 Welcome to the 13th meeting in 2016 of the Finance and Constitution Committee. We have apologies this morning from Neil Bibby. First of all, agenda item 1, taking decisions in private. Do members agree to take consideration of the draft report on the land and buildings transition tax in private at agenda item 3? We're all agreed. Thank you, colleagues. The next item on our agenda is to take evidence from the Audit Scotland on the fiscal framework, and I welcome to the meeting Carline Gardner, who is the Auditor General for Scotland, and Mark Taylor, who is the Assistant Director of Audit Scotland. Auditor General Carline, can I ask you if you want to make an opening statement? It's a very brief one, if I may, for the record convener. First of all, thank you for inviting us along to meet you this morning. As you know, the Scottish Parliament's financial powers are changing very substantially at the moment. As a result, there will be more complexity, more uncertainty and more volatility affecting the Scottish public finances. The fiscal framework is vital to how the new powers are used as it sets out the agreed rules by which they will be managed. That comes at a time of continuing pressure, as we know on the public finances, together with uncertainty about the potential impact of the result of the EU referendum. Some clarity may be provided by the Chancellor's Autumn statement this afternoon, and I'm sure that we're all looking forward to hearing what that contains. What's clear, though, is that the wider system for Scottish public finances, including the budget process and financial reporting, will need to be further developed to reflect that increasing fiscal responsibility and financial risk. In my view, we should be aiming here in Scotland for world-class public financial management, which will require Scotland-specific solutions that draw on experience, expertise and ways of working right across the world, but reflect our own fiscal and economic context. There's plenty to work through on the best way forward as the new powers and the fiscal framework provisions come on stream, and my colleagues and I are committed to working with the Parliament to help you in developing new arrangements that are fit for purpose. We'll be doing that through informal commentary like this, with committees and others, and through our formal audit reporting, as I hope you can see in the submission that we've made. As you'll see from the submission convener, I think that there are three important areas for the committee to focus on in terms of public financial management. Firstly, a more strategic approach to public financial management will be needed, with longer-term, more joined-up thinking and planning based on a good understanding of the economic and fiscal situation here in Scotland and much more widely. Secondly, the Scottish Government will need to manage much more financial risk than ever before, making choices within the provisions of the fiscal framework, and the Parliament will have a key role in understanding and challenging that as decisions are made. Lastly, I see a need for much more transparency over each of the components of the fiscal framework, the overall picture of the public finances and, importantly, what's being achieved through public spending. Convener Mark and I are happy to do our best to answer the committee's questions on this important area. Thank you very much, Lord General. Thank you for coming along this morning. Certainly, your paper on Scotland's new financial powers, which you produced earlier in your summary, was very helpful to committee members. On the issue of the strategic approach, you state in your paper that there's a need for a more strategic approach that you've already outlined in your opening to public financial management, including an overarching medium financial strategy. It's useful if you could expand about what you mean by that in practice, how that, for instance, might be different from the publication of the comprehensive spending review. Are there any international examples that we can apply here in Scotland where this is happening elsewhere that we could learn from to help build that world-class system that you quite rightly outlined at the beginning? From my perspective, there are two elements that make it important. First of all, the fiscal framework contains new powers for revenue borrowing for the Scotland reserve, for thinking longer term about the impact of not just spending decisions but taxation decisions and the financial strategy for investing in infrastructure in ways that weren't possible before. All of those need a longer term view, and of course they all do interact with each other. There are limits on the amount of money that can be transferred into the Scotland reserve both in total and in an individual year. Having that line of sight through what might be possible is really important. On the other side of the equation, the Scottish Government has pioneered the outcomes approach, embedded that now within the community empowerment act, and thinking longer term about how some of those outcomes can be improved, and particularly about the prevention agenda, means that I think that there's a need to be thinking longer term about what public spending is achieving than either just in the single-year budget or in the overall fiscal thinking that goes into the comprehensive spending review and the UK picture at that level. In terms of international examples, one example that we've been looking at quite closely is New Zealand, where they take a similar outcomes and output approach. There is, as well as the annual budget process, a longer term financial strategy for the public finances and, in fact, much more frequent reporting on progress towards them. That's not a template for us to use, but it is an interesting example that shows what can be done and how it can help to focus decision making at a more strategic level than how much is the spending on the health service going up by next year. That's interesting, but what you're really saying is that the nuts and bolts that are already available, at least I think that's what you're saying, the nuts and bolts of creating that medium-term financial strategy already exist, it's about putting it together in the right package and making it all link up. Is that right? I think so, yes. I think that the fiscal framework makes it more important and also gives some of the mechanisms that would enable us to do it. It might help if Mark gives you more of a picture of what we think should be in a medium-term financial strategy to bring it to life a bit. Thank you. What the Auditor General said there, to give a sense of what it might look like, obviously decisions about what it looks like for Government and Parliament, to give a sense what it might be. I guess it's a multi-year document, might be around five to seven-year time horizon. I think that it includes an analysis of what the economic context is and how that might change and what that might mean for predicted levels of funding and revenues through time, indicative spending levels and a sense of what the prioritisation and the broad levels of spending are and what that might mean for anticipated and borrowing and reserves through time. In answer to your question, convener, about how does that differ from a spending review, I think that it's about the level of detail. I think that a spending review is a three-year budget and it's quite precise and quite detailed in the amount of detail that it has