 Felly, dweud i fan hynny ar gwrs cymdeithaswyr mameis 2014 o'r ddaf i lroedden nhw, i ffrind i ddim yn lefbeithio ar hyn o'r ddaf i gael gwneud addysg o'r ddweithio mewn ddymar amdannu yn eu cyffredinol. Yn y gwell yn y ddweud i'r ddweud i ddweud vo'r ddweud i ddweud i ddweud i 3, 4 i 5 i gwneud o agorol, mae nhw'n wedi chi'n gweld, yr agorol yn y ddweud i ddweud i 3 gweithio ond y sgolwnghwm gennymau cyfanol, yn 2014. Mae gennymau llwyddiadau am ymddangos. Mae ymddangos cyfanol yn ysgrifonau o Rachel Holmes. Rhaid ei wneud, Rachel, ac hynny'n gweithio ar y cymru. Yn y cwm yn maen nhw, rhaid ei wneud gyda'r cwmysgol ymrwythnosion, ond mae'n rhaid i'w cwmysgol i'w cwmysgol i'w cwmysgol. Ysbcoswch cymaint fiamnol Strachael, canediaeth chi ar y llwyfodol igarodd mor cymaint o ddwylliant. Mae'r gaelindeid i'r cyflwyffordd iaddai'r gaelindeid arall byddai'n cymaint, ac, byddai'n dweud, mae'n cael ei prif. Mae'n griffwyd诱l gyda llar ac, gyda'r cymaint, yma, yn dod o'r cyffwyd rai hwn. Mae'n rai hyny sydd wedi'i cynllunau iddyn nhw ond mae'n cwestiynau ni'n gweithio there is little opportunity for change to suit specific circumstances—be there economic demographic or social of Scotland—you say with a no-vote there is little further discussion to be had in terms of the Scottish parliament. I am just wondering if you can tell us whether or not you feel that Scotland has the tools that are needed to boost the working-age o'r wneud o bobl â'r ffysgolau i'r cynhyrchu i mwy o'r plwy. Siaradau yn gweld, oeddwn ni'n gweithio o'r cyffredinol bryd, wedi cwp yma, ddiolch i ddweud i ddweud i ddweud i'r ffordd yn ei ddweud sy'n ei ddweud i'r pryddau. Mae'r gweld yn cyfraffio i'r cyfraffi If there is a criticism of Scotland in having, in some way, a higher-aging population than the rest of the UK, I would argue that that's the case for actually doing something about that, and that involves a range of measures, one of which, of course, is having control of immigration policy, which we have none. In my view, from what I've read, from what I've watched on the news, from what I've read in various briefings, immigration is a very different political topic from here, from what it is in the south of England. There's a different political agenda to an extent, not completely, but I would argue that population densities, existing levels of immigration are different from south of England and from here, and therefore it would benefit Scotland to increase, or at least encourage, educated, talented, ambitious young people to come to Scotland, and with the current immigration policies, I don't actually see how we can do that. You say in your paper that, and I quote, the UK's lone rankings of countries in terms of provision for pensioners. Many countries, often those with small populations, do better. I understand that there's around 13 million people of working age in the UK that are under-saving for retirement. What in your view have been the decisions taking my successive UK Governments, which have contributed to this pensions crisis, and what could have been done differently? The crisis has been there, I would argue, from before the financial crisis, 2007-2008. It has been brewing, it has been recognised as being a problem. This can go back as far, at least since I became interested in these sort of topics, as 1997, with the first budget of Gordon Brown to take taxation from dividend income earned by pension funds, and that's had, over the years, I believe quite a substantial hit on the growth of those funds. There's one element there which has hit pensions, and that's going back quite away, but it has never been revoked by success of UK Governments. So there's scope there, some people call that a raid on the pensions. I would also argue that one of the newest reforms has not been helpful for pensions, the reform whereby people who have saved into a private pension scheme all their lives and have had the tax relief on that at the highest and the additional rate, some people at higher earning levels, they are now able to cash in their lump sum and take it in its entirety and spend it however they want. They've had tax relief on pension savings, which then will not be forced into being in an annuity. This has been described not by me, but by OCD and various other pension bodies in various terms, including reckless. So I'd argue that this sort of, I think they called it the Lamborghini reform, where you can take the money and spend it however you want. There's no provision, there's no enforcement to have to take an annuity there. I think that's also problematic for the future. It's also going to mean that while Government gets income tax revenues from that lump sum up front, there is no longevity to those revenues as the annuity is paid down and taxed. So there's a longevity in the tax income that's coming that we've lost there as well. So that's a sort of second aspect to that. Another one which I believe is to do with fairness is the way our tax system works and the way it works for pensions. We actually have a fairly progressive tax system in the sense that it taxes different income bans at higher and higher levels. We now have basic, higher and additional rates. You discount the lower savings rate. So you could argue that's progressive at some level, but when you start applying it to tax relief, it becomes regressive. It means that people who earn the most are capable of getting the most relief. So you can save into a pension