 Good morning, and welcome to the 14th committee in 2021 of the Finance and Public Administration Committee. Today, we meet in hybrid format with the Scottish Parliamentary Corporate Bodies Agreement due to the timing and nature of our budget scrutiny. Additional mitigations are in place with fewer people attending this meeting. There is one item on the agenda today, and that is to take evidence from two panels of witnesses as part of our scrutiny of the Scottish budget 2022-23. First, we will hear from the Scottish Fiscal Commission, and then from David Iser, Fraser Valander Institute and Professor Graham Roy University of Glasgow. For our first panel, we are joined remotely by Dame Susan Rice, chair, John Ireland, chief executive, and commissioners Professor Alasdor Smyth and Professor Francis Breeden. We have up to 90 minutes for this discussion, and I remind members that a broadcasting team will operate their microphones. I would like to hear an opening statement now from Dean Susan Rice. Thank you very much. Good morning to the committee, and I would add that, in addition to my two fellow commissioners, we are also joined by John Ireland, our chief executive. Last week, the finance secretary presented the medium-term financial strategy for the next five years alongside her budget. Over the coming months, she will be preparing Scotland's first multi-year resource spending review for a decade. As usual, our reports include forecasts for the next five years, so I thought that I would draw out specifically some of their implications for the longer-term public finances. I will make a start with our economic forecasts, where we continue to expect a strong recovery, with Scottish GDP growing by 10.4 per cent this financial year, which will return to pre-pandemic levels of economic activity by the second quarter of 2022. Despite the pace of the recovery, however, there is some evidence that the Scottish economy lags behind the UK. Looking back longer-term, since before the pandemic struck, employment and earnings have been growing more slowly here in Scotland, with important implications for income tax. As you will know from our previous reports, the Scottish Government's income is largely driven by the spending decisions of the UK Government. Nevertheless, the Scottish Government's tax policies and social security commitments play an important role in determining the overall picture. We expect Scottish tax revenues to increase by 20 per cent over the next five years, but the net effect on the budget will be negative in every year, with the exception of 2024-25. That is because the positive contribution from Scottish tax revenues is outweighed by growth in the block grant adjustments, as defined by the fiscal framework, which is the amount that is removed from the Scottish budget for each tax. The slower employment and earnings growth that I just mentioned results in a short fall of £190 million in 2022-23 and £417 million in 2026-27. Last January, we highlighted a reconciliation risk arising from income tax funding in 2021-22 due to timing differences in our and the OBR's forecasts and the considerable uncertainty then around Covid-19. We now anticipate that there will be a negative reconciliation of £469 million due in 2024-25. The fiscal framework requires that that reconciliation be managed within the Scottish budget. Finally, we are all aware of the significant reforms that the Scottish Government is making to social security payments. Existing payments administered by DWP on behalf of the Scottish Government are gradually being replaced by new payments, and the Scottish Government is also introducing brand new, uniquely Scottish payments. Next year, we will also see the biggest payment, adult disability payment, launch, as well as an expansion to the Scottish child payment. By 2024-25, we expect spending on the Scottish Government's largest social security payments, along with completely new payments, to be around £750 million more than the corresponding funding received as part of the block grant, reducing the funding available for other priorities. To close, I will mention just one component of the 2022-23 budget for the coming year. The Government has assumed that it will receive an additional £620 million of resource income from a number of sources. We have reservations about the likelihood and amount of income available from some of those sources materialising during the financial year, but, unbalanced, we consider the Government's assumptions reasonable. Thank you very much, Dame Susan. I will start off with the last point, simply because that is what you ended on, which was £620 million. As you said, you have some doubts about the £620 million, whether it will arrive in the Scottish Government's coffers. Do you refer to an XA of the budget document as detailing that? I wonder if you can go through what the sources are and what the likelihood is of the £620 million coming to the Scottish Government. I am sitting here with lots of my screen, but not that table. I turn to one of my colleagues who has their hands on it. There are five different sources for different reasons that go into the £620 million. One is a discussion about settling a number that has been going on for some years, and there are different reasons why each source is possibly uncertain in terms of when it may materialise. Are you able to speak to that? I do not have the Alex A, but I can talk a bit more about the elements. There was some potential for extra funding from supplementary estimates for the day, so that would be a common factor. Indeed, additional funding from the spring UK fiscal events is a fourth on which, as Susan mentioned, there is an agreement over funding transfers to spillovers. Obviously, that has been an issue that has been said outside for some time, so that is a concern, whether that is a particular year that it will be resolved and finding that there is income from offshore wind leasing, which I guess is a more certain one. Overall, what we felt was that, even though any one of those four may not deliver the amount of money that is expected of them, we think that it is reasonable, because there could be more from one than is expected. Similarly, there could be some funding from other sources, particularly underspends within the Scottish budget, which may have historically occurred and have not been factored into those funds. In a sense, whilst we have some concerns about the individual elements, why we came to the judgment that the overall number was reasonable was because we felt that there was a possibility that other sources could fill in for gaps in those sources, or indeed those sources could deliver more than is currently planned. I can see why it is a slightly odd way of putting it, but you can see our argument that we think that the overall number is reasonable, even if we have concerns about the individual element. I have to say that it is all about vague. I think that colleagues want to explore that in some depth, because we do not see really any numbers against that, £620 million and how it comes together. Moving on to another point, in terms of your forecasting, I am just wondering how your thinking has evolved since August and why there are some changes in your judgments since that period. For example, one of the main surprises that came out of the budget was the £190 million reduction in the net tax position from your previous forecast. I am just wondering if you can maybe talk us through how you come to that. What we have typically done and have been asked to do by the committee in the past is compare budget to previous budgets. We make a lot of comparisons to the January budget the last time there was a Scottish budget. Obviously, we also can comment on what has changed or moved since January. One of the things that is a little bit more normal perhaps now is that our budget and our work is much closer to that of the OBR, which is typical in the past. We have looked at a variety of factors, and a number of them have not changed significantly from August. I am just wondering if John Ireland has some detail in front of him and would like to pull that through. Thank you, Susan, yes. Just looking at the various bits that fall into the income tax forecast, since August, our GDP forecast is pretty similar. It does tailor down a little bit more at the end because we have a little bit more information on population growth or exactly population fall. However, the GDP forecast is pretty similar to August on inflation, which is obviously important here. December forecast has a little bit more inflation than the August forecast. Inflation has gone up in the December forecast from August. We are still forecasting in line with the OBR on inflation, but the interesting thing on inflation is the cause of inflation. Back in August, we were thinking that there is a combination of supply chain issues pushing prices up and labour shortages. However, our thinking is much more that this comes from the international supply chain issues and also from energy prices and much less from labour shortages. The story behind inflation has changed a bit, and that is important because of average nominal earnings. In August, we obviously thought that the labour shortages were pushing up earnings. Now, we are in a position of taking a little bit of a back step on that. We have reduced the path through domestic inflation into normal wage growth because of our view on the source of the inflation, not so much labour shortages but energy prices and international prices going up. That means that we have got downward revisions to our average nominal earnings growth between August and December. Earnings are growing less than we thought in August, and we are finally turning to the other part of the picture, employment. Employment growth is now a little bit lower towards the end of the forecast than it was in August. That, again, comes from demographic factors. If you take all those things together, although our December forecast for income tax is much higher than January, so the previous budget, it is lower than our August forecast. That would help to explain the nature of the income tax gap. It is quite significantly lower than, for example, the OBR in the Bank of England, what they anticipate. I would be quite interested to see how that follows through. One of the issues that MSPs will know about battle over in the chamber in the weeks ahead will be the numbers here. For example, you have said in your report that the overall Scottish budget will be 2.6 per cent lower in 2022-23 than in the current year, or 5.2 per cent lower in inflation, assuming a deflator of 2.6 per cent there. Obviously, we have been bombarded with that at plethora of figures. For example, in the budget, the Scottish Government has said, in practical terms, through 2021-22-23, resource funding is 7.1 per cent less in real terms, and the equivalent reduction for Scotland's capital grant funding, which seems to be less controversial, is not a 9.7 per cent real terms cut between 2021-22-23. I am just wondering why you have come to the conclusion with regard to the figures that you have, as distinct from some of the other figures. For example, some figures that include Covid spend have predicted an increase in real terms in the budget, so I just wonder if you can talk us through these figures, please. Shall I, one of my colleagues, want to pop in here? Do you know, Rush? Any, many, many more? Yes. Mr Ireland? Yes. The thing to focus on here is the figures that you quoted for growth in the budget. We are saying that the budget is falling by 5.4 per cent in real terms, and the Scottish Government is saying that it is falling by 7.1 per cent between 2021-22-23. That difference is because we focus on the sides of the whole budget, whereas the Government is focusing on something slightly different, which is UK funding. I think that we are taking a more holistic approach than the Government in those headline figures. That explains the difference between that headline figure, and we will get into more into detail if you wish about the various components. I am sure that my colleagues will want to push that particular issue. As I fire out all those different areas that we want to cover, there is so much to cover and so many issues to raise. I will mention another one, which is very important. You predict a £417 million shortfall on income tax by 26.27. I wonder how much over and above UK productivity must the Scottish economy grow to negate that figure so that we do not end up reaching it. It is a really important area to focus on. It is difficult to answer specifically, but what we would point to is that we have focused, in fact, since obvious, increased our view of a declining labour market participation. That obviously has a very direct impact on income tax, and that goes through the future of this particular forecast. I think that Alasdair would like to come in here if we can get him off mute. Thank you, Sue Susan. I can't answer your question absolutely directly and say how much productivity growth would be needed to reverse the income tax shortfall, but the income tax shortfall is explained by relatively low growth in Scottish earnings, which derives from productivity, and lower labour force participation than in the UK, partly because of the proportion of older people in the population, partly because young people participation in the labour force of young people in Scotland has declined. I apologise for not giving you a direct answer to your question, but I think that the thing to emphasise about all those factors is that there are relatively long-run effects. We have seen them developing over the past few years, and they are not going to be reversed quickly. They might be reversed in due course, but it would not be sensible to think that there is going to be some quick miracle next year that will completely reverse the income tax position. If it happens, it is going to be a slow process. The amount of younger people in the labour force has come up quite a lot, certainly in a private session beforehand. We also discussed that to some extent. What is the reason for that? Is that because more people are in higher education, lower birth rate and the fact that there are fewer young migrants in the population? What is the situation? Why do we have that and why is it so different relative to the rest of the UK? As in most questions, there are multiple reasons. If we look ahead over the five years of our forecast, we are expecting the number of children under the age of 16 to fall by about 60,000. That is a number that we have pinned to that particular cohort. However, if you look at the younger population overall, it is not growing. Therefore, fewer people are going into jobs. A lot of younger people in work typically have been in the retail hospitality leisure sectors, which are fairly big here in Scotland. Those have been quite slow or dormant during a good bit of the last two years because of the pandemic, so fewer opportunities for some of them as well. That is really two reasons why we see less opportunity and slowly but inexorably a lower population going ready for work and looking for work. Paragraph 22 talks about how the poundage is below the rate of inflation for the next year. In terms of your assessment, you have suggested that the non-domestic rates income will increase by 25 per cent from 2023 to 26.27 to more than £3.5 billion when the economy is expected to grow by about half that. What is the reason for that? Is that just inflation or are there other reasons why you expect that income to grow? Francis, do you want to come in on this question or the previous one? I am sorry. It was on the previous one. Although it is true that generally property has done relatively well, that is a factor here, but I will give a baisonsur to that question. Tell hospitality leisure reliefs between England and Scotland, for instance, for the relief that is offered in England at least at this point in time, shows for the full budget fiscal year of 2022-23. The Scottish version lasts for the first three months of 2022-23, so there is a difference there. Both reliefs are set at the same level, which is at 50 per cent. Otherwise, the reliefs are fairly much in parallel, but that is one element here. Neither applies to aviation, which they did previously, but only to the retail hospitality leisure sectors. Alistair, do you want to put some flesh on that? Just to add one point, which is that, like many other aspects of the economy, non-domestic rates revenue fell in the Covid-driven recession and has bound us back. Part of the growth that we are forecasting for the next year, part of that is explained by a bounce back from previous levels, has taken place and has continued. It is part of the general bounce back of the economy from Covid. If you take the nadir of business rates to 2027, the growth will be 69 per cent. That is why I did not actually take the nadir. It was from 2223 to 2627. Obviously, I discounted that because that was an unusual year. There is still a 25 per cent growth in rates. That is obviously quite a lot for the business community to cough up. That is why I was wondering if that is your view of where that money has only come from as it has been