about each of the spending areas. Yes, of course, it can change but it's tied down at quite a specific level. I think that what we have in mind around a medium-term financial strategy is, yes, a broad picture of spending but at a broader level in a sense of what that means for the overall public finances and that provides the context for discussions about what are some of the issues that we are facing, what are some of the priorities. You might envisage that there is an indication of how spending might shift and we have talked about some services, the health service about how spending might shift over time, how spending might shift to preventative spending and an indication of how that might be planned out over time. That gives the ability for yourself as a Parliament, yourself as a committee and the public more generally to take part in that discussion about what are the issues that we are facing here, what does it mean for the Scottish public finances and an ability to have that conversation at a broader level. It's not a substitute for a budget, it's not a substitute for a more detailed spending review where that's appropriate but it provides a higher level context for those sort of conversations and something that allows those conversations to take place not in a narrow period which is the budget review period but on a continuing basis in a sense of what the bigger picture is through time. I guess that would allow us in Scotland to get away from a discussion about the numbers so much and much more involved in the discussion about the purpose of what we're trying to achieve so I can understand that out. Do you think there would be a role in that for the Scottish Fiscal Commission? The Fiscal Commission would obviously play a significant role both in what it is currently set up to do which is forecasting the revenues from the devolved taxes and in the consultation in terms of the fiscal framework for it doing the GDP forecasts that would play into all of that. I think there's an interesting question about where all of that comes together. The committee will know that increasingly what the Fiscal Commission is set up to do looks very like what the Office for Budget Responsibility does at a UK level. The one outstanding gap is the question of commenting on fiscal sustainability over the longer term. At the moment the OBR produces a fiscal sustainability report every couple of years which gives you that picture based on current policy commitments, current demographic trends of what the public finances look like. At the moment we don't have provision for that to take place in Scotland and I think it's something that would very much inform that medium-term financial strategy that Mark's outlined for you. In terms of a parliamentary session, given that the Parliament obviously came into being again the new Parliament in May, and if it is that medium-term strategy five to seven years out with a five-year parliamentary term, it would fit neatly into the system that we currently have. So where would you envisage that sitting in terms of the timescale from the new Parliament coming into being? I think you're right, convener, that with a five-year parliamentary term here it fits well with that and relatively soon in the new Parliament, probably soon after the programme for government in terms of how the government intends to give effect to its proposals would feel like the right timing. It's not something that I think would be set in stone for the next five years. I'd expect it to be refreshed and updated in response to circumstances during the life of the Parliament and then informing the annual budgets that flow from that. Okay, that's quite a helpful context. Thank you. James, you had questions around information that would be available to us and that probably fits neatly from that question. It does follow on in order to be able to correctly comment and make decisions on the issues. Clearly, as you said in your opening statement, you need accurate financial reporting that aligns with that and the presentation of that reporting is going to be absolutely the key, particularly as we have these new revenue raising and borrowing powers coming down. What do you think are the key points that need to be addressed by the Government in terms of ensuring that information is not only presented accurately but presented in a format to help yourself from an audit point of view, but also us as parliamentarians, decision makers and also stakeholders in the country to understand better the figures and the consequences of the potential decisions ahead of us? I think that the first thing that I say is that we absolutely see the budget cycle as a cycle. The budget documents, including the longer term financial strategy, the annual budget and then the annual financial reporting form a cycle that needs to be seen as a whole. I think that we've got a chance to make sure that it's better integrated in future so that you can see what happened against the plans that were agreed by the Parliament before the start of the financial year. We've produced a couple of reports on where we think there are opportunities for the financial reports to be more complete for Scotland as a whole. For example, at a UK level, we now have a whole of Government accounts that pull together the whole of the public sector and give you a sense of the total public sector pension liabilities, total borrowing, total commitments to revenue-financed investment in ways that we don't currently have here in Scotland. And there are some other areas where there's room for more of that transparency about whether risks might sit with student loan financing, for example, what might happen in terms of the level of repayment there. So we've made some proposals for how the financial reporting end could be developed further. In terms of the budget, I think that the big win is first of all for this committee and the Parliament as a whole to have a clearer picture of the overall public finances than it currently does, especially with the new fiscal framework coming in, with the new borrowing powers, the reserve, different sources of funding coming into the budget in contrast to almost all of it being funded by the Westminster block grant in the past. That becomes much more important. And then making a closer link between what the Government proposes to spend and what it wants to achieve with that, which is the convenience point. What's the purpose of the spend and how will we know that that purpose is being achieved or not so that we can take the appropriate action? What do you want to add to that? I think that what I would add to that is a sense of there needs to be transparency about both the detail in the big picture. So particularly in the early years, the detail of how the fiscal framework is operating, each of those elements of the fiscal framework and how they relate to one another. And the big picture being how does those aggregate up in a way that sets out the main aggregates in the budgets, the main totals in the budget and how do they relate to each other to show how total funding will be applied to total expenditure and that the total funding is able to be applied to total expenditure. So that big picture. Around the performance, reporting around the outcomes, that's a clearer sense of what the money is going to be spent on and how that will contribute to outcomes and an opportunity to be a bit more specific around that. In both those areas, the Government has shared some material with the Public