fund and you're getting relief at 40 per cent and 50 per cent. Now, arguably, when you've got poorer people who actually can't afford to save at all, I think there's an ethical or moral or fairness equality argument there for saying that there could be an element of redistribution there to even this ever widening income wealth gap between the poorest and the richest in this country. So for me that's a problem. The other problem there with the way the pension schemes work is you can pay, now it's up to £40,000 annually into pension fund and get the tax relief, whichever is higher, 100 per cent if you're earnings are £40,000. That has come down in recent years. Only a few years ago, that amount was £250,000. A single individual could save and attract tax relief as a lump sum in a year of savings. That's only come down because of the financial crisis that the Government's needing to boost its tax income again. I suspect, I can't be sure of this, the Lamborghini provision is one way of appeasing the people that have suffered an inverted commas from the removal of that amount of pensions input relief. If Scotland had control of pensions, what could we do that would be different to that? For me it would be a really good opportunity to take a step back, look at where we're at and look at the specific requirements of Scotland. We are in a different risk category in terms of life expectancy from the rest of the UK. We've got one policy that's coming from London, and yet we're having to apply that policy across the board when we have different circumstances. For me it's a chance to look at equality, fairness, all of those issues as the politicians desire and as the electorate that elect the politicians desire. It's also a chance to look at how we structure it, how we apply tax reliefs, where we might want to encourage poorer people to at least have the opportunity to benefit from some of those tax reliefs, which in my view are unfairly disadvantaged at the moment. Okay, thank you. I will let colleagues in on that or so, but you say also in your paper that, and I quote, comparing the UK state pension provision to the rest of the world, the Melbourne Mercer Global Pension Index scores the UK at a C+, alongside Chile, while smaller nations such as Denmark, Netherlands, Australia, Sweden, Switzerland, are ranked above with A or B ratings. You say that the organisation for economic cooperation development under UK pension provision, the average person might receive 32.6% of the final salary from the state once they retire, which is the lowest proportion in Europe. The average equivalent figure for the total 34 countries measured was 40.6%, but Australia was 76.6%. Given that Scotland spends a small share of tax taking, GDP and social protection, which includes pensions in the UK as a whole, does this mean that Scotland is better able to afford the cost of state pensions? At the moment, I would argue yes. I would hope that in time, the age differential, the life expectancy figures of Scotland, which are horribly lower than the rest of the UK, I would hope that we would be able to address that with the right policies and so on. But yes, given the current figures, the agreed figures, then yes, you have to agree that at the moment they are more affordable. I would also argue that there is risk of staying with the current system and the United Kingdom is severely in debt as a nation. There is very little that Scotland can do about that. There is an argument for saying that people talk about the risks of us taking ownership of our own pensions provision, but I would argue that there is also some quite severe risks facing the UK as it goes forward. We can see that the pension provision from the UK as state pension provision is nothing really to write home about. That is independent groups. I see the OECD, as you mentioned, has also placed the United Kingdom just about bottom of the league just above Mexico. I've got that report there. So it's not like we have this fantastic benefit or provision as it is at the moment. I'm not quite sure why Scotland could do any worse if it were to manage its own pension provision. Thank you very much for that. I'm going to open up the session now to colleagues around the table. First, our questions will be welcome to be followed by Jean. You make some general criticisms of pensions. I'm sure many of your points people might... Aspire to agree with you, but I'm not quite sure about your assumption that it would inevitably be better under independence. You say we're better able to afford the cost of the state pension, but do you not think the indicator used last week by most of our expert witnesses of pension expenditure per working adult is, in fact, a pretty valid indicator of the affordability of pensions? You could use that indicator. The question is if there's a problem as you say, how do you address it? And at the moment, the problems we face here or whatever indicators you want to choose, we have absolutely no power to address them. So we'd argue that if there is an issue, if you choose to take that particular indicator, then what can we do about it? And at the moment, there's very little we can. These issues are reserved to Westminster. Now, they are quite rightly making decisions for the majority, those that elect them and the majority of the people. And the majority of the people aren't us. We're 8%, I think, of the MPs in Westminster, just about less than 10% of the