driven by inflation, or is it because it is twice the level of growth? I am just wondering why you are predicting it to increase from £2.8 billion to £3.5 billion over that four-year period. It seemed quite a big increase in a relatively short period of time. One way of thinking this through is to look at our budget forecast last year and compare it with our budget forecast this year. If you do that, the thing that is driving the biggest increases in revenue here is inflation. If you just let the forecast increase by inflation, by the end of the forecast, that adds about £137 million to the forecast. That is the biggest driver if you sort of separate it into its various components. Remember that the tax base is fixed because it has quite little to do with economic activity because of the nature of the tax. Inflation is a really big driver. The Scottish Government has increased poundage not by the amount of inflation but just under the amount of inflation. Obviously, that takes a little bit off of that increase in revenue. The biggest driver here is probably inflation. In social security, you are predicting that there will be a £764 million shortfall in social security spending by 24. When you look at that figure, some of those measures are fixed and will remain within the budget, but surely some of the measures that are being introduced in terms of trying to drive down levels of poverty, the idea is to reduce the number of people who are eligible and claiming those benefits. Has any of that been taken into account in assessing those figures? A couple of comments to start and then again on turn to colleagues. One of them is that that figure that you read out is the figure that we have reported on. It is probably somewhat conservative in the sense that we have taken the biggest social security payments that will or will have by next year transferred to Scotland. We have taken the brand new payment, such as the Scottish child payment, and added up those forecasts over the next five years. Other payments, some of them have already devolved to Scotland and have been for a couple of years based on the formal undertaking by Social Security Scotland to try to increase uptake of benefit payments. They have been tweaked or changed or recast in Scotland, so that it may be easier for people to apply the renewal or restatement of eligibility. There are various ways in which advertising and attracting people in may be more expensive than would have been under the DWP. All of that means that some of the other benefits will also be increasing in numbers. I just want to verify that that number is a somewhat conservative one just by way of starters and background. Alasdair, you are wanting to come in on this. Thank you. I will pick up two examples by answering your question. One is the Scottish child payment. We do in our projections for the cost of Scottish child payment allow for the fact that the number of families eligible for Scottish child payment is likely to fall a little bit in the near future, but effects such as that are frankly dwarfed by the cost of doubling of Scottish child payment, which the Government has now announced. Any effects from a welcome reduction in family poverty are relatively small compared with the cost of doubling. The other big element in our budget projections for social security is the cost of adult disability payment. Adult disability payment does not change very much with what is going on in the economy, in particular with family poverty, because it is driven by disabilities that are typically long-standing and where individual eligibility for adult disability payment is not driven by the economic circumstances that are driven by their disabilities or whatever they are. For different reasons, neither of those items and those are the really too biggest things in our budget projections for social security. None of them are going to shift very much in response to any welcome changes in family poverty that take place in the next few years. A final question from myself before opening out to colleagues around the table. You said that, over the next five years, you expect capital funding to fall in cash and inflation adjusted terms. In paragraph 42, you say that that is primarily because of the reduction in UK Government funding. What is the implications of that for Scotland's borrowing limit and its ability to seek forward capital projects? Don, do you want to come in? Yes. There is basically between the first year of the budget and the final year of our forecast are 15 per cent fall in the capital budget available to the Scottish Government. A lot of this is driven by falls in basically UK capital spending, which are then passed on to the Scottish Government. It is true, however, and you are perfectly right to call attention to it that because the Government has been trying to always plan to borrow the maximum amount that it can on the capital side, £450 million a year, it is heading up towards its limit on borrowing and towards the end of the forecast period. They are thinking that they are probably going to be approaching the limit and that they will be able to borrow less. There is certainly a factor there that the upper limit on capital borrowing is starting to bite before the end of the forecast. One caveat to that is that, although each year the Government says that they will borrow £450 million, quite often they borrow slightly less. Perhaps we will hit the capital limit slightly later than the Government plans indicate. Thank you for informing us a bit more on some of those trends. Can I concentrate on the income tax receipts issue, particularly the fall that you have been predicting? Can I first of all talk about some data? My economists talk about the Laffer curve, and I know that that has been a bone of contention when it comes to some political issues. Nonetheless, that curve is important because it is the relationship between the tax rate and what is collected in revenues. In terms of your updated data, do you have information about the taxable income elasticity? In other words, the taxable income change in response to the changes in the rate of taxation, because that is obviously important for policy. Do we have good data on that? Alasdair, over to you. It is an issue that is very hard to get good data on, but it is an issue that has been extensively studied in a variety of countries with a variety of fiscal arrangements. We are in our projections assuming taxable income elasticity, which has an impact on Scottish income tax revenue, as Scottish rates rise or Scottish rates diverge from the UK rates. We have taken into account the taxable income elasticities at a level that is in line with other studies. Frankly, those kinds of effects are not the big factors in driving our projections of Scottish income tax revenue. It is interesting to talk about laughable effects and all that, but that is not at the heart of what is going on here. As I said in answer to the convener's previous question, the income tax projections are driven by Scottish earnings growing a little bit less fast than earnings in the rest of the UK, partly the decline of the Scottish oil and gas sector, partly the buoyancy of the UK financial sector in London and the southeast, and also driven, as I said earlier, by declines in labour force participation relative to the rest of the UK. Those are the big impacts on our tax projections, not to behavioural tax elasticity. Is it not the case, however, that, notwithstanding what you have just said about those big factors, that those factors have considerable implications for the amount of the tax take that comes to Scotland? Therefore, when a Government comes to decide on its tax policy, the projections that you are giving about revenues in relation to the factors that you have just mentioned are extremely important? Yes, they are certainly important. They might be particularly important in the Scottish environment where it is relatively easy for individual taxpayers to choose—it might be relatively easy for some higher-rate tax periods to choose residents in the rest of the UK rather than in Scotland—that might be particularly easy when someone switches jobs to remove the primary residents in or out of Scotland. However, we have taken those factors into account. They are built into our forecasts. Yes, I agree that they are important. We have considered them. I am sorry if I can make one other point. I think that they have influenced the Scottish Government's policy in that the divergence in tax rates between Scotland and the rest of the UK has been relatively modest, particularly the 1 per cent divergence in the tax rate. I am sure that that has been a question for the Scottish Government, not for us, but I am sure that that has been influenced by the concern that, if it pushed the tax rates too far away from UK rates for higher-rate taxpayers, the effects that you are concerned about would get larger. As you said, that is an issue for the cabinet secretary in due course. Can I ask about what you said about the oil and gas situation? You said that that was one of the big factors having an effect on that. To what extent do you think that the decline in the oil and gas sector is having perhaps one of the biggest effects on reducing the tax take? I hesitate to rank the different effects, but the decline of the oil and gas sector means that there are fewer high-income taxpayers in the Scottish economy than there were a few years ago, and that has had a significant impact on Scottish tax take. In our report in the economy section, we have looked at regional differences in Scottish incomes and the most striking regional decline in Scotland is in the north-east, and that seems to be driven by oil and gas. It would be fair to say that, given the transition to net zero and the predictions that the oil and gas industries will diminish further, that the predictions as a result of that will cause on-going issues for the tax take. That is your prediction. Yes, though, one has to be really careful about thinking about timescales and things. Our tax predictions are for the next five years. The effects on the Scottish economy, if it is or to expect it to be a long-term decline in the oil and gas sector because of climate change concerns, is something that happens over a much longer period. We are not at all downplaying that, but that is a long-term issue for the Scottish economy. It is not really reflected very much in our forecasts in the sense that the current decline in the Scottish oil and gas sector is largely not driven by climate policies driven by the gradual decline of resources in the north-east. Francis had a follow-on response to that question, if you do not mind. I just wanted to slightly move away from the oil and gas sector in the sense that the other thing that you see from that regional chart that we have in the documents is that all reach since Scotland have underperformed a relative. Although oil and gas is a factor, I would not put it in as the number one factor. I think that the two participation effects are the key ones that are going on. I just wanted to highlight that. Thank you for that. It leads into my final question, which is about the participation rates and the changing demography within the labour market. Obviously, there are concerns there, particularly in relation to the number of young people who perhaps have more transferable skills for the future coming into the market. To what extent do you feel that those are significant issues in terms of projections for the future? I will give you a quick answer and then say if anyone wants to follow me. The labour participation rate and the fact that it is declining has been doing so over a number of years now is a significant factor. At the same time, the overall population of Scotland is not growing and is not projected to grow. In fact, it is coming down or the working age population, put it that way, is coming down over the next five years by about 50,000. You have more people on that older end, if you would, and fewer active. The convener asked a question earlier about differences. What would it take in Scotland in terms of differences in productivity rates? I could not answer that question directly, but it is worth considering that if we are already lagging, to some extent, our productivity, even if it were on a par with England or the rest of the UK, would not catch us up, because we would not be there yet. Our productivity would have to go up quite significantly to make that comparative difference decrease. I think that you have already responded to the convener's question about young people's participation. The other big factor in Scottish participation rates is the ageing of the population. That is driven fundamentally by Scotland having had relatively low birth rates for quite a long time now. That feeds into a demographic picture where the older parts of the population constitute a larger percentage than they would in a population that had a higher birth rate. That is a really long-run effect. I fear that whatever we might hope to see, there might be reasons for that. You might expect young people's participation to change, possibly, if various things change. However, the demographic effect of Scotland having a relatively high proportion of its population over the age of 65 is something that is going to be with us for a long time. I am not going to ask you if we are sending too many young people to university. Am I right in saying that if we sent less to university and had more working and doing apprenticeships in the short term, that would boost the economy, although in the long term it might have a more damaging effect? I would argue that, in different ways, if it led to an increase in the number of people actively working and employed, it would have a short-term positive impact. Apprenticeships are not necessarily the highest-paid roles and the number of young people who might go through that kind of programme or the change in balance between those going to university and those going straight to apprenticeships would not be huge. I am not sure how much of an impact that would have. This is a personal view. I would have thought that more young people getting more education if possible and relevant university education in the longer term is the better thing because they may be better able to find jobs, to find a range of jobs, as the emphasis on different types of jobs and different industries adds and flows. They might well be higher earners in the longer term as well. I am not sure what you are suggesting. I guess that it makes sense, but I am not sure that it would make a lot of impact or enough to suggest that we should do that. Alistair, do you have a view as well? The first thing to say is that perhaps a suggested panel includes two professors of too many people going to higher education is probably not a proposition that we will readily agree with, but my serious point is that we do not control what young people do with their education and their lives. It is not something that Governments directly control. Young people choose to go to university or to go into other forms of further education or to go into apprenticeships. It is not an instrument that we have available to us. There may well be a strong case for making more vocational forms of education attractive to the young people, but we have to face that. That is what you have to do. You have to make them—you have to encourage them to choose that. As Susan said, they will choose the path that seems right for them rather than the path that we, whether we or professors or politicians, would like them to take. Thank you for that. I do not want to spend too much longer on that. Although one of my nephews, aged 22, has not gone to university and has done extremely well in his botany's own house, however, my main point that I wanted to go on to was the GDP growth rates. We are an interesting paper from Spice referring to some of the growth rates that are predicted. They have been made over a relatively short time, but I think that timing may be part of that. If I just quote them, I mean the Scottish Fiscal Commission 3.8 per cent for 2022, Fraser Valander 4.8 per cent, OBR 6 per cent, NISR 4.7, Bank of England 5 and HMT 5. In that sense, the OBR seems to be a bit of an outlier in being quite high. Theirs were made in October, which was only two months ago, and yours was more recent. Can you say a little bit more about those differences? Should we consider—obviously, this is having a real effect on our budget, but the OBR 6 per cent seems very high. I am looking for who would like to come in on this one. Francis, are you? We have a table in our document that is slightly different from yours, so I think that is why we had a little bit of confusion. We had, for 2021, OBR 6.5 and then 6, which is roughly in line with the average of forecasters, which was 7 and then 5. That is pretty much similar. Given how volatile economic circumstances have been in the last two years, there is a remarkable consensus among forecasters that we are roughly in the same place. Clearly, all of those forecasts were produced in pretty hours before Omicron really took hold. Therefore, there may be significant revisions around the corner for all of us if