 billion of further cuts to social security benefits implied cuts to public services to 2018-19 would mean departments facing budget cuts of 17.1% on average what would be the impact on Scotland and he said and I quote I have no reason to believe that the numbers would be significantly different in Scotland so what do you think that would imply for jobs and services in Scotland through our devolved budget if the situation remained the same post September 18th right so since Paul gave evidence in March we've obviously had a new set of forecasts from the Office for Budget Responsibility which would slightly change the numbers for the UK I'm afraid off the top of my head I can't remember exactly what those are the current plans penciled in post the 2015 election by the UK Government are for a further squeeze on public spending and as it stands that comes welfare benefits but from public services almost by default because we haven't heard specific announcements either on tax or spending tax or welfare spending what we don't know is where those cuts are going to come we don't know how they're allocated across departments and presumably that would be well it will be the key decision for whoever is elected to Westminster Parliament after next May without knowing how those cuts are distributed it's very hard to know what that means exactly for employment and the level of public services clearly this is a further cut to public service spending and that does have costs in terms of the level of service delivery but it's likely to be significant Scotland assuming it's going to be the same across the UK departments the precise settlement for Scotland would presumably depend on how budgets are allocated across the UK whether it's exactly the current Barnett formula or any changes are made to that I don't know the precise number for Scotland but a similar picture would I suspect I don't want to get into the Barnett formula but assuming everything stays the same all else being equal the likelihood is that Scotland will have a significant further adoption to its budget I think the current UK Government plans are to squeeze public service spending across the UK after the next election based on what's currently penciled in the detail about how that would be achieved I suspect that would be the case for the part of spending that goes to Scotland as much as what goes to the rest of the UK the current UK Government is doing that in part to achieve a surplus on the overall fiscal balance by 2018 the Labour Party for example has suggested that it would seek to achieve a slightly less tight fiscal position by 2018 to spend a bit more scope to spend a little bit more if you wanted to so I think what happens after the next election will depend very much on which party will be in power and what their priorities are ok right well with that I shall conclude with just if any final further points anyone wants to make that haven't been made already you all kind of exhausted by it all well first of all I'd like to thank our three witnesses for their hard work this morning and answering so many different and varied questions I really appreciated you all being here I'd like to thank members of the committee we agreed early on that we would take the next item in private so I'll just have a one to two minute recess while we allow the public and witnesses an official report to leave