Audit and Post Legislative Scrutiny Committee with ourselves and indicates the direction of travel and some of the work that they are doing around that. And we know that that thinking is going on. I think that ultimately our clear wish or clear observation is that there needs to be clarity around all of that to enable you to do your job and also to enable the public more gently to understand what's going on. The thing I'd add to that is that in doing that, there's something about the nature of the process changing from one where there's reasonable certainty about how much money there is and what the plans to spend are to one where that's much more uncertain and needs to be managed through the year. So another area of transparency for you to think about and for us to think about has been how does the Government report on what it's doing through the year and how it's managed that position through the year. So again, those decisions and there's more choices that the Government's got, those decisions are clear and the basis for those decisions are clear. Okay, I think that those are points well made, particularly in terms of having an overall picture of Scottish public finances. Another theme we identified there is the link between revenue and expenditure, which is going to be much more crucial as we move ahead, particularly as the revenue-raising aspects of it will be an element of forecast in there. What do you think are the key points in terms of reconciliations there between revenue and expenditure that we need to have in place in order to properly scrutinise that as a committee? As Mark has said, I think that there will be a need for more frequent reporting than is needed to be the case up until now when the Government has primarily been spending a block grant from Westminster. The reconciliations obviously will happen after the financial year and in the case of income tax quite substantially after the end of the financial year, 18 months in some cases. I think that that's why for us this recognition that there is more volatility and risk and more thought about how that volatility will be managed is so important. It's not just that tax revenues can go up and down, but it's quite likely that if tax revenue goes down, then social security spending will be going up at the same time. So thinking about the interactions becomes really important in all of that. As part of the longer term financial strategy, thinking about what the response would be to changing economic circumstances, we know that an economic forecaster, forecast of tax revenues, is never right. It can't be right in that sense, so being clear about what the underlying assumptions are, what scenarios have been played into the budget and what action would be taken in better or worse circumstances than the central forecast is part of what the committee in the Parliament more widely will need to be seeing from the Government and from the fiscal commission forecasts that are coming into that process. James. Mary, I think that you were interested in the areas around that. Yes, I am interested in that. I think that it's one of the most important issues for the Scottish Parliament and it's something that we pride ourselves on, is our transparency and accountability. I know that the last couple of years there's been an issue with getting late autumn statements from the Westminster Government and that's impacted on our ability to produce a timely budget and allow for scrutiny. Given all the constraints and difficulties and volatility, what would a world class system look like in terms of transparency and accountability? It's a great question and obviously right at the heart of the tripartite review group that this committee and the Government have put together in which I'm pleased to be a member of. I think first of all that there obviously is a balance to be struck between the time for the specific scrutiny of the budget and the certainty as far as they can ever be certain of the figures going into that. I think we will have to recognise that that certainty is never going to be as strong as it was in the past anyway, which probably moves the balance for me a bit further towards allowing time for scrutiny rather than the premium that's placed on getting the right numbers into the process. The other thing that we say is again going back to this idea that it's a budget cycle rather than a budget event that's so important, that if you have got the medium-term financial strategy, there's time throughout that to be thinking about looking at challenging and understanding the elements of it and what might be moving over time. If you can make a clear line of sight between what the budget proposals were and what the out-turn look like, both in terms of the finances and what was achieved, this committee and the subject committees can drill into that at any point in the year, not just in the six weeks or two weeks or whatever it ends up being, which is there in the formal budget cycle for the annual budgets. And the testing of the assumptions, the understanding of it will continue to build up over time. As I say, we have got some examples like the Government of New Zealand where that sense of a process is absolutely there. And there are also some great examples, some from the developing world, of citizens budgets, which provide information to members of the public interest groups, civil society, to drill down and understand what it means for their part of the country, for their area of interest and to really become part of the debate in ways that I think will become critical as we're talking about raising taxes as well as spending money. So there's no single answer but lots of pointers that I think we can draw on. Would you be looking as well at tax behaviours? So the behavioural response to taxation, because I think one of the keys is that if there is openness and transparency and people understand the outcomes that are achieved by paying their taxes, then they're more comfortable paying their taxes? I couldn't agree more. I think we've seen it in America recently, this idea that somehow simply paying taxes bad rather than the idea that the alternative view taxes the price you pay for a civilised society and here's what we all get for it. I think there's more that we can all be doing about that broad argument and the quid pro quo for that is that we need more transparency, more accountability for the way the money is raised and spent. I think it's quite easy to get hung up on the narrow aspects of behavioural responses to taxation that we can't announce this before that because people will change it. I think that you're right, there's a much bigger issue for us and Scotland's at a great point in history for doing this, to make the case for why good public finances, good public spending can help everybody in society and demonstrate that we recognise the accountability that comes with that. Thank you. I'll trigger a supplementary in this area. Yeah, thank you. Good morning. Just on this theme of transparency and accountability, a lot of what I see in your written submission today and in other Audit Scotland documents about those talks about people understanding the basis on which decisions have been made, your first answer to Marie Todd there seemed to be moving more in the direction of taking part in those decisions, people actually having a role and the Scottish Government says that it supports participatory budgeting as a tool for community engagement and as part of the wider development of