this continues to get worse than the situation already is. I do take that point, but it seems to me that this is having a real effect on our budget in the short term, although it will all come out in the wash, I accept, in the long term. Previously, we had this Scottish-specific economic shock, if I have got the words right, which was really a timing thing between your forecasts and the OBR. I wonder if we are having this in reverse at the moment, that they made an optimistic for the UK forecast of 6 per cent in October. You are now saying 3.8 per cent for Scotland in December. Is this just a timing thing, or is it a mixture of timing and reality? I think that it is a mixture. I would say that our forecasts are relatively close in time this time. Indeed, unlike the previous occasion, when a lot happened between our forecasts this time, not a lot happened. As I mentioned, our forecasts are slightly different. Obviously, some of it is due to the fact that we are discussing, and we generally think that there is slightly slower growth in Scotland than the rest of the UK as a factor. Fundamentally, it is a slight difference in the forecasting approach, which will always cause some differences. As you know, that comes out in the wash with reconciliations. If we are heading, you make the point in paragraph 39, page 14 of your report, about the £469 million reconciliation for £24.25. It would seem common sense that, if any Government knew that they were doing that, it would perhaps slightly underspend going forward each year. However, you are highlighting that there is a problem that we cannot really save up that money in preparation because of the rules around the Scotland reserve. Could somebody expand on that and explain that to me and others? I turn to John first and then Francis for a follow-on to that comment. No, but Francis first. Something that we have tried to highlight quite a few times is that I know that there is a concern about borrowing them, but the upside is also constrained in the fiscal framework. That means that, as you rightly pointed out, because of the time and reasons that we have the Scottish specific economic shock, that continues to affect the risk of borrowing and the reserve limits for not-can-need or carry on until 2023-24. That gave the Scottish Government more flexibility to borrow and to put money into the reserve. Unfortunately, in terms of the timing, that rolls off exactly in that year, 24-25, so that the borrowing limit is only 300 in 24-25 against reconciliation that we think is only bigger than that. Indeed, the annual drawdown of the reserve is 250, and the limit and size of the reserve is 700. What we have seen in the past with the reserve is that it is almost all-news to manage and understand departmental spending issues. The reserve does not have enough capacity left over to look after reconciliations. Therefore, that big reconciliation that we are looking at 24-25 is one that will result in potentially one-off changes in spending or access to deal with, because the capacity of the system to absorb it is limited. It gets quite complex, and presumably that will be one of the things that it discusses when it gets to reviewing the fiscal framework. My last point, linked to that, is that on page 29-2.35 talks about the Scotland reserve and the average underspend. The point that the utility of the reserve is actually reducing was 2.1 per cent, and it is now 1.5 per cent. Maybe it is yourself as well, Professor Breeden. Can you explain just why that is happening? There was a factor that basically, as the budget grows—I think that that makes a good point—some of them want to come in and bring another point in. One of the key factors is that the limits in the framework are fixed. Obviously, the combination of inflation and the growth in the size of the budget in real terms as well means that trying to manage a bigger and bigger budget within what are nominally fixed limits will become increasingly a difficult thing over time. It is not as if we can say that the limits are fine because they were fine in the past, but they will become more and more constraining in the future. As the budget grows, the size of the underspend and the size of a consulation will naturally grow with them. Thank you very much, John. We will now have Daniel Duggan to be followed by Ross. I want to move on to regional comparisons across the UK, but before I do that, I want to extrapolate your overall implications in the medium term in terms of the funding envelope. It is fair to say that the thing that took most people by surprise was the net tax position, essentially reducing the available funding by £190 million, rather than adding to the funds available. I am looking more deeply into your report that that picture is just going to increase the issues that it causes in the Scottish budget. I would like to check what you are saying the implication is. If I look at figure 2.1, 2.3 and 2.4, a block grant that you are saying is essentially going to stay flat over the next five years, the net tax position by £26.27 will increase a negative impact of £355 million, but critically, the new social security spend plus additional spend will be an additional £764 million. Is the implication of all of that is that the £1.119 billion will have to be found within the Scottish budget within the next five years? Is that the correct analysis to draw from looking at those three trends of block grant, net tax and social security spend? That is not the exact lens that we have taken to it. I am looking for one of my colleagues to lean forward and give the answer. I think that that might be Alasdair. Really what we are saying here is simply to highlight, since the Scottish budget has to be balanced every year, that as there is a commitment to spend more through social security payments to enable benefits to society as a whole, those additional outflows of money will have to be balanced against other spending priorities. That is the kind of take that we have brought to this area. Alasdair, do you want to come in with a more specific response? Basically, just to agree in broad terms with the question, and I think that Susan New has responded to it. I do not want to fan the number around, but broadly speaking the picture is right. Devolved taxes that we are projecting are going to contribute less to the budget than in the past. The block grant is constrained, and social security expenditure is projected to increase. With a balanced budget, the pressure coming on the budget from two or three sides will put pressure on non-social security expenditure, the facts of arithmetic. That is very helpful. It is important, because if we are looking forward to a comprehensive spending review halfway through the next calendar year, that will give a picture of the overall envelope that that will have to work within. The next key question touches on the point around the net tax position. Why Scotland is performing less favourably compared to the rest of the UK? The big change for me is that that is not just compared to London and the South East. It has been alluded to by the cabinet secretary, but that is really compared to every single other region across the UK as a whole. As I was saying to committee members in private session for this, my rough rule of thumb is always to assume that we will be behind London and the South East, but somewhere around the South West and normally a bit better than places like Wales and Northern Ireland. That is not the case when we look at our net income tax position. Every single Scottish region is lagging pretty much every single region of the UK. Why are those impacts so much more significant in Scotland than they are in places such as the North East of England or the Midlands, which might have comparable demographics, one would suppose, to Scotland? One thing that I would say is that the chart that we have in the document is only one year, so it is 22 September 2021. That is obviously a key for this budget and for our analysis, but it may be just that we have a snapshot of a particularly unfortunate combination for Scotland. The longer term trends are probably, if I recall, more of the time that you are talking about. However, that does not take away from the point that, as we have raised, there is particularly this labour market buy situation and also this oil and effect. Things that are going on in Scotland do not seem to be going on as much in the rest of the UK. The demographic effect is UK-wide, as I was going to say. Scotland does seem to be particularly affected. It strikes me that this is an area that requires much more attention both on behalf of Government and indeed the Parliament, both the specific point about labour market participation. However, I just struggle to understand how that explains in its entirety given that you would have thought that those demographic challenges would appear in other regions of the UK. Scotland is not so different to places such as the north of England or indeed Wales. Where should we be looking to explain this and do further analysis so that we can adopt the right policies to address it? I certainly agree that this is an issue that is worth a lot more thought. Again, I emphasise my point of saying that I think that how Scottish vs the rest of the UK position will look very different depending on what window of comparison you use. I would not necessarily say that Scotland has got a lot worse and will remain a lot worse. I think that different windows will give a much more balanced picture. However, I do agree with you that those participation effects are important because the key question is whether they are cyclical, particularly the use of participation? Is that something that will disresolve itself every time? Or are they something that is structural and will continue? Obviously, that has huge implications for future budgets. I will ask one final question. One of the explanations is the relative performance of the financial services sector in the rest of the UK compared to Scotland. My understanding has always been that we have a strong financial services sector in Scotland. Why would the financial services sector in Scotland be underperforming the rest of the UK? I would go in and say something about that, not to give you a detail about the financial services sector, but it is booming. That is mainly in and around London. For various reasons, it is the continued interest from a number of financial institutions that are more international, more global, of being in the UK and continuing to want that, and London is a real financial centre for them. Reflects perhaps some of the shift of what we used to think about as Scottish financial services to being managed and operated outside of Scotland. The question is a little bit broader than just the one sector. We have said in the report that part of the difference is because financial services really is booming there. It is fine in Scotland, but it is not booming, it is not growing to the same extent. That is a difference in expansion of that sector, if you will. The other side is something that we already mentioned, which is the oil and gas sector, which is right now in the doldrums, which is not a technical economic term, but it has slowed down. One of the things that I might suggest is that, in trying to find answers to your question, one looks at the major sectors and what is happening in them. Those are two that we pulled out. There may be other kinds of activity that affect other areas. Also relating to your regional lens in your question, a lot of the financial services firms that are booming, if you will, in the London and Greater London area have also established quite significant presence in other parts of England quite intentionally. One of the biggest banks has a huge centre in Birmingham, just as an example. It is just London, but, as it grows, it also expands employment elsewhere. Doldrums might not be a technical economic term, but it is a very good descriptive one. I will hand over at that point. I would like to return to the point that Daniels explored around the income tax deficit. Looking at figure 4 in your report, the broad trend from 2021-22 to 26-27 is pretty clear, but I am interested in what you are projecting for the year 24-25, where that gap closes considerably and then begins to widen again for the rest of that period. What caused that change in direction in your projections? I have other documents in front of me, so one of my colleagues who has that table could perhaps come in. Alasdair, you seem to be ready. What we will be projecting for next year, for 2022-23, is a very natural follow-on from the position in the current year. We are expecting the net position to deteriorate by almost £200 million over that two-year period. Your question about the next year gets us into complications, because complications that make the explanations more complicated rather than being inherently complicated, but the UK Government has announced that it is going to freeze the higher-rate tax threshold for several years ahead. We make a forecast on the basis of announced Government policy. That is a UK announced Government policy. The Scottish Government has only committed to freezing its higher-rate threshold for one year ahead. Two years ahead, we are assuming that the Scottish higher-rate threshold is going to rise with inflation, which reduces the policy gap between Scotland and the rest of the UK. I was certain that the Scottish high-rate threshold will rise. No, it is just reflecting. In fact, it has not made an announcement about that. Years beyond 2022-23, character-involved assumed differences between Scottish policy and UK policy, which may just be an announcement differences. For 2022-23, the position is clear. The big differences between Scotland and the rest of the UK are the tax rates in Scotland, which are not going to change, and the difference in the higher-rate threshold is not going to change next year. Going further ahead, there are more moving parts, so we can be a little bit less certain about exactly how the number is going to turn out. I would rather say that, when we are looking at the years beyond 2022-23, the actual divergences that we are projecting have a bit less certainty about them because they are policy-independent. However, the persistence of the general pattern is testament to the fact that the forces underlying the negative and declining net income tax take for Scotland are long-run forces. The arithmetic may vary a bit, but the issue is going to be a pretty persistent one. That is a useful clarification. If I could stick with you for a moment, Alasdair, just a small point of clarification to one of the answers that you gave to the convener around your projections for the cost of the Scottish child payments. You said that the numbers there take into account a slight fall in the number of eligible children. Is that due to the fact that the population of children is going to shrink, or is it due to an assumption about reductions in child poverty levels? No, it is largely driven by the demographics that the population of young people is going to decline, and therefore the population of young people in families eligible for the Scottish child payment will decline for the demographic reason. It is perhaps worth saying that there are some forces that push a slight in the opposite direction, because there is an interaction between eligibility for Scottish child payment and universal credit. The change in the taper rules for universal credit means that a number of families who previously were not eligible for Scottish child payment are now brought into eligibility, not because they have become poorer but because of the UC taper. The existence of a double Scottish child payment gives a bit of an incentive for people who might not have claimed universal credit before to make sure that they claim because the benefits of claiming are greater. The state answer to your question is that the decline in numbers is largely driven by demographics and the other effects affecting Scottish child payment. Some of them go in one direction, some of them go in another, and we are not assuming that, in the short run, there is going to be a big reduction in family poverty that would affect eligibility for Scottish child payment. I second the issue of demographic change, but a different area has fallen on from John Zyne's question about falling labour market participation by young people. That is in part due to the falling birth rate, which is a long-term problem that we are familiar with in Scotland. However, the one significant difference that we are going to have over the next five years compared to the last 15 is a change in immigration policy post Brexit. How much are you building in an assumption of a change in the number of young people in the workforce based on immigration changes compared to the long-term issue of birth rate that we are familiar with? What I was going to say is that the rest of the assumptions that we have shared for a number of years are built into our work here and are implicit in it. We have been thinking about that particular factor for a while. It is not a new factor that we have suddenly considered, but it is there as part of our underlying considerations. Alasdair, were you wanting to say something on that? Just to add that, yes, we do assume in our population projections that Brexit and other factors will have an effect on international migration into Scotland, and it will decline. The effects of that are smaller than the effects of demographic change, so, yes, it is a factor, but it is not as big a factor as the declining birth rate. Great, thank you very much. I recognise that you are dealing with different papers, but figure 316 in the papers that we have is looking at the changes in PAYE employment from start of last year, compared to October of this year. I have already discussed the significant regional effect in the north-east, due to its oil and gas, but it has significant decline in employees there. The other area in Scotland that is in decline is eastern Scotland. I wonder if you could talk a little bit about the particular regional forces that are driving that. We are all very familiar with what is going on in the north-east, but I would be interested in hearing a bit of explanation about why eastern Scotland is also in quite a different position to the rest of the country. Francis, I think that you want to come in. I was actually going to ask that sort of confused question, but it gets much harder when you get down to it. When we do our forecasts, we are not building up from regional forecasts up to the point. When we talk about individual reasons, it gets increasingly difficult to tell. We can try and tell stories about why they are different, but it gets increasingly difficult to pinpoint key factors, because clearly different parts of the economy just perform differently. I think that you said that you were looking to come in on the previous question as well. If you have something to add on that, feel free to cut it off. If you are really interested, I was going to give you the numbers about migration, which is that we have our own population assumptions, including migration. We have zero net migration in the coming year, and then we have a net of 4,000 in the future. I think that you just reinforced that, Alice, to the point that those are pretty small numbers compared to the overall demographic effects. As a new member, I just wanted to check something on the income tax table on figure 4. Am I right in thinking that if we hadn't devolved income tax, the Scottish taxpayer would be £742 million better off, and the Scottish Government would be £190 million better off. Is that right, or am I missing something? It is not quite right, because that £740 million figure is a figure that is calculated on the assumption that there have been no Scottish policy changes, but the effect of devolution is that not only can Scotland introduce its own active income tax policies, but it is no longer following the UK policy. When we are doing our arithmetic and we are looking, for example, at the effect of Scotland setting a higher rate threshold, we are defining Scottish policy as being a Scottish higher rate threshold that does not go up with inflation. However, the rest of the UK has a policy towards the higher rate threshold, which is to push the higher rate threshold up to a level way above an inflation adjustment. The better figure to look at in thinking about what would happen if income tax were not devolved would be what would be the effect if Scottish income tax policy were the same as UK tax policy. For £22.23, that number is not £742. We do not have a projection for that for £22.23, because that is not what we have looked at. However, SPICE projected a number for £21.22 for the divergence, which is minus £530 million. Projecting forward the arithmetic that produces that number of £530, the number for £22.23 would not be £750, but more like £800. That is a very long answer to make a small adjustment to your figure. The important part of the answer to your question is yes. Those numbers mean that if Scottish income tax had not been devolved and had stayed with UK income tax policy, it would have made a difference of the order of £750 to £800 million to the Scottish budget. Is that just to the Scottish taxpayer or would the Scottish Government have extra money as well because of the block grant adjustments? No, that is after the block grant adjustment for income tax. The Scottish Government's position is not as negative as that 750 or 800 number would imply, but it is because Scotland has raised some of its higher tax rates and frozen the higher rate tax threshold. That has generated income from Scotland, but in future years we are projecting that extra income from increased taxes in Scotland will not be sufficient to make up for the loss of income through the block grant adjustment. Thank you. There is no mention in your report about council tax. Is there a concern that with the council tax cap being removed that that would bring an overall burden to the taxpayer, increase our overall level of tax, and that could have a damaging impact on the economy? I could just respond without meaning to avoid the question, but council tax is not part of our remit at all, so we have not explored and examined it and that is why we do not address it in any full way in our report. Maybe you would get more depth of response in another suite of evidence sessions from us, but we do not look at that. I will move on. When I was reading the report, it seems to be that tax earnings are falling compared to the rest of the UK. Social security charges arise compared to the rest of the UK. Work in population is falling compared to the rest of the UK. Economic growth is lower than the rest of the UK. Recovery is slower in Scotland. When I read all this, I was concerned about how sustainable is this going forward and whether there need to be action taken in the short term to try to stop some of the figures that we are seeing coming through. It is a correct question in general to be asking whether the plan in Scotland is to spend more for social benefit than that would be taking priority over possible other expenditures. It is a matter of balancing how to make those discrepancies if you will come out whole at the end of the day. If you spend more here, you spend less there, but it is the right point to be focused on, that there is growth or decline in different directions, and the Parliament should be quite right to think about that. Any other comments from anyone else? I want to go back to where we started, Professor Breeden. I could not quite hear your answer to what was specifically contained in the 620 million other income. I heard spillovers and underspens, but I genuinely could not hear what you said. My question is, what estimates have you put in there and at what levels? I suspect that we will also want to probe with the Scottish Government what is in there, so if you do not mind just running through it. In particular, I would say that I am also interested in how you have factored in the health and social care levy in your projections, and you estimate that the Scottish Government has done the same. I understand that the Treasury says that it is in there, but I do not have a tangible sense of what level specifically in the budget. Those two things, thanks. I cannot find no pay, so I have to do this from memory, but the supplementary estimates at the time, which will come out in February, will be the UK fiscal events, so that could generate funding. There are estimates that would generate extra funding, and there appear to be fiscal events in the UK that could generate extra funding, and both of those is an assumption that something will come. Then there is the resolution of the spillover question, which could generate income, and if obviously the spillover case is resolved this year, that will generate income for this figures coming year. Finally, there are the leases for offshore wind, which are long-term factors, so those are there. I would say generally that we see our role in what I have just explained and looked at the numbers. It is really just to highlight them, because in a sense we are not the experts on them, the Scottish Government is the expert going on. I would recommend you, as you said, that you really ask them more of this than us. We are just a messenger in this case, so we wanted to highlight that this rather large amount of funding and these are the sources that we have been told where they have come from. That is a question that I would raise with them, as far as our message has gone, is to say that this is going on in the background, which historically may not have become so public. In a sense, we are quite pleased that we would be able to highlight them as an issue, because I think that the more the transparent the budget becomes, the better. However, we are still clearly not the experts in any of those four elements. I apologise if that was an unfair question, but we will be following it up with the cabinet secretary. Are you confirming that the specific amounts, as I understand it at the moment in terms of the health and social care levy, the UK Treasury is saying that they are included in Barnett consequentials, but we do not have a sense of over what exact amount. Is that correct, and is that the assumption that you are making as well? I think that that is correct. One thing that I would also highlight about those extra effects is that it would be nice to be able to say that they are a little bit uncertain. We do not quite know the scale of them, so let us be a bit cautious and put in small numbers. Because of the way that the fiscal framework works, and we have just discussed this, having too much money coming in the last minute is almost as poor as much as having too little money coming in the last minute. Therefore, that is another reason why I think that it is so feasible. Even though you think that the money might not arrive, it might also be larger than you say. Unfortunately, extra money has no way to put it in the budget, so it has had to make a shot in the middle of where those numbers are. That is one of the background issues that the Government faces in trying to project those numbers. They cannot be cautious, so they have to aim for the middle on each occasion, but I think that Alasdair will add something. If I can add just two points, the health and social care levy should be seen as different and distinct from the issue of the £620 million. The levy itself is a reserved UK tax, and the plans to spend initially on health and in subsequent years on social care by the UK Government will have fed through the Barrett formula, like the other effects of the UK budget. That has come down that route, and it is not involved in the £620 million. The only point to add about £620 million to what Francis has already said, when he said that it is good that this is out in the open and able to be discussed is a good thing. We also expect the Scottish Government to report as the fiscal year proceeds on how the additional income has materialised, and we will expect in our fiscal updates during the year to keep track of that and keep the Parliament informed. Just another small question that we were touching earlier on demographics and the anticipated reduction in immigration. I appreciate what you said, Alasdair, earlier that demographics were a much bigger implication than reduction in immigration, but it is in terms of your modelling. Do you have any sense of the reduction in the tax take over, if we sum it up to the 50,000 Susan, what the actual cost to tax take for the UK Government? I do not know if you model that at all, or you have just done it by numbers. However, I am not sure who is best to answer that. Can you repeat it very slightly? The reduction in tax take at the back of popular population change, is that what you are asking? What I am trying to work out is what sort of number, what is the sort of cost in numerical figures to the Scottish Government in tax take of the reduction of up to 50,000 immigrants. I do not know anything about the nature of how much tax he paid, whether he would average it, but I am just trying to get a sense of what has the cost been in budgetary terms. I will start off with an al-Hendel to Alasdair. The year-in-year migration numbers do not make a huge difference, as we saw in those in relatively small numbers, but I think what your question applies to this is where it gets very difficult. Migration, 20 years ago, has an impact on tax take today. The deatility of migrants is another factor that has an impact on tax take today. Unraveling the migration effect within tax is very complicated. We have not done that because it is very difficult to unwind the effects of migration, because it has such a long, slow impact. It impacts the whole structure of the labour force very slowly, but it builds up to be quite a large factor over long periods. I want to thank the Scottish Viscal Commission for their evidence today and for producing such an excellent and detailed report. That concludes this section of our evidence taking. We shall reassemble at 11.37. For our second panel on the Scottish budget 2022-23, we are joined by David Iser, Senior Knowledge Exchange Fellow for Reservalda Institute, and Professor Graham Roy, Dean of External Engagement and Professor of Economics, College of Social Sciences, University of Glasgow. We welcome you both to the meeting and can again remind members and witnesses that a broadcasting team will operate the microphones. We have up to 90 minutes for this session. Before I open up the discussion, I can ask Professor Roy to start us off with some opening remarks. Professor Roy? Great. Thank you very much, convener, and thank you very much for the opportunity to come through and give evidence today. I just want to make three brief points that jumped out from me, from the budget, and obviously much of the debate as usual will get focused on our budget lines going up or down, what's happening to income tax thresholds, etc. I think that if we take a step back, then there's some interesting reflections which were picked up in the early discussion that I joined at the end there just about the overall trend in the public finances in Scotland, which I think are really crucial. If some of those are discussed with the Fiscal Commission earlier, I'd have huge uncertainties. Discussing the overall trends and thinking about what they might mean for public services and the public finances going forward are really important. The first thing is the conversation that you just had about the relative economic performance between Scotland and the rest of the UK. That's something that has been in the system, so in the numbers that we've seen, not just recently, but depending on which way you do it, since the middle of the decade, even back after the financial crisis, where the Scottish economy in a per capita basis is growing more slowly than the rest of the UK, and the question that I think we've had in previous budgets was, is that temporary or is it something that seems to be more structural? If you look at the numbers again from the Fiscal Commission, it seems to suggest that there is something more longer term that's driving those numbers. The three years of negative income tax reconciliations added to, with another two years forecast in the next round. We've got the discussion that you just had about the relative tax gap between Scotland and between Scottish income tax and the block grant adjustments, which are now negative. And the key thing is what's driving that, so we can hear it. We now understand the technical reasons for that, lower weaker earnings growth, weaker participation, but what is it that is actually driving that? Is it challenges in the North Sea? Is it weaker growth more broadly in the economy and what can we do, if anything? Can we do about that or what can this Parliament do about that? I think that that's the first broad thing that I think is important to focus on. I think that the second thing gets into the pressures that we're seeing coming through on public spending. Again, just to take the one example around social security. Again, divergence through policy choices primarily between the commitments that we're making on some elements of social security and then the block grant adjustments. That's not to say that they're not the right policies to do, but they come with an opportunity cost. If the tax base is not as growing as strongly as we would perhaps hope it would be, that means that that money is going to have to be found from some other places. That brings me on to the third point, the pressures that we see in public spending more broadly. We obviously know that the public service has been under huge pressure through the Covid crisis, particularly in the health budget, big increases there, but are they enough to cope with the legacy effects of this crisis and the reforms and the structural changes that we need in terms of our future health projections? The key thing that jumps out from all those questions there is just the importance of the discussion that we had maybe about a month ago around public service reform and the fundamental value that that has in managing through this crisis. It's really good that the Government is now looking to have the spending review next year. I think that the questions that are in there are exactly the right types of questions, like prevention, like greater cross, collaboration across Government. For me, that's really where the big focus will have to be over the next couple of years as a Parliament about how we cope with managing the pressures in the budget through genuine reform that means that we can continue to deliver the public services that we all want and we all depend on. I don't think that you wanted to make any other remarks, but you can if you so wish. I'll base my initial questions on the statement that Professor Roy made. You said that we have to look at public service reform and that we have to be genuine in that reform, but the issue is going to be, politically, how we bring in genuine reform in terms of prevention and more efficiency and better use of public power, where it is just being seen as cuts, etc. That's one thing, so I'm just wondering if you can address how we approach that. The second thing, of course, is the issue about whether or not we do that and whether we do that are not successful. There still is a real long-term issue that appears to me about the sustainability of the public finances and, indeed, the relative divergence in taxation and tax revenues with the rest of the UK. Following on from that, and obviously I'll be asking David to comment on those matters as well, what can we do to try and reverse some of the issues in relation to productivity that we have in Scotland? If the economy was more productive, if we were 1 per cent more productive a year, for example, than we are now, then I think that we wouldn't really be facing this problem for much longer, so how do we actually address those broad issues before we go into the meet-and-drink? It's great questions, and I think that maybe we'd go on the second one first around the economy. I think that one of the things back to when the fiscal framework was signed up and we agreed to have those greater devolution was the acceptance that there's a risk built in here about Scotland's relative economic performance compared to the UK. I think that what's been quite striking is, over the last throughout since that tax devolution, that risk has all gone in the negative way where it's actually been that Scotland's been underperforming relative to the UK as a whole. I think that there's a genuine question about what we can do to address that. Is this something that is in the gift of policy makers? Is this something that is in the gift of Scottish policy makers? Is this things that we've got levers that we can change? Or is this actually more structural changes that are in our economy? We heard earlier about demographics, about the decline in the North Sea. It's very difficult for policy makers to take a different choice. The North Sea is something that is naturally going to decline as a major economic sector in Scotland. You can do things around that. You can do things to try and replace that with the growth of renewables, etc. However, there is a big fundamental structural change in the Scottish economy that we have to recognise, and we have to recognise that it's going to always be there. Where can we make a difference in terms of boosting productivity and what are the potential options there? Obviously, the Government will be publishing shortly its next economic strategy for economic transformation. There are questions about how we can become more productive as a country around linking about our skills gaps and where there are potential skills mismatches in our economy. When we look at productivity, we always think of productivity being right at the top end, so how we can become more productive in terms of having the best-performing companies. However, if you look at all the evidence, one of the things that we see in Scotland is that our core business space is just naturally less productive, less entrepreneur and less innovative than many of our key competitors. What can we do to shift the dial in that core business space to become more productive? That is less about the next generation of new technologies, but about being able to use existing technologies better. What can we do to boost the overall core skills base and digital base of our economy? On your first point about the spending review and the challenges around cuts, as we discussed that four weeks ago, it is really hard. As we discussed, the Christie commission was a point in time where the independent budget review was saying that those things were going to happen. It jumped forward 10 years. Those things are now happening. The pressures on public services, the challenges around demographics are now here. It is the opportunity to have a significant review of how public services are delivered and what we can do to do what the Government is talking about through greater collaboration, reform, prevention and so on. That will involve difficult choices, but that is ultimately what the Government has to do in order to make the public finances sustainable. Obviously, you have touched on demographics, and there was a lot of discussion in the previous session about that. Indeed, there was a private session earlier on. David, just touching on that, I would be happy to respond to any of the points that I raised already, but we discussed, for example, immigration down perhaps because of Brexit, birth rate down, even the number of younger people who are in tertiary education. We are still in Scotland at a time of a high number of vacancies. A record number of vacancies have around 100,000 people, roughly around 4.5 per cent of the population, unemployed. Clearly, if those people were in productive employment, that itself would make a difference. What can we do in terms of trying to upskill those people to improve market participation and reverse some of those trends that we can see at the moment? I think that you are right to highlight that, although the unemployment rate at the moment is remarkably low considering where we were a year ago, most forecasters were expecting that we might be looking at an employment rate of 7, 8, 9 per cent now. The fact that the economy has recovered so much more quickly than anyone was forecasting this time last year is remarkable, and it obviously reflects the success of the vaccine programmes, the success of the economic support measures that have been in place during the pandemic. You are right that one of the reasons why unemployment has remained low is that inactivity has increased or is higher than it was amongst the young. That is partly because of an increase in educational participation, but it has also increased among some of the older age groups as well. To a large extent, that reflects the fact that we are still in the early stages of the recovery and the economy is going through this structural shift. Although the economy as a whole is expected to be back at pre-pandemic levels in the second quarter of next year, for some sectors they are not expected to get back to pre-pandemic levels for a significant time after that, for obvious reasons, and we can all see that as we go about our daily lives. So there is a role for the public sector to support this transition to a new economy, to a different sort of structural make-up, if you like. I think the government is actually doing a lot of the things already that it should be doing in terms of a focus on employability and skills. We go back to that question of, are we doing enough to ensure that we are capturing the outcomes of that activity, that activity is delivering the sorts of outcomes that we want, and those are difficult questions. The stated aim of the spending review is to get to grips with those issues and to plan spending policy on the basis of an evidence-based and outcomes-based approach. On paper, that is certainly the right thing to be doing. One of the issues that we have with the budget is the plethora of different figures that you have seen. For example, we have a situation where the Scottish Government is saying one thing in terms of figures of the Scottish Fiscal Commission is saying something slightly different. Of course, the UK Government is probably saying something different depending on whether or not Covid figures are included. Where does the Fraser of Ireland Institute, and indeed Game yourself, where do you stand in terms of the figures that we are actually dealing with? What we have on page 2 of the budget document that you have seen is the Scottish Government is saying that in practical terms between 2021 and 2022 and 2023, and I think that the key words are in practical terms, that resource funding is 7.1 per cent in less than real terms, and they also go on to say that it appears to be less controversial from the figures that will be presented by others. The equivalent reduction for Scotland's capital budget grant funding is a 9.7 per cent real terms cut between 2021, 2022 and 2023. Where do you feel we are in that? Obviously, when we are trying to scrutinise the budget, we have to look at the figures and see where we are and what room for manoeuvre the Scottish Government has. I think that it makes sense to focus on the block grant from the UK Government, because that remains the key determinant of the Scottish Government's overall spending envelope. Obviously, the last two years have been exceptional because of the pandemic, and they have, as a result, been exceptional ffiscally. With the Scottish Government receiving around £8.6 billion in 2021 of Covid funding and £4.9 billion in 2021-22 of Covid funding from the UK Government on top of the usual core block grant, that Covid funding drops out of the equation in 2022-23. What we are left with is a core block grant that is significantly higher than it was pre-pandemic, about 8 per cent in real terms, higher than pre-pandemic, but an overall level of resource from the UK Government that is 7 per cent lower in 2022-23 than it was in 2021-22. Those two figures are factually correct. There are the two comparisons that you can make. In some ways, neither of them are all that helpful, because it is all very well to say that the core block grant is 8 per cent higher than pre-pandemic, but the pandemic continues to have a substantial legacy on public services. In itself, quite how meaningful is that? Not entirely sure. On the other hand, to say that the total block grant is 7 per cent lower in 2022-23 than it was in 2021-22 is perhaps not all that helpful either, because we all at least hope at the moment that 2022-23 is going to be a year in which the direct impacts of the pandemic on public services are significantly less than they were in 2021-22. There are always different comparisons that you can make, but I think that the undeniable point is that, in the context of the priorities, the commitments that the Government has set, and the legacy of the pandemic on public services, it's a challenging outlook for the budget. In fact, the following two years, when the resource block grant is effectively flat in real terms relative to the 2022-23 level, that outlook becomes even more challenging, so I do think it's a challenging outlook. There are, of course, different numbers in the SFC's document, and that's because, as John Island pointed out in the previous session, they're not just looking at the resource from the UK Government but various other things, so they're including, for example, around £400 million drawdown from the Scotland reserve in 2021-22, which boosts spending in 2021-22, but at the moment there are no plans to drawdown in 2022-23. I suspect that that will change. They're also including the Scottish Government's assumption that additional resources will come from the UK Government in the early part of 2022-23, so that also boosts Scottish Government spending in 2022-23. The other thing that's material here is the non-domestic rates and the rollback of the non-domestic rates relief in 2022-23, which also contributes to additional spending in 2022-23 relative to 2021-22. Okay, thanks. Just before you come in, Graham, David touched on it there. He talked about the fiscal commission. They can sit halfway between the Scottish Government and the UK Government's assessment of the figures. In paragraph 9, the overall Scottish budget will be 2.6 per cent lower in 2022-23 than in the current year, 5.2 per cent allowing for inflation. One of the issues, of course, as David touched on it, is that it includes drawing down of resources, et cetera. What are the implications of the long-term fiscal sustainability of Scottish finances, given the fiscal framework that we have to work with and which has become through inflation, et cetera, becoming increasingly tight as we progress? David has run through the numbers. We have this at every budget. There's a ding dong about whether the budget has gone up or down and what's the size of that. I think that it's now become Christmas every year that happens and we can move on. If we take a step back, the big quite is exactly the point that you made there. We can all agree that the budget settlement is tight. Whether that means a marginal increase or a marginal decrease, I think that we can agree that the budget settlement is tight with additional pressures because of things like inflation. Inflation is potentially going to be much higher this year than it has been historically, which puts huge pressure on wages. Even if you have, in relative previous years, a relatively generous increase in public sector wages, it's likely to be a real-terms cut for most people because of inflation in there. You add in inflation and that builds in challenges. You then add in the stuff that we've spoken about already about the challenges and the tax revenues and things like that and then you build in the wider public spending pressures. If we can agree on one thing, it's a challenging settlement. What the exact number looks like, you can debate that all day and I don't think you'll get anyone to—everyone will stick to their fixed position, but I think that the general point that you make is really important. The way that a committee is trying to cut through a lot of the burden is not exactly easy but to cut through some of the politics at least to try and get a consensual approach, if possible, on that. One of the things that I'd be keen of to try and get some more information from either of you will agree and perhaps will go first is this legendary £620 million, which is next, say, of the document, but it's not really spelled out in precise terms as to how we amount, how we get to this £620 million and how likely that money will be delivered. Of course, the Scottish Fiscal Commission have said that they think that it's reasonable to assume that, but the difference has been reasonable in whether or not the money will actually arrive and, of course, it does have implications, so I'm just wondering if you can say something about that. Go ahead, Graham, and then yourself, David. Then Daniel Watt wants to come in with a related question. David Watt might know more about the detail on it, but I think it did jump out as being quite a significant addition into the budget. Again, just listening to the Fiscal Commission and reading the report, it doesn't go into the detail about exactly what makes up that £620 million, so what's the components of that? All the explanations make sense around, obviously, there's this personal allowance resolution due, it might be due this year, it might be slightly later than that, which might lead to additional funding flowing to the Scottish Government, if the Scottish Government are successful in their challenge around the fiscal framework and no detriment. There's obviously the potential for another fiscal event between now and the start of next year, so early next year, so around March time, you'll have another UK budget or spring budget, which might bring additional Barnett consequentials, and the Government are obviously making an assessment about what that could be. The other point that the Fiscal Commission made quite well there is that the nature of this framework and the way it works. Actually, the Scottish Government is right to have an overestimate of that, because anything that underestimates then potentially leads to challenges around how it manages its budget, so having a relatively generous assessment for that probably makes sense from a technical point of view. The key point is that if this money doesn't flow through, then that's additional pressures that are going to have to be found from within portfolios in order to make up the demand there, but David might know a bit more about the breakdown of what's in the £620. I'm still struggling to find the table, but I know I have seen it. My view on this is that we know from past budgets that it's almost inevitable that there will be some additional resources of at least several hundred million pounds that flow through to the budget for £22.23 because of additional UK Government spending that might come at main estimates and might come at the March budget. In that context, while the Scottish Government's got a couple of options about what it does, it can assume that it's not going to happen and when those additional resources are confirmed, it can then decide at a later point what it's going to do with those additional resources and announce that as part of the spring budget revisions, or it can make an