population. So I'm not saying that in any way Westminster is deliberately punishing or penalising Scotland. What I'm saying is the situation we're in in terms of the arithmetic is not helpful to us in terms of doing what we either want to do or need to do. I don't really accept your assumption that our circumstances are fundamentally different. They are in the sense that, unfortunately, on average, people are not living so long, but obviously that's one of the key problems that we need to address. But sticking with my original point, you would accept that even a present pension expenditure per working-age adult is higher in Scotland than it is in the rest of the UK. Unless we have the high immigration scenario that you outlined, then that's going to get more accentuated in the years to come. And I'm not necessarily arguing against the high immigration scenario, although I think there are problems about doing that within a common travel area. I disagree with you on the high immigration. I think we need immigration and it needn't be high. I already have, I can't remember, 24,000 net immigration as it is. I think the figures are not... I'm no expert on immigration and numbers, but I don't think this idea that it's a scary high figure. If people find that scary, as you say, you don't, then I don't either. It's an emotive topic, as we know from the way some of the press reported it. I don't necessarily think that the immigration needs to be that drastic to address these problems or what I've read. The other point is if you're saying you have indicators and so on that say we're ill-equipped or unable to fund our own pensions, I would really like to argue why that situation has arisen. We are less equipped, you could argue, than other European nations and yet they seem to be managing quite well, nations of similar size and demographics and so on. I would argue that's the case for saying there's something not quite right about the current situation. I don't, some of those countries obviously have higher levels of taxation, which is not, I think, proposed under the Scottish Government's white paper. Talking about the white paper, I'm not saying that you need to be committed to the proposals on the white paper, but is one of the significant things on the white paper that notwithstanding certain variations such as keeping savings credit, the actual structure of pensions and, to a large extent, the regulation of pensions and the fundamental structure of pensions is actually very similar to what we have at the UK level in the white paper that's been proposed. I think that's fair. I'm kind of a gradualist about any kind of change off and think it's better to work with what you have and I think I've put that in my paper. I think any changes in what we would do as a Scottish Parliament with power and control over pensions policy would need to be taken with a great deal of consideration and a great deal of thought. No-one's saying that if there was a yes vote I don't think that any of you, whoever of you are in power, should in any way make any sweeping drastic changes. I think that these things will happen incrementally, they will happen slowly, but they will happen where they need to happen or where MSPs who have the decision making powers can decide what's best. When you rightly criticise the policy of wealth, will there be people benefiting most with tax relief at the higher rate? Is that changing that? Is that part of the white paper proposals on pensions? If it is at the moment, I haven't... So you will know that the Labour Party at UK level is going to abolish tax relief at the higher rate, which I presume you know that. Presumably that rather undercuts your argument that only through independence can we fundamentally change pension policy. I could argue that that satisfies my personal views on equity, equality and so on, but it's taken a long time. You can still invest £40,000 a year if you have it and get tax relief on your pension investment. There's still my personal views about equality and redistribution of wealth and so on. I would applaud the Labour Party personally for doing that, but we will be dependent on getting a Labour Government to do that. Thank you. Okay, Jean-Claude Ford by Jamie. Thank you. Thank you for your paper. Interesting. I wanted maybe just to go back to the comparison with other countries and the much higher levels of pensions. Is that all to do with investments that are made by these countries so that they actually have a pension pot which we don't have? Or is it also in relation to the countries that pay higher pensions, pay higher contributions as well? Is it tied up with other things? Are there other benefits? You can never look at something just on its own. Are there advantages in other ways that we enjoy in this country in terms of medical care or other things that you would see that people don't have, have higher pensions? There's a big picture there, Jean. As you say, we've been talking about state pension provision, the comparators we have. Actually, that's a comparison. Some of those comparisons of state pension across different nations are based on proportions of your salary, average salaries and so on. We've stripped out the other variables. You're right, it's a complicated picture and it's not an exact science. My understanding is that in terms of state versus private provision, the UK is one of the better ones in terms of people having their own private provision. I