participatory democracy in Scotland. I wonder if you can talk about the impact that a really innovative approach to more participatory budgeting in Scotland would have on your role as Audit Scotland or as the Auditor General rather and whether there is at the moment any scope for that to happen at a national level. The Scottish Government is placing a lot of the expectation on that happening at local level, but is there a scope for those kinds of principles to apply in terms of national budget setting as well? To answer the last part of your question first, absolutely, I think there is, that we've seen in the Community Empowerment Act a commitment to some participatory budgeting and actually I think the answer to lots of the really knotty problems facing public services is much better community engagement, not just consultation on budget proposals or service proposals, but involving people in why, for example, our health and social care services need to change, not just because money is tight, but because it's a better way of meeting the needs of an ageing population. That conversation is a difficult one to have and you can't have it once and consider it finished, but I think it's just as relevant in parts of Scotland where there are proposals to change services, as it is at a national level, where the parliamentary and media debate often gets focused in on one particular aspect of a much bigger and much more complex system to everybody's detriment. One of the reasons why I feel so strongly about the opportunity that this point in devolution brings in Scotland is that it gives us a chance to think about what does that look like at a national level, what information do people need to have available to be thinking about talking about understanding the choices that are in there? How do we build the case for a coherent and sustainable approach to taxation and to public finances that people feel they've got a stake in? It feels to me that it's never been more important for Scotland or looking around the world generally to get that debate going, and if we get this right I think we can move Scotland a long way forward in terms of what's necessary and possible. We're quite some way from having that opportunity at the moment for participation, I mean that even Parliament is getting a couple of weeks to participate in the budget discussion this year. Do you see this as having something that involves any year revisions to the budget, or is it part of an annual cycle? How do you see this working at a practical level? My sense is that it probably has to work at every level. The convener was asking about the timing of a medium-term financial strategy. It seems to me that it flows very clearly from the manifesto of parties heading into an election, the programme for government that comes out of that, whether it's a single party government or, as in previous times, a coalition, that sense of what are the priorities for the government for the next five years, and then linking to that how much money do we have available, or are we likely to have available to do it, and how do we intend to target that money and to make changes in public services generally means moving money around? What does that mean? At that level there's a debate that I think Scotland's pretty well placed to be opening up, and then you can move it into the annual budgeting cycle and also changes that may be required in year. If it does turn out that tax revenues are lower or higher than expected, how do we want to use that opportunity to move things around? Again, like participatory budgeting at a lower level, I don't think it's something that you do once and tick the box. It's a continuing process that we need to embed in the way that the Parliament and the Government do their business. Thank you. I think that that needs neat learning to Ivan, who had issues around forecast and mid-year adjustments, etc. That's already been touched on a couple of times. There was a couple of things that I just wanted to go through. One was round about this issue that we talked about in an earlier session, which was obviously that the revenue stream is unpredictable with it being on the taxation side now, but there is data available on a monthly basis. The formal process runs 18 months or more out before you really know what the hard and fast numbers are, but you're getting a very good 80 per cent indication of what those are on a month-by-month basis from HMRC tax-take data. As you're feeling that, we should be using that data to drive in year changes to the budgeting process rather than wait 18 months or two years before we suddenly realise that we've got a problem. I think that that question's made more complicated over the next couple of years because of the transition towards the new financial powers. I'll ask Mark to pick up the detail of that, if I may. I think that the challenge in here is twofold. One is that there is more complexity in how all of that works. That therefore gives more opportunity to look at the data as it comes in and begin to make decisions about how to manage and move the budget on based on that data. There is also a wider range of tools that are available to Governments to decide what to do. One of the questions that arises is how far through the year do you need to be before you can be sure that taxes are more or less than you expected to be? When does that information come through? You're right that some of that information is published on an on-going basis. My expectation is that it will take a bit of time to get an understanding of the real patterns of tax and when those sort of judgments can be made. Some data about that in the meantime is obviously very helpful to try and do that. Okay, another question. Okay, so on is to come back to have said quite a bit about this outcomes focus, preventative spend and the mechanisms behind that. I suppose just at the very start, just in terms of terminology definition, can you tell me what you would say the differences between an output and an outcome, because you talk about both of them as being different things? I think outcomes are what we see in the Scottish Government's outcomes framework in Scotland performs in the programme for government, the things they want to do. For me, an output is one of the staging points on the way to that. I distinguish it if we stick with health and social care for example. We know that it's about helping people live longer, healthier lives, close to their own homes. At the moment, we tend to measure inputs, the amount of money going into the health service or the number of nurses or doctors or whatever it is. Outputs for me are the things that we expect will be influencing the outcomes that we want to improve. So the number of older people, for example, who are unable to stay in their own homes rather than being in this revolving door of emergency admissions because they're not being supported well enough, the number of people, older people who feel that they're not lonely in their communities longer term would be a great outcome, I think, in thinking about some of that. So those are measurable? Absolutely. Right, that's clear. Not easy to measure, but measurable. That's good. I'm glad you said that. Right, so I suppose that there are other things round about, I don't know if you want to go through, some of what they do in New Zealand or some of what the Government's might be shared with you, round about how you have that alignment between the money and the outcome and how you set that up, how you track that. In my experience of doing that in the private sector, very often that leads to organisational changes because you need to have the responsibility. And I suppose you've kind of seen a step down that road with IGB, that we need to see much more of that, do you think? And is that a second you share what maybe New Zealand have done? What we've reported in a number of our performance audit reports over the years is that the outcome is often clear, but it's not always as clear what the Government's plan is for improving the outcome in a sort of joined up way. So I think there's room for being more explicit at a minimum around saying that if the outcome we want to improve is this, here's what we think will make a difference to it, whether that is putting in place integration authorities that do these specific things, and here's how we will measure what progress that's making. Now, in my reports on health and social care, I've been critical of the fact that the measures that tend to get the attention tend to be around acute care and around spend rather than what is happening in terms of community-based health and social care. And if you put it all together, there's a raft of measures which don't obviously join up at all towards what the outcome, the overall thing that we're trying to achieve is. Now, the Cabinet Secretary has announced a review of targets, which I hope will help to join that up. But for me, the starting point is to be clear. If that's the outcome that you want to change, what's your plan for doing it? And that will be based on varying degrees and quality of evidence, but you still have a plan that says we're going to do this because we think it will work. And then how will we know it's working? And some things will work, some won't. The ones that don't, you need to know so you can change course. And the ones that do, you need to know so you can invest more in that way of working. For me it's not a terribly sophisticated approach, but it does require that clarity of thinking and, again, engagement with people about why you're doing what you're doing. Yeah, clear. Thank you. Thank you very much. Murdo, I think you want to ask some questions around borrowing and the reserve. Thanks very much. Good morning. You've got some interesting comments in the paper around the new borrowing powers that are being introduced in the interaction with the Scotland Reserve. I wonder if you could expand just a little bit on how you expect the borrowing powers to be utilised and, in particular, what is the reporting mechanism so that Parliament and this committee is aware as and when government is using these powers? We know that within the fiscal framework there are the three elements, if you like, to what you've described. There's the capital borrowing powers, the revenue borrowing powers and the Scotland reserve. On top of that we already have a fairly significant commitment to revenue-financed investment through things like public-private partnerships and NPD models, so it's adding to what's already there at a Scottish Government level. We don't yet know what the Government's plans for reporting on that will be either in terms of the budget proposal or the in-year reporting on what's happened. I think that our starting point is that, at the moment, if you look at the Scottish Government's consolidated accounts, it doesn't currently give you a clear picture of where all the borrowing is as we stand. As you add those new levels of complexity in the interactions between them, that question becomes all the more urgent. It's why we're raising the question just now about the importance for this committee, the wider Parliament and anybody with an interest to be able to see what the plans are and what the longer-term consequence of that plan might be. On the revenue borrowing, it is intended as a mechanism to smooth out the peaks and troughs, where there has to be a forecast for tax revenues that hasn't been met in the actuality that allows the Government to balance out the shortfall. What's the expectation in terms of paying back that revenue borrowing? Is the expectation that we paid back within a short time scale? There are limits within the fiscal framework, and Mark will talk you through the detail of that. On that question specifically, the fiscal framework sets out that there's a discretion of Scottish ministers between three and five years at the point that the borrowing is made to determine what period to pay that back. On the broader point, there's judgments to be made about how revenue borrowing, capital borrowing and the reserves interact with one another, and one of the things that we say in our paper is that there's an opportunity for the Government to set out its principles and policy about that, because there's a number of things to manage there. There's the balance between flexibility and the ability to say, well, we've landed on this particular place because of the variability and this is what's happened, and therefore we can use the reserves and we can use the borrowing in response to where we've got to, but also balancing that with predictability and resilience, that we've taken a judgment that we need to put money into a reserve that allows us to have that resilience when it happens, or we've taken a judgment that, rather than taking advantage of a revenue borrowing facility, that we'll look to cut expenditure to manage that. There's some judgments to be made about what's the overall interaction between each of the tools that are available and what's the Government's overall policy, which uses the phrase strategy in the paper, about how it intends to go about those. We don't have firm views about what the right answer to those questions are, but that's a discussion that we think is important for Government and Parliament to have. You would expect Government and due course to be able to set this out to us in terms of what their approach would be. You mentioned your paper at paragraph 12, and this went to understand a bit more about that in the area that Murdo was talking about. Only in the case of a Scotland-specific shock will the Scottish Government be able to borrow for resource purposes. Who decides what's a shock? I think that this is one of the areas in the physical framework where there is some guidance, some framework around what a Scotland-specific physical shock is, and the agreement of it will depend on the agreement between the two Governments. It's why the intergovernmental machinery becomes so important in all of that. We don't yet know then what a specific shock might look like, and that has to be agreed between the two Governments. Is that right? Within the physical framework, there is a description of what a Scotland-specific physical shock means, and some numbers around how big it needs to be to trigger those exception powers. However, there will need to be an agreement between the Scottish Government and the UK Government that any particular set of circumstances meets that definition and therefore that the borrowing powers come into action. Broad rules are set out in the physical framework. So there are rules set out in the physical framework, which ultimately are about the balance between UK GDP and Scottish GDP. Those are either the actual GDP figures where there is a difference set out in the framework or whether there is a predicted difference. Those rules are set out and they are defined. What sits behind that is the discussion that is an agreement across the pieces about how objective or otherwise that is in practice. Another bit to clarify is that the Government is able to borrow in response to a range of things, including forecasting errors, including cast management purposes, but it can only budget to borrow in advance where there is a fiscal shock. For borrowing powers, resource borrowing powers, generally it depends what has happened through the year and then there is an ability to use the resource borrowing powers, whereas from a budget perspective it is only in the case of a Scottish specific shock that the Government up front can say that we are expecting a Scottish specific shock based on the figures and therefore we plan to borrow at these levels for resource purposes. If there is a shock, it usually means that there is some significance happening in the economy. Is three to five years long enough to be able to deal with that potential turbulence and revenue hit effectively? I think that the answer is that none of us, nobody yet knows that, for example David Bell, who I know has been before this committee on a number of occasions, has done some work to look at whether the provisions in the fiscal framework would have been sufficient to deal with the fiscal circumstances over the past few years, as far as you can tell. Now, as we all know, this year more than any other past performance isn't necessarily a guide to future returns and I think over the last couple of weeks all bets are off really on what might happen in future. I think that what we are going to have to do again is to build experience as the new powers come on stream, to understand the underlying assumptions that inform the proposals and the decisions that are made by this Parliament and review what happened to learn from that. This very much is something that we will all be learning from as it is implemented. That, based on one of the specific provisions of the fiscal framework, is where there is a Scottish specific shock, where the Governments agree that the powers that are in there—the limits that are in there—are not big enough. There is an opportunity within the framework to agree a different approach, whether it is a different timetable or whether it is different limits. David Bell, you have covered most of it, but just one question about this Scotland specific shock. In the past eight years we have had quite a few shocks to the economy. We have had the financial crisis, which was not Scotland specific, but you could argue that it had a greater impact in Scotland because of the financial sector. We have also had the oil and gas downturn, which I would imagine could be classified as a Scotland specific shock. In terms of how you identify that, you mentioned differential of GDP between Scotland and the rest of the UK. Would it be tax revenue collected as a result of the shock? Would that be something that would be taken into account? As I understand it, the Scottish budget going forward will be driven by the divergence of tax raised, not necessarily economic growth, between Scotland and the rest of the UK. It is more driven by the amount of tax raised in Scotland compared with the rest of the UK. The short answer to that is that the provisions that are set out in the Frisco framework are about GDP. There is a link, obviously, between GBGDP and tax collection, and those will be what drives the forecasts of tax collection. However, the provisions are around relative levels of GDP, either measured levels or forecast levels, and that is defined in the framework of what a shock will comprise. I ask a related question just on GDP relative to tax take. Is there obviously a direct correlation between GDP growth and tax take? Is the correlation in Scotland more direct or less direct or the same as the rest of the UK? Is that perhaps a question for another occasion? I think that the answer is that it is complicated. We know, for example, that Scotland does not have nearly as many high-rate, high-rate taxpayers as the UK as a whole does, particularly as England does. It is not a simple one-for-one relationship between GDP and tax take across Scotland and the UK as a whole. Understanding that will be a key part of good tax policy and good tax setting for this Parliament, I think. Talking of shocks, I think that I should want to raise issues around Brexit. Surprisingly, you spoke earlier about the need to plan more into the medium term, which I think that most people would agree that that would be a good thing. I am just wondering how that fits into the slightly wider context if we look at what is happening at the UK level at the moment. There might be impact of spending decisions that the UK might make, and that might affect Scotland's budget. Obviously, there might be changes coming soon, we do not know when, as a consequence of Brexit. Does that present additional challenges for that idea about our planning further into the future? I think that it does, and at the same time I think that it makes it all the more important. I often talk to the boards of individual public bodies with the same message that they need to be thinking about longer-term financial planning. They will say to me, but we only get an annual budget allocation from the Government. When you start to explore that with them, they know lots of what is likely to happen to demand for their services, they know what is happening to their costs and, starting to pull that together, give you a sense of the scale of the challenge that you have to manage and start the process of thinking what your options are. It is glib to say that it is the same problem, the same question for the Scottish Government and the Parliament, but it is true. It is not again because I think that doing that planning gives you the right answer, but because it is a really good way of building that conversation about what are the things that we need to deal with, what are the opportunities that we have and what are the choices within that that we want to make. It is probably going to lead to better decision making, and it is also a great way of involving the people of Scotland in the discussion as well. Are there things that the Scottish Government could be doing to plan for those things that are yet unknown, if you could put it that way at the moment? Yes, and I think that simply the process of being more explicit about what are the things that are on their radar, and we know already at a very straightforward level things like the impact of demographic change on health and social care, on education, on higher education, all of that could be more transparently set out. We know where there are commitments that are hard to get out of in the short term, whether it is revenue payments for non-profit distributing model investment or salaries and wages in a no compulsory redundancy context. What are we committed to here? Where is the discretion that we have to use? Starting to think through quite explicitly how much does Scotland depend on EU funding at the moment, not just for the agricultural funding but also for structural funds and regional development funds? What would happen in different scenarios if that money either was returned to Scotland in fall or if some other amount was returned? There is a whole range of things where there is not a right answer, but just the clarity about what are the known unknowns, if I can put it that way, leaves you better prepared to deal with the unknown unknowns as they emerge and they are bound to. Wally Coffey, when I served on the audit committee, there was some discussion about the nature of