assumption and factor it into its budget plans. Given that it seems inevitable that at least several hundred million additional will be confirmed, that's just our experience of recent years, it's prudent to factor it into the budget. It seems to me that that probably results, arguably in the money being used most strategically and subject to greater scrutiny than if it's dealt with at spring budget revisions. More a 21 on short than a 21 against, so to speak. I wanted to start by following up with you, David, about this point around is it seven point something percent up or seven point something percent down and confound you both by saying that I can recognise both figures and not be rigid about my view on it. I recognise that the total figure because of Covid, there was approximately five billion of resource funding in the current financial year. To my mind, the key point is this, throughout the debate around Covid spend, both publicly and indeed privately, the Government has been pretty clear that that money cannot be used for non-recurring budget items. I think that we can all accept that Covid hasn't completely gone away so that the costs to incur have not disappeared and therefore that's where you end up in that fuzzy middle position. Is there an issue here around transparency and about the clarity both in terms of how that five billion has been allocated and whether it has been allocated strictly speaking on non-recurring Covid items? Indeed, what in the current budget is Covid? I think that this budget is particularly difficult to track. We see a number of items jumping between line items and it's not entirely clear what in the budget just presented is directed at Covid. Is that a fair assessment of why we find ourselves in this position? I agree that tracking things in budget documents is always challenging and especially when the 21-22 budget was set, at that point the Government didn't have 4.9 billion of Covid consequentials. It had significantly less than that so a large chunk of that 4.9 or 5 billion has come during the year and been allocated in year so that all adds significantly to the challenges there. I do think as we, it was always going to be the case and Audit Scotland has talked about this and flagged this up on a number of occasions that as we moved in time away from the pandemic making a distinction between what is pandemic spending and not pandemic spending was going to be increasingly blurred. You can see as an example of that is health spending and the substantial increase in the core health budget in 2023. How would you disentangle what of that is because of the legacy of the pandemic from the underlying pressures that were there all along? I am not sure how helpful it would be to try to do that so I do not know if that answers your question. It does although that is quite useful in and of itself and we know what the increase in health spending is about 2 billion so to my mind that means there is about 2 billion to find elsewhere and if the Government is basically saying and it is not unreasonable for them to say it that we still got on-going costs from Covid across the board then it should be more straightforward to identify that in non-health budget lines but it is not entirely clear where that is in the budget outside of health. Sorry you mean it is not clear where the resource for the 2 billion uplift in the health budget has come from? That is quite relatively straightforward. We see the increase and we know what the consequentials are in terms of health but if you are to say that essentially it is a 7% cut you need to be saying that basically we have still got all of that Covid cost and that extends beyond health and therefore in terms of that delta there is sort of a billion to 2 billion to be found in other budget lines that are essentially legacy Covid spend and it is not clear what that is. I agree it is very hard to track individual budget lines and the consequences of the change in the overall resource settlement for those individual budget lines. To an extent that is always the case, it is magnified this year because if you compare budget to budget you are ignoring the large chunk of the Covid funding that has been allocated in year this year. Much more to add other than the fact that budget documents and the budget information are not really designed to go down to that level in that significant way. The second thing I would say as well is that you can probably think of the areas that are quite clearly a Covid cost, so lateral photo tests, boosters, it is quite obvious what that is. Non-domestic rates extension, that is clearly related to Covid but is extending into next year, but that is not Covid funding, that is barat consequentials coming through which are giving the Scottish Government the opportunity to do that. I understand your frustration and I think that there is potentially some areas where there could be greater clarity but in other areas there is just going to be naturally grey areas and all of that. I think that there is a general point which builds on the convener's question and your question there as well around levels of understanding complexities and ability to do scrutiny of the budget. It is exceptionally complex and the stuff that we have done just recently on the research on this and just how difficult it is for people to understand and work the way through all of this. I think that that is something that we need to get better at collectively as Parliament, Government and others about what more we can do to make it more accessible in the information and understanding the differences in the lines. Everybody is right in what they produce. What is missing is somebody to then come in along and say, well, this is why you are getting, pull it all together, this is why you are getting the different results here and there. I argue that it is also important for Governments that they can just manage. Moving on, I just again continue on from line of questioning from the convener. The fiscal commission document is important in getting a more medium-term outlook in terms of fiscal pressures. On the one hand, we were all surprised by the pessimistic outlook in terms of tax and the implications, but the other is the potential growth in social security spending. I just really want to test the bit of logic that I put in front of that. If you take those broad assumptions, I freely accept that they are forecast and are therefore liable to error. If you look at the net tax position of a negative consequence of around £355 million, coupled with a growth of around £764 million in terms of additional and new social security spend, is there essentially a deficit of around £1 billion that will need to be addressed over the next four to five years in the Scottish budget? There is no deficit in the sense that the Scottish Government does not run a deficit. It is a challenge. The opportunity cost is the way that I would describe it. What else could you be doing with that money? A couple of things. The income tax situation is concerning. It comes back to the early point that it is making around the growth in the tax base and the relative economic performance, and not just Scotland's economic performance but relative to the UK. The fact that the UK is growing much faster, which is an issue that was always built into this fiscal framework, it was not just how Scotland did, it was how the rest of the UK did. If it has got London flat out, we are struggling to keep up with that. There is an issue in there, and that leads to this negative tax position. The interesting thing is that there was a technical point about the assumptions that the commission uses about what happens to future tax policy, and the fact that the UK is freezing its thresholds means that you have to take some of those numbers in terms of the exact specifics of it with a bit of caution. If the Scottish Government chooses to freeze the thresholds, that will have indications for the specifics of the numbers in there, but the general point is that the next tax position is negative. On the social security thing, if you look again at the breakdown, there are issues about how the block grant adjustment works in there, but I think that the fiscal commission has a quite helpful table in decomposing that into differences by the block grant and the differences by discretionary choices, and it is the discretionary choices that are driving quite a lot of that. That is not to say that they are not the right choices, but with a fixed budget that brings an opportunity cost that you then have to find somewhere else. Would you agree with that, David? Am I getting the right numbers? I certainly agree that the fact that the Scottish Government is setting a distinctive policy on the new social security levers that it has, the adult and child disability payments, and is rolling out the Scottish child payment, that is clearly a great illustration of the benefits of devolution, but its policy choices in this case come with cost implications, and that would, on the basis of these forecasts, the implication is that spending on other things will be 700 million or so lower than it would otherwise have been, so that is going to add to the medium-term challenges, undoubtedly. The income tax situation, again, taking the current forecasts as given, is an additional constraint on the budget. My final question is just coming on to the point that, Graham, you raised an interesting point around Scotland's relative economic performance. That, in a sense, drives all of that. Perhaps my oversimplification rules of thumb in my head. I have always assumed that Scotland will do a little bit less well than London and the south-east, but better than pretty much the rest of the UK. That analysis should seem to suggest that that is not correct any more and that we are actually trailing most of the rest of the UK. In particular, I have always assumed that Scotland is not that different to certain other parts of the UK, whether that is the south-west or the north-east in different ways. What is it that is particular about Scotland in terms of the lower participation and slower growth in income tax? Can you go a little further into why our company said something really interesting about our companies being less productive? What is driving that? You were suggesting that we have not been as good at adopting technology and things like that. Can you go into a bit more detail? I am really interested in that later point. The familiar question is correct in that, if you look at Scotland's level of economic performance in comparison to other parts of the UK, typically Scotland is third behind London and the south-east. That has been sustained over a significant period of time because of core strength in our economy, such as financial services, such as the highly skilled workforce and the North Sea. Scotland, like the rest of the UK, has been boosted by inflow of migration from the European Union in the early 2000s, which in turn helped to support the Scottish economy. The starting point is that that is where Scotland would normally sit, relative to other parts of the UK and the UK as a whole. Pretty much not that far away from the UK average but third behind London and the south-east once you account for the huge regional inequalities in the UK. Since the financial crisis, we have seen that from that base, the relative growth of the Scottish economy, particularly on a per-head basis, but also on a total basis, has been slower than the UK as a whole. The fiscal commission talks about the potential reasons for that. It is hard to disagree with that on issues around demographics in terms of participation. We are protected from raw demographics because of the block-grout adjustment, but if the participation for older workers is slightly different, you will have an impact on that. There are also some interesting charts in the Fiscal Commission's report about what has been happening to PYE numbers and average earnings in the north-east. That has been a huge part of Scotland's economy for 50 years. It was our largest industrial sector in terms of output for decades. As you go through that transition and entering its twilight time, that is something unique to the Scottish economy. It is in the UK economy but it is a fraction. If it is 10 per cent of the Scottish economy, it is 1 per cent of the UK economy. That relative importance of that means that there is a much bigger impact on the Scottish economy. In crucial issues, jobs in the energy sector tend to be higher paid. There is an additional issue on the income tax, because income tax tends to be paid by the higher earners. There is an interesting report from the Productivity Institute just a couple of weeks ago, which is an initiative across the UK that is looking at productivity. It is starting to unpick some of those issues. It is one of the things that is quite noticeable. Scotland does well on productivity because of our sectoral mix, because we have high productivity sectors such as financial services such as energy. That boosts our productivity. However, if we move away from that and look at the core business base across other parts of our economy, our average productivity, our average take-up of innovation entrepreneurship is lower than the UK look at our average spending on research and development. It is lower than many other parts of the UK look at business investment. That is one of the really interesting things that I think about from an economic point of view. Quite often we look at the star companies. What can we do to attract more life sciences or more inward investment into the country? However, thinking about what our core business base is like, the basics of connectivity, of access to digital skills, of flexible working, of good management practices in businesses, those are the sorts of things that, if you can shift a dial in them, you can shift a larger business base. You are not talking about radically transforming and creating gazelle companies and the next sky scanner, but what you are doing is just gradually shifting the core productive base of your economy. That is where there is potential. Not just for Scotland, but it is an issue if you look at UK comparisons to other parts of the world, too. That is fast. I think that we need a committee session just on that topic. David, I do not know if you have got anything to add. Not really. It is clear that since income tax devolution started in 2017-18, Scottish earnings growth has been slightly lower than the rest of the UK. I think that it was only modestly slower in 17, 18, 19 and 19-20. The latest forecasts seem to imply that that divergence is going to increase in 22, 23 and subsequent years. If you were looking on the bright side here or trying to find a way to look on the bright side here, part of the reason for this divergence in the forecast is because the SFC and the OBR are taking a slightly different view about how inflation will feed through into earnings growth. Probably in reality, the way that inflation feeds through into earnings growth will not be as substantially different between Scotland and the rest of the UK as the forecasts currently imply. It does not really matter whether it turns out that the OBR is being a bit optimistic for the UK at the moment or the SFC is being a bit pessimistic for Scotland at the moment. If they end up being a bit closer, then the outlook will not be quite as bad, but I would not want to alter the conclusion that it is. It is clearly not a particularly great outlook for Scotland, and even if what I am saying does come to fruition, that is not going to change this fundamental outlook, which is not particularly positive in terms of income tax revenues. Just following on from that point, if we do assume that the main challenge is to address that problem about declining tax revenues as a proportionate share, am I right in thinking that you are both suggesting that the policies that are required to deal with that challenge are not fairly straightforward fiscal policies about whether you increase tax and whether you change thresholds, but policies that are going to aim at addressing some of the structural problems within the Scottish economy, is that fair to say that? It is certainly not a case that this is something that you can rectify by changing income tax policy. It is much more fundamental than that. The sorts of policies that will change this outlook are incredible. There is no obvious answer. If there was an obvious answer, we would all be jumping up and down and saying here is the answer. It is fundamentally very difficult for any Government to change the outlook for productivity and earnings in the short run. That is at the heart of this. This is not a straightforward thing to address through any policy. I am asking you, because one of the issues that has been flagged up, well, certainly today, but previously as well, is the difficulty that we have an ageing population and the working population, which is obviously those who are paying the tax, as a proportion is shrinking. That is not something that somebody can change overnight. Therefore, that leads to the question about whether there are other policies that we have to do to try to compensate what I have predicted. You have both said