think that's a good thing. Hence why I disagree with the Lamborghini reform that's just come in. I think people have had the tax relief they should be forced to take that as a pension and annuity so that they're not spending all night dumping themselves on the state 20 years time. In terms of government, Mr Chisholm mentioned higher tax rates. Yes, some of these countries do have higher tax rates in Norway, for example, but their average income is also proportionally higher. Per capita, they are without shadow of doubt wealthier than we are, even with their higher tax rates. So saying they pay higher taxes for me isn't the argument. The argument is what you left with per capita GDP wealth per capita if that's your chosen measure and a lot of these countries are better off than us. In terms of investment, the most notable ones that do have paper on me, some of them have them even without oil wealth. But just about, I think, everyone who has oil wealth apart from the UK and one other, is it Iran? I'm not sure about that. Is it Iran or Iraq? We're the only ones that hasn't invested a penny of our oil and for me, people say the oil's running out. Yes, it will run out. I can't tell you when. What are we going to do with what's left? It's been used to fund tax cuts at UK level over the past 10, 20, 30 years. It will continue to be used as such. There will be no oil fund in my view if we carry on sending the oil wealth to Westminster. What is crucial for me if we are going to pollute the atmosphere with oil, if we are going to use it, let's invest it for the future. Nor we have the biggest fund in the world, the biggest single collection of assets. They can move the market every time they trade in it. It's astonishing how what they've done with their money. They've saved it. It's generating income every year in perpetuity that they will use for their pensions. I do believe it. If I'm right, it's in the white paper that at least part of Scotland's oil wealth will be put aside not only to fund future pensions but to realise the revenues year-on-year to smooth them so that this volatility can be coped with. Sorry, that's not a full answer to what is quite a full question. Slightly moving away from pensions but you've been studying the experiences of overseas Chinese students and I just wonder whether you could talk about that and the advantage to Scotland and how it enhances or how we make the best use of our university's reputation in that sphere. This is my doctoral research that I'm currently studying towards, I teach at the university and quite often a significant proportion of my classes are students who've just come off the plane from the overseas. For me it's an ethical argument about how we best educate them how we best give them an experience that they can expect to receive in line with what other students receive coping with language and so on. It's also important for the UK and Scotland as a source of educational income. The universities as we know have expanded Government funding hasn't quite expanded along with it either in England or in Scotland although in Scotland we pay our students fees, our home students fees and so it's an important income stream for our universities now and on my university's agenda internationalisation as part of the new strategy has been before and it's probably on the agenda of most universities around Scotland and the UK now. So it's an important income stream and universities are now becoming more dependent on it. Again we're coming back to the immigration policy issue here. We are having to impose on our students some very strict immigration requirements. We are having to it's called tier 4. The university is having to implement a lot of very strict administrative requirements to allow these students to come and study with us. It's becoming to the point where we are now having to compete with countries like Australia who have slightly more relaxed immigration requirements when it comes to students and we are now having to fight to get these students in now. There are threats to them going to India and Australia now which is a threat to us and our numbers I think this year I can't speak with exactitude. They're certainly not growing as much as they were a few years ago and for me immigration Parliament having powers over that would be beneficial to Scottish education. Thank you Eric. The issue of the Malcolm Chisholm touched on highlighting the evidence, the pensions policy institute provided us where he was expressing a concern about the cost of pensions per adult of working age but of course their paper was predicated on the Office of National Statistics low population growth estimate which I think was about 7000 per annum and you yourself have made the point that it's closer to 22,000 in actuality and the pensions policy institute that if you use a higher estimate which is actually closer to actual levels there would be a better cost per working age adult for pensions in the UK as well. Would you accept that? I don't know if you've seen the evidence they gave us but would you accept that hypothesis and does this sort of come back to the issue you've referred to about having control over the levels that can influence these factors? I do think we need what was the paper you referred to? The pensions policy institute that they gave us last week. I think we need control over that. Our young people are going, I read Bell, Cymruffords and Isers paper yesterday and