the relationship between Audit Scotland and the national audit office in relation to tax powers and so on. If you could update us on where we are with that, is there a reciprocal arrangement in place now? Can Audit Scotland give evidence at a Westminster committee, for example, and can the national audit office give evidence to, for example, this committee in the future? That is a really important question, and I am grateful for the committee's interest, because obviously it is not of interest to many people. Our starting point is that when this Parliament was established in 1999, there was a pretty clear division between the UK public finances and Scotland's public finances and between what the national audit office does and what Audit Scotland does. Over time, that clear edge has increasingly got ragged, I think, that we are now in a position where the national audit, the HMRC, is collecting the Scottish rate of income tax in this year's budget, the 2016-17 budget on behalf of the Scottish Government. As you say, we have arrangements in place for some joint working to make sure that this committee gets the assurance that it needs about that, but from next year, that will go from being a small amount of money raised to a very significant amount of money raised through the devolution of all non-savings, non-dividend income tax, and in the next two or three years we will be seeing the interaction with DWP becoming increasingly important. We have got a starting point in place for that to work well, that is based on the national audit office continuing to audit those two UK agencies, HMRC and DWP, but my team is staying close to what they are doing so that we can influence the work that they carry out if that is needed and provide assurance back to this Parliament that Scotland's interests are being taken care of. I think that we will need to revisit those arrangements in due course, as the amounts of money collected by HMRC increase very significantly and as DWP also comes into the picture for at least some of the social security responsibilities. Has there been any step taken though to appear at Westminster committees and vice versa? I have not been invited to appear at Westminster committees yet, although, as you know, my counterpart, the Comptroller and Auditor General, has appeared at Scottish Parliament committees. In going forward, you were talking about developing new arrangements audit Scotland, where the informal reporting that an example of which you have given us today is still there, but also the formal reports to Parliament. Do you see audit Scotland's role also having to change in recognition of those new powers coming to Scotland, where perhaps you have much more of a role in process rather than at the end of the process looking backwards at performance, which hitherto was a historical role for audit Scotland? I think that I probably distinguish between this period when the new arrangements are still developing, when I think that we do have an important perspective to play into the Governments and the Parliament's deliberations about what is needed, because this is our core business. What we do is reporting on accountability and transparency, and I think that we can help to shape arrangements that really are world-class and fit for purpose. In the longer term, once the arrangements are there, I suspect that we probably will be pulling back again to reporting on the information that is made available by the Government itself. At the heart of that will be its annual accounts, which I hope will be more comprehensive and more transparent than they are, and the link back into the budget process. We would step back from this role of seeking to influence the way that it is done once we reach a steady state, if that makes sense in today's world any more. On the back of Willie Coffey's questions, we are, of course, the Finance and Constitution Committee, and we are interested in the constitutional arrangements of what I would call shared rule, as well as the financial concerns. I wonder if I could just push you a little bit more about this, because it seems to me—I do not know if you agree—that the Smith Commission agreement, the Scotland Act 2016, and most obviously of all the fiscal framework itself, have done away with the old distinction that we have run with for 16 years or more, that a power is either reserved, comma, or it is devolved to a situation where clearly some powers are reserved, clearly some powers are devolved, but also there is quite a lot of shared responsibility, quite a lot of shared power, particularly but not only in the field of social security, but also taxation. I suppose that thinking constitutionally about it, what kind of architecture, what kind of institutional architecture do we have robustly and transparently to hold the exercise of shared power to account? That is not just about keeping close tabs on what the National Audit Office is doing with regard to its audits of DWP. It is about joint auditing between Audit Scotland and the NAO of the joint workings between DWP and the new Scottish Social Security Agency, assuming that it comes on stream. I wonder if you could just push that a little bit more. I am happy to do that. Again, recognising that there is still a lot of uncertainty about how that will unfold. In relation to HMRC, I do not think that there is a need for very much more than we currently have got. I think that a lot of the way that needs to unfold will be about the interaction between the comptroller and Auditor General and this Parliament, the interaction between HMRC and this Parliament, but it will remain the case under the current settlement that all of the devolved income tax will be collected by HMRC as part of its UK-wide income tax collection exercise, and the assurances that Parliament needs will be about making sure that Scottish taxpayers are properly identified, that the collection rates that apply to them are in line with collection rates across the UK and that customer service levels are as good for Scottish taxpayers as they are for anybody else. I am not sure that there would be much added value in joint audit work in the sense that you are describing for that, because it is still a quite a self-contained exercise that is well established. VAT might be a bit more difficult, given what we know about the data challenges underlying the assignment of VAT revenues, and there are some really important questions there to be resolved. We are watching closely how that develops, but it is too soon to say what that means for what audit work is needed on behalf of the Scottish Parliament. The uncertainty again about social security benefits I think is very significant. We know that the Government has committed to establishing a Scottish social security agency, and that will provide a thing that we will audit, so we will be auditing that. Equally, it is very clear that that agency will have to have a lot of interaction with DWP, not least around things like universal credit, which are intended to be very joined up approaches to social security. As that unfolds, there may well be changes that mean our role moves on, as Mr Coffey suggested, and that there is a need for much more joint work, not least to provide assurance to both parliaments that that joined up package of support to people is being managed properly, and we will not know that until we see it. What I think is possibly more immediate is progress on the ministerial mechanisms for joint working between not just those two Governments, but the other devolved Governments around the UK, which was a very clear recommendation of the Smith Commission, was a headline in the fiscal framework, but I think that we haven't seen very much more about the mechanics of it, and it seems to me that that's a priority as we head into the land of block grant adjustments, indexation, Scotland-specific fiscal shocks, those sorts of things. We need robust mechanisms for managing those in practice. I wanted to follow up on Willie Coffey's question as well, but in a slightly different direction to Adam. Adam was talking about the shared power between the Governments within these islands. There's also a sharing of power between Parliament and Government here in the decisions that have to be taken. Let's imagine that later today we hear that there's going to be some extra capital spending from the UK Government. That's going to have an impact on Derek Mackay's choices that he might have available over the next few weeks. Some people will lobby for local projects, shovel-ready projects and all that stuff in their own areas. Other people might argue for investment in things like energy efficiency or childcare, arguing that those are jobs rich. We have to make those decisions, though, in a way that's informed, not just by what gets gained in terms of the public benefit from that spending, but what impact it will have on future income tax revenues as well. What is your role, not just this year but on an on-going basis, in helping Parliament to be informed in providing the tools or the modelling or the information to enable us to be informed about all the future impacts of those decisions when, particularly crucially at the moment, Government doesn't have a majority simply to push its own plans through, but it needs to gain agreement across Parliament? I would say that the most important role that we have to play is in helping you and the Parliament and Government to shape a process that means that you're not making those decisions in the next six weeks after the autumn statement and before the Government's budget is put up for agreement, but there has been this process of discussion that's informed by a good understanding of the economic context and the public finances, the Government's priorities and that may be a majority Government, a coalition or a minority Government in future. It needs to be fit for all of those circumstances and, in my view, it also provides scope for people to have their say in that and that's a continuing and long-term thing. My priority at the moment is thinking about how we shape a system that does that. Within that system there will be different players providing different bits of information. I think that a lot of the information has to come from Government itself and that will shift in different political contexts as to how firm it can be. The Fiscal Commission has a role and will have a greater role in future around the GDP forecasts that are needed. I've mentioned the need for this report on fiscal sustainability. We're seeing from groups like the Fraser of Allander Institute more commentary coming in about the choices that are there and the opportunities and constraints around some of that. I think that that's all very healthy and the budget process that we've got now can't possibly squeeze all of that into a very short six-week period. It's a continuing thing that we need to move on to. It does bring us back to this question about what the roles are of the different organisations because in this kind of process it isn't going to be adequate for everybody to be relying on information that comes from the Scottish Government when the Scottish Government is one of the political forces involved in a political discussion about choices. I would disagree with that in the sense that if we get a system that is looking across the whole budget cycle, it won't be possible in a hypothetical sense for a Government to just produce a set of members and say that this is the picture. Subject committees will all have the chance to drill down and understand more what's happening in terms of financial pressures, demographic pressures and commitments that are already baked into the budget to be thinking about what the options are and to have a prioritised sense of if this shifted if we had more tax revenue or more of a stimulus from the UK Government, this is how we would propose to use it. The Government's information has to be a starting point and in this sort of brave new world that I'm talking about, I think greater financial reporting would give you more assurance from the audit work we do about things like the commitments to revenue financed investment. There would be more certainty across the piece about what the numbers mean, that you could play into that decision making. I don't think that we've got a role in costing policy proposals in that sense. It's a thing that would drag us right into the politics of it in ways that I think would limit our usefulness to you. I think that the real win is in getting more of that information routinely into the public domain and with that stamp of assurance that good independent public audit can bring. I want to make sure that you've already got a chance to ask all the questions. Dean, did you get all the stuff in productivity that you wanted to ask? Is MDLs got anything that they'd like to raise? There was one other thing that I was going to mention on the equality assessment of the budget. Again, this may be an area where you don't feel that there's currently a core part of your role that's relevant, but I wonder whether that's worth considering again. The Scottish Government's equality budget advisory group has recommended that equality considerations should be an integral part of the core budget and spending review process, and it's argued that that should be relevant to all government agencies. I wonder whether you have a view about the scope for yourselves to have a role in that process in looking at the equality impacts of the choices that have been made in the past or the options that are available in the future? In terms of options that have been made in the past, we've done some of that, and I think that there's probably scope to do more of it. For example, the performance audit work that was done by Audit Scotland on behalf of the Accounts Commissioner on Educational Attainment contained an element around looking at the inequalities and inequalities dimension of that. We've looked at health inequalities through a very significant piece of work in the past, and we'll continue to do it, particularly since it's such a headline priority of the Governments. In terms of what the core responsibility is, they're setting it out. Again, I think that in terms of the Government's budget proposals and specific policy proposals, because of their focus on reducing inequality, it seems to me that good assessment of how what they're planning to do will affect inequalities is something that this committee and the Parliament more generally should be expecting of Government, and we'll certainly be looking for that as we have done in other reform agendas. Auditor General, thank you very much for coming along and giving us such a helpful and constructive perspective this morning. I think that I've found it very useful and very educational in terms of how we might take things forward. I thank you very much for that, and with that I move this session into private session before we get to agenda item number three, and we'll have a short break.