today, as did the Fiscal Commission, that the outlook is not great. What I am trying to get at is where do we think are best chances in terms of policies that we will try to address the difficulties and the potential deficits that we have? That is the main question that I will ask the cabinet secretary as well, but I am interested in what you think the evidence shows. As I said, it is very difficult to say here is a list of three or four policies that you can do that will inevitably close this gap. Some of the things that we have been talking about are the explanations why average earnings growth in Scotland has been slower than in the rest of the UK. That is the key issue here. It is the relative performance that matters. Some of those things are very clearly linked to developments in the offshore sector and the way that those, as Graham was talking about, have a more direct impact on the Scottish income tax base than on the rest of the UK income tax base. It is not immediately obvious to see how you undo that in a short space of time. Professor Roy, you made some extremely interesting points about productivity and how, in some cases, Scotland does very well, but in other cases, we do not. Relating that to the concerns that we have about employment trends within the Scottish economy, do you think that we have to do more to use employment policies to try to get around some of those difficult structural issues? What would you suggest about employment policies? As David mentioned, unemployment is less of an issue than it was. The question is more subtle about under-employment, skills gaps and mismatches. It is those areas that I think are probably there. About two things in particular. It is quite clear that there are people to work but perhaps not able and willing to work in certain jobs. That is why the vacancy rate has stayed higher than perhaps we might have been expecting at a time where unemployment was supposed to rise. There is a mismatch of skills and, therefore, maybe we need policies that will address that. Do we also need policies on the education front that allow younger people, in particular, to have a wider number of skills to be more flexible in the jobs that they can do rather than increasing flexibility over the years? Are we at a stage in which we have sufficient flexibility to fill some of the gaps? All that is interesting and worth looking at in terms of incentives to work. That is why things such as living wage are really important, because it is not just an important thing to do, but it is what Evan suggests that it encourages people to go into work and boost productivity through that way. The wider question about skills and education is really interesting around the balance between the skills and the balance between education for the workforce and the labour market that we know is coming down in the future. My generation is coming through. The idea was that you studied at school, you went to university, that gave you your education, that gave you your skill and that was it. Whereas the labour market now is much more dynamic, much more flexible, people are probably going to have to be retrained and skilled on a much more regular basis. Are we set up for that? How easy is it for somebody who is in a job to go and be retrained and re-skilled? How affordable is it? How are you able to do it along with your existing work commitments and caring commitments? Is it accessible that people can re-skill and retrain? How do you do those skills, gaps and skills? I think that there are some really interesting things that are worth looking at in that context about how you get the labour market much more dynamic. The more general point about what policies we can do in all of that is that there is a fiscal policy. We also have some tax powers and there is a debate about whether increasing tax or decreasing tax is good or bad. Of course, increasing tax means that you can spend more in those things that help boost productivity, so it is not as easy as simply saying that increased tax is bad and decreased tax is good, because you can actually invest it correctly. The wider point that we have spoken about is the huge structural pressures that are in Scotland's economy around demographics and around transitioning from oil and gas and moving into new industries. We have seen it before around the big structural changes that happen in our economy and the great legacy effects that we see across the UK. There is a word of caution that policy makers can do things at the margins. They can make differences at the margin, but there are those big structural changes that are happening, which is then, I think, large about adapting to it as much as what you can do to try and think that you can counter them all easily. John Toffol by Ross Thanks, convener. Following on, some of the issues that have already been touched on, particularly, maybe, David, I can start. Spice produced a report that I quoted at the last session—I do not know if you saw that—about the GDP growth rates in the calendar years coming up. Phrase of Rallander was at 4.8, which I think was made in September, whereas Scottish Fiscal Commission was at 3.8 in December. That is within Scotland, just, and then we have the OBR at 6. Generally, at a UK level, the OBR appears to be at the highest end higher than the Bank of England, for example. Do you have any thoughts on that, apart from what you have already said? There clearly is and has been a lot of uncertainty around the outlook for the economy. That was true even before anyone had heard of Omicron. Despite the much stronger-than-forecast economic performance during 2021, which I mentioned earlier, there were bigger uncertainties for 2022 around things like the outlook for inflation and how that might impact things. There were uncertainties about what we will see in terms of business investment. There were uncertainties around this issue that we have been talking about in terms of reallocation of the economy to a slightly different configuration and how quickly that would happen. I think that all forecasters have been very open about saying that there is greater than usual uncertainty about their forecasts, so there is inevitably some variation around that. The uncertainty has increased in the past couple of weeks. You said earlier that, in one sense—I get this—if the OBR is being a bit optimistic and the SFC is being a bit pessimistic, it will come out in the wash in a few years' time. The problem for us is that, in the short term, in the next one, two, three years, those forecasts affect our budget, so we could end up having to make savings that, in the wash, that will not happen in the long run and it would recover. There is a problem if one is cautious and one is optimistic, but, in a way, if that is what is happening and it does all come out in the wash, that is a much more preferable situation than one where the forecasters have got things right and there are those big structural differences in the performance of the economies and it does not come out in the wash. If it does come out in the wash, that is the best outlook that there is at the moment. In short term, there is pain for long term gain? Yes. If it turns out that, in 2022-23, things have been better in Scotland than in the forecast or worse in the UK than in the forecast, there would be a positive reconciliation on income tax in a future year, so there would be a transfer of resources over time. That is right, but it would be a transfer of resources over time, but that is probably a preferable outcome than one where the current set of forecasts are a good reflection of what arises and there is no positive reconciliation further down the line. I was interested in what you said about differentiating between what we can change and what we can't change. Some of the stuff around productivity, some of that is probably the more of the work of the economy committee, I suspect. I still wonder about the productivity thing. For example, if we put two people on a train to screw on a train, that is less productive than one person on a train, but increases safety and we get the fares collected and all those things. It seems to me that productivity is not always an issue. With tourism, is that a sector where it is harder to have productivity, because a good hotel has more staff and looks after the people better? I am not sure. Where I am going with that is population. In one sense, that is something that we cannot control, but on the other hand, with immigration, we could control it. I am just wondering, out of all the issues that we are talking about, productivity, skills and population, is the biggest one the population? Is that really what is holding us back? I have not done any modelling on what would do the relative difference between two. What I would say is that population is not a quick fix unless you can get migration, and it is something that beds through. The challenges that Scotland has got about the population are decades old. It goes away back to the differentials between what happened in the mid-twentieth century between Scotland and the rest of the UK in terms of our population flows. That is just coming through. Those are things that are decades in the making rather than something that is short-term. On productivity—I did not mean to set the discussion away into a big discussion about productivity—the nail in the head about productivity is not everything, but it is a crucial way to boost wages, which, for the fiscal framework, whether you agree or disagree with economic growth or whatever, in the framework that has been signed up to, what matters is the ability to get earnings growing, essentially get earnings growing and employment growing at the same rate as the UK, roughly speaking. It is crucial for the framework. You might disagree with that, but for the framework that is absolutely fundamental to it. The other point that you made that is really important is that productivity is not just about volume, it is not about doing more stuff, it is about doing better quality stuff. That is where an economy like Scotland has the potential to focus on. It is about better quality jobs, better quality products and activities, rather than simply volume. That is where, sometimes in the past, the conversation has got too lost in a technical discussion about productivity. However, if you focus on doing more—and it is not about working smarter, it is about working smarter and using things more efficiently to create better quality things—that is where an economy like Scotland has the potential to be a comparative advantage. That does not say that there is not a wider discussion about whether growth is good or growth is bad, but for the framework, that is ultimately what matters in terms of whether the relative tax revenue is in our favour or not. I realise that you are in a university and you said earlier on that there was this assumption, which was absolutely the case when I was younger, that if I went to university I would get a good job and that would be me for life. I think that the schools are still thinking that way, in a sense. I made the comparison earlier and I do not want to get too into personal details, but one of my nephews has gone to university and will take some time to earn wages. The other one has not and is earning very good wages. In the short term, that helps tax, that helps. Are we emphasising universities and academic qualifications too much at the expense of practical apprenticeships, even engineering some of those things? I am not an education specialist so I cannot really comment too much in detail on that. In some ways, I do not always think that it is less. If we take a step back and look forward to the changing nature of our labour market, how do we provide that flexibility and that accessibility to education and skills that we need for the labour market? That will still involve significant tertiary education, but it is accessibility to colleges. How do we make universities and colleges more accessible to older workers in terms of the ability to access all that expertise and things, and what more can we do out of universities to support innovation and technological change? There is also a general question about what can we do more to provide support for young people to enter into the labour market to give them the skills and the experience, which is ultimately really important. I have not answered your question specifically, but that might be something that you want to follow up with. If I can just have a final point, I do not think that we have said very much in this session about capital expenditure, we seem to be coming to a limit with how much we can borrow for capital expenditure, which is £3 billion. If we have to cut back on capital expenditure, is that going to have a real hit on growth in the economy? I think investment spending, capital spending is an important component of growth in the long run, clearly. Not just public sector capital investment, but private sector investment as well. Capital spending is the same story as with resource spending. The capital block grant from the UK government is the key that influences what the Scottish Government can do. You can argue about whether the UK government should be being more expansive on capital spending or not. In effect, the Scottish Government has to play the card. It has been given there. The long run picture is that over the next few years the capital budget is relatively high in historic terms, but it is fairly flat over the course of this Parliament. Borrowing powers, the Scottish Government's borrowing powers, can increase that a bit at the margins. Is there a case for the Scottish Government to have higher capital borrowing powers? I think that you could probably make the case, and what you could certainly make the case for is that the current limits are fixed in cash terms, the 2016 cash terms levels that were agreed back then. There is no rational explanation for that. At the very least, these limits should be being increased in line with some measure of inflation or some measure of the overall budget. I think that there is a very good case for that, so both the annual borrowing limit and the overall cap. Borrowing limits beyond that would be something that the two governments will negotiate in the fiscal framework review next year. Is it not the case that capital is declining quite significantly in the next financial year by about 9.7 per cent in real terms? In terms of productivity, is it not one of the issues that much of the Scottish budget is demand-led? The ageing population needs more care workers, more people than the NHS. Those are areas where it is harder to increase productivity, because a lot of it is very people-focused, very labour-intensive. You cannot just suddenly decide that we are going to reduce the number of people that are seen by a certain doctor, nurse or carer on a shift. It is much more difficult than, for example, increasing productivity through technological change in manufacturing. The short answer is yes. That is why it comes back to my general point about how much we think that we can turn the dial in those things, because a lot of the stuff is about things that are naturally not going to do it. It also comes back to the general point, that creating good, secure work in social care is not about boosting productivity or having a better economy, but about providing good quality care for people in social care. We should not lose sight of that. The point that I am making about productivity is that, at the margin, there might be things that you can do, but, as you have just said, you have to take that in a wider context in what the Government can control and make a difference on. David Sorry, you were going to say about capital. Yes, on the capital spending, my comment was in relation from 2022-23 throughout this Parliament, as far as we know. It is fairly fragmentary in terms, but you are right that there is a drop from 2021-22 into 2022-23. Ross, sorry to be followed by Douglas. Thank you. Following up on John's point and some of the comments that you were making, Graham Orrind, the objective of driving up wages and creating a high-wage economy, do you think that, in the plethora of economic plans, enterprise strategies, innovation documents, et cetera, that exist in the Scottish public sector landscape, is there a clear overarching sense of what sectors we are specifically talking about when we are talking about creating a high-wage economy and where we think that we can actually create those kind of jobs? Is there a consistent understanding of what that actually means specifically beyond a very agreeable high-level objective? I think that, as you probably know from the stuff that I said in the past when I was at Fraser Rallander, it is about that cluttered landscape and that lack of focus in many ways. I think that that is something that we would need more of in Scotland about being focused about what is it that we are trying to achieve and generally what are the sectors that we could potentially create value? What is our relative scale? We talk about some sectors that are large employment, such as social care, such as tourism, which might, on a technical basis, show up as being lower in terms of productivity than something like life sciences, but we employ far fewer people in sectors like that relative to that. We are never going to employ large numbers of people in life sciences, so I take your point about being laser-like focused on where are the sectors and where are the opportunities that we have to create high-value jobs? Where have we also got the opportunity to create better quality work, fair work more broadly across the economy? That is not just a way of increasing on a tax revenue side, but it also feeds through to all the other conversations that we have had about demand and public services as well. On another wider point, we are going to be moving pretty quickly in a matter of weeks into discussions on the spending review and the remit of the review. Beyond the obvious overarching question of how we should close the gap between the cost of current spending commitments and the resource that is going to be available, what are the questions that we should be asking? What should the remit of the spending review specifically include, again, the obvious, how we should close the significant gap? Three quick things, for me. Obviously, you are right. The first question is about what is the immediate priorities given the envelope that we have that we might not be able to shape too much off, because a large amount of it is demand-led, as the convener said. If you then look at what the Government is identifying as the priorities around cross-Government collaboration, public services reform, better targeting, targeted revenue raising and the rest of them, I think that the thing that is important for me is to separate them into two elements. Things like prevention and public sector reform that we have spoken about for ages are very long-term. The changes that you make now in the spending review that will take place in the spring will not really chain to dial over the next few years. Things about greater cross-Government collaboration, things like better targeting, things like targeted revenue raising are things that you could make more of a progress here. For me, it is separating those three areas. What are the very long-term things and the difficult things and have a discussion about them? What are the things that you could do now through better efficient and better working that could actually have an impact in the medium term and then what do you do about the short term in terms of prioritisation? I agree with all of that. I think that what the Government set out as the principles by which it will undertake this review are all very sensible, outcomes-focused, evidence-based, consultative. That all sounds right. Clearly, what the spending review needs to do is to provide certainty about spending over the two years following the 2022-23 budget. What I would expect therefore is for the Government to set out very clearly what it thinks its overall budget outlook will be, the allocations that it has made as part of that and how this outcomes and evidence-based approach has informed those allocations. That is all from me for now, convener. Okay. Douglas, to be followed by Michelle. Thanks, convener. I just want to talk about North East and the North Dean, not just because I represent North East, but because, as we mentioned earlier, it is still a significant part of the Scottish economy. I remember that oil price crashed back in 2014-16 and things were quite grim up in Aberdeen. We have seen that oil price has recovered. It is in quite a good place. Why is the North Sea economy still holding the Scottish economy back, if the oil price is back to where it was? There are lots of dynamics, as you know, going on in the North East about what is happening in the oil and gas industry and the changing nature of the workforce and the changing nature of deployment of oil and gas activities. That is having an impact within the sector, but, as you know, more broadly across the North East economy, the spillovers of that into the North East, into the core business activity there, that is not as strong as it has been in the past. One of my reflections is that, in many ways, there has been a lot of churn happening in the North East and a lot of churn happening in oil and gas. Typically, if you look over decades, what we are seeing now is the sector moving into its mature phase, which is then feeding through into the longer-term trends that we are having in employment, levels of investment and overall economic activity. That is where the efforts of the North East to try and pivot into other opportunities becomes absolutely crucial, not just into other forms of energy, when hydrogen and carbon capture and the like, but then to broaden out its diversification into other parts of the economy. The stuff that one does around supporting life sciences, around trying to get more of a digital economy, trying to boost tourism and focusing on the quality end of the tourism stuff, is ultimately crucial for the North East transitioning away from being the oil and gas capital to being more energy capital, but also a more diversified economy. What we are seeing is not something that is happening over years. It is a decade of transition that is coming through that is showing up in the numbers. In terms of policy, we know the decline is coming. It is just about how fast that decline is. There are obviously big political debates about how that is managed, what is the balance, what is the trade-off between that and climate change objectives, etc. Again, purely from a technical point of view, in this framework, the importance of high-income jobs across the Scottish economy is absolutely crucial. Looking at this framework, what really matters in the long-term, what really matters from a Scottish perspective, is getting people who are in high-paid jobs in the North East tied to oil and gas that might not be there in 10, 20 or 30 years' time into high-paid jobs in other parts of the economy, either in renewable energy or other sources of energy, or into the wider economy. That is what is crucial in that framework because of the nature of how it operates. David, do you have anything to add? On the question that I had, convener, it is about prevention and collaboration that you mentioned, Professor Roy. I do not want to be a spokesperson for local government, but when you can see what has happened to the local government budget, I have got a fear that, in terms of prevention, that could be impacted by the cut of 2.7 per cent to the local government budget. Is that something that you share as well? The fear that the prevention agenda cannot happen because where a local government, where a lot of the prevention takes place, is having its budget so squeezed? I probably would not say anything specific about local government whether their budget settlement is going to make it better, worse than prevention. I think that your privacy of overall question comes back to the very first question that you gave to me. If you have a tight budget settlement, how can you make the changes that let you do prevention? That means shifting money from something in the here and now into something that is potentially speculative and potentially really long-term. That is really hard to do. Local government is at the front end of that because a lot of what they do is about prevention there. If it is helpful in the spending review to try and separate it out and not try and put everything into the pot at once and try and separate it out into what are the changes that we could do now that might make some savings and make better service, delivery or efficiencies that will generate relatively quick savings and then continue to have the really thorny difficult conversations about where do we actually make the changes on prevention that are going to take a very long time. I do not have the answer to that. We have been talking about this for more than a decade and we had James Mitchell in the Auditor General talking about this a month or so ago. We have not come up with the solutions in the six weeks since then. I think that we have talked about it for a long time and still not find solutions. Let us be a bit more optimistic than that. If you are looking for optimism, you have possibly come to the wrong place. We have covered an awful lot of what I would have wanted to explore in this session. Sometimes politicians play these games about, if it were me, what would I do? There are lots of things, for example. We could make all of Scotland a free trade zone. Oh no, we cannot do that. We could attract lots more entrepreneurs into Scotland going back to the digital link. Oh no, we cannot do that. We could really pick up on George Osborne's own phrase about the kind of march that the makers and, as a convener pointed out, there has been a 9.7 per cent cut in CAPEX. However, having said that, I accept your comments, particularly about public sector consolidation and focusing key sectors and the move away from the oil and gas. One thing that this session has been very good for is looking at the wider perspective. In terms of structural issues, you made that comment and I do not know if we have ever talked about that enough in this committee. My question is how are the structural issues in the UK economy holding Scotland back? I fully accept that there are structural issues in the Scottish economy, but looking at the macro picture, how are the UK structural issues holding Scotland back? A few things, I would say. You generally make as well about who controls the levers. I think that it is important, again, to reflect in the sense that this framework means that Scotland takes the risk of its income tax performance diverting from the UK, but it is not the Scottish Government that purely controls what drives those income tax. They are the structural factors, but they are also UK policy choices that will not just impact on Scotland but will impact on Scotland relative to the rest of the UK. It is nice to be at committees not mentioning Brexit, but Brexit is an example of where decisions taken at the UK will have an impact on Scottish income tax revenues. We do not know whether it is going to be worse or better in Scotland relative to the UK, but it is an example of a decision taken outside Scotland that would potentially have an impact there. Again, we have to be realistic about what this Parliament can do to control the relative performance there. In terms of the structural issues that you highlight, many of the structural issues that we have spoken about from a Scottish perspective exist at the UK level. Some of them are slightly more pronounced in Scotland, some of them are potentially less. The UK has an ageing population, too. It is just that it is more rapidly ageing in Scotland. I heard an earlier conversation about different parts of the UK ageing differently as well. In Scotland, Scotland has been seen in that context. The productivity puzzle is a UK productivity puzzle. Scotland has caught up with the UK in recent times in terms of productivity, but it is the UK overall that is lagging behind our key competitors. We think that regional inequalities as well, so that built regional inequalities that exist in the UK economy and levelling up whatever that means, will be designed to try to address that. We have the wider inequalities, too, which, again, the Parliament can control to an extent. Those wider inequalities were not just an issue in themselves, but we know increasingly the evidence that that feeds through to issues of productivity and able labour market participation and the like. For me, they are the broad UK issues, which are very similar to Scotland. There are just nuances about whether or not they are more significant or less significant from the Scottish perspective. In that respect, I accept that, so that a lot of the levers that you might choose to use reside at UK level as you talk about macroeconomic policy. There are a whole bunch of taxis and there is borrowing, which Scotland cannot do. There is immigration that you have talked about. In terms of looking at the current Scottish budget, is your assessment of that that the Scottish Government is doing the best it can with pretty limited—I do not want to put words in your mouth, I am not trying to do that—with fairly limited fiscal levers? You can put your own words to it. The reason that I am asking that question is that, consistently, whether it is the economy committee or this committee, we have all been agreed that post-2008 and post-Covid requires really quite radical policy choices. Yet this entire session has brought out the limitations that the Scottish Government has when we look at macroeconomic policy when we look at levers. I suppose that I am trying to get a sense of—again, it links back to if it were me—what I would be doing. Every single thing that I thought of, we could not do. Every single radical thing that I thought of, we could not do. You are the expert, both of you. I am not merely a committee member, so I would appreciate your thoughts. I will maybe dodge two parts of your question there. One about what would happen if Scotland controlled more of those levers, because that opens up a whole series of questions about macroeconomics in different constitutional settlements and whether the Scottish Government is doing the best that they could. Ultimately, that is a decision for you guys to scrutinise the Government and see whether you think that they are doing the best. I think that two general questions I would say about the point is that, under the framework of the Scottish Parliament, it takes the risk of income tax divergence, but it does not have all the levers there. That is a natural refraction of devolution in the nature of the framework. Decisions taken elsewhere will spill over into the relative performance, either good or bad, of the Scottish economy. In terms of radical policy choices, there is nothing constraining the Scottish Government within its spending envelope to do different things. That is within its gift to do it. On the economy, if it wanted to, it could, with the money that it spends at the moment, do completely different things from the UK on all aspects of skills, on education or economic development. In general, it is interesting to look at devolution over 20 years. There has not really been that radicalism in economic development policy in comparison to other areas. You can think of things such as smoking ban or the minimum unit pricing. There have been quite radical decisions taken in different aspects of the policy of the Parliament control. However, if you look at the economy, yes, there are differences in the margin, but there is not really that radical difference there. That might be a consensus on what constitutes the right policies in economic growth, supply side policies and so on, but there has not certainly been a difference in radicalism. I would not say that purely because I am constrained to do that. I think that that is a deliberate choice. Last week's question is to you both as a behavioural element. You talk about the Scottish Parliament taking the risk. If I was running a business, there is no way that I would run a business in that way. How does that affect behaviours? It is probably my last question before the convener closes me down. I am sure that that is a risk. Does that act to diminish appetite for change? If you are taking the risk, as you highlight, about differential tax policies, does that inhibit behaviours? I thought that you were going to ask about behavioural responses to tax change, but I have just realised that that is not what you are asking about. Do you think that there will be economic outcomes for the two-hour link? I do not know if I have any immediate thoughts about political cultures and behaviours and how those influence policy. On economic development policy, there is a consensus that if you look at what we need to do to create a better economy, most people would agree on what they are—the skills, investment, and tax inequality. Those things are there, so there is probably broad consensus across most policy makers and most economists about what that would be. The relative balance is how do people weight things more than the others. The nature of the framework means that we are always comparing what we are doing to the rest of the UK, and that might constrain behaviours. That might be less of an issue about risk, but more of just about how much are you spending on economic development or what is your poundage on business rates versus what is the UK's poundage on business rates. The framing of that might constrain the willingness for people to be more radical if it is always going to be looked through that lens. It is an interesting question that I think will be interesting to follow up on. I sometimes think that we look too much about what happens in the UK, not perhaps beyond our borders a bit more, where there have been many more ideas that we could perhaps look at. That brings us to the end of our time. I want to thank both our guests, both David and Graham, for once again providing some very thought-provoking and helpful evidence for our scrutiny. Thank you very much. We will just have a one minute break for our witnesses to leave a couple of minutes with members of the committee to update them on important matters.