there was one graph they've got in there that's very telling. It's a graph of the immigration net to England or the rest of the UK and the net immigration from the rest of the UK into Scotland and the graph sort of crosses each other, crosses itself at particular points for me and it seems to me that age groups 18 to 39 on my graph here in the paper show that it's the young people that are leaving Scotland to go south. My brother's an example of that, he's in London with his nephew, we don't see them that often and for me what we need is the young people to be staying in Scotland. It's the older people that tend to repatriate here and for me that's part of the problem it's the immigration not only from outside of the UK attracting young talent to people like my brother in law who's Polish, it's a lawyer here and that's what we need to be attracted here and we also need to keep the young people that we grow up and educate here, it would be good to keep them here not only socially but also for putting back what they've received from the country so yeah, I do think that's an important aspect. A case of trying to provide them the opportunities to be here in Scotland that they feel they have to go elsewhere and again that would contribute positively to the issue of cost it would contribute to pensions because they would be here either creating wealth or paying taxes from public sector payment wages but it would also be beneficial because the ratio of old to young would be rebalanced it would address that criticism that we are somehow more ageing in the UK which I agree we are marginally but certainly not as much as many countries in Europe and that was a fact pointed out in the Bells paper that I read yesterday as well so Scotland, it might be worse than the UK in terms of ageing depending on what indicator you take it's certainly not bad in comparison with the rest of the UK and if there is an issue with an ageing population in Scotland we need to be able to do something about that. The women have been treated poorly in the UK pension regime can you talk a little bit about that why you feel that's the case? I've often thought this and it's not necessarily because I'm a woman it's because I've changed a job more than traditionally I mean that's normal now but when I think about my parents generation you started work usually in those days it was the man more often the woman stayed at home or went into part time work or worked and took a career break for children it was much more likely in the past that a man would start work and continue to get all the NIC payments and benefit from full state pension for women that was much less likely from a state perspective also from a private pension perspective if you're moving job fairly frequently as people tend to now mobility and so on you're leaving pension pots behind you and I mean that's another big area that you perhaps don't want to open up today but I've been waiting for some kind of provision whereby you can either consolidate those pension pots at low cost which you can't at the moment it's very costly or somehow you carry it with you I think there's scope there for some innovative creative thinking which to me just hasn't happened and certainly in my working career and well back to women so women career breaks for children and so on they have a more erratic period of NICs payments and therefore they are on in my view punished possibly too strong a word but less likely to benefit from full state pension on retirement and I think the facts figures bear that out that there are more women in retirement poverty than men Talk about the Melbourne Mercer Global Pension Index which I freely confess is not an index I was aware of before I read your paper you say that it scores the UK a C plus such as Denmark, the Netherlands, Australia, Sweden and Switzerland are ranked above with A or B ratings can you tell us what does this mean in practical effect? It just means the state pension provision by government in the UK is much further down the list than anyone who doesn't sort of pick up these things and sort of pay attention to them is aware of in my view that the debate in the news about pensions crisis and so on but no one has actually said what we have is actually really quite far down the list on several of these rankings we always see D1's most recent one to come out to my knowledge that is so it's not we all go oh your pensions at risk if people vote yes we're seeing a lot of that in the campaigning that I've been seeing going on put our pensions at risk no thanks one post to us on your pensions are not that good at the moment and secondly who's to say it's not at risk as it stands you know the country's up to it's neck and debt so for me the message that somehow UK pensions are safe cosy secure for me that's a bit of a fallacy and that shall Denmark, Netherlands, Australia, Sweden, Switzerland pay their pensioners a bit of pension on the whole these countries per capita are wealthier than us Luxembourg in particular where I've put personal experience of working so being small is not, for me it's an advantage it's not it's not something to be scared of you can be small and wealthy as a lot of the indicators show most of the wealthy nations in Europe anyway are the small ones the same correlation in the OECD index or study OECD it's more international than just Europe but we come just above Mexico in that ranking you say we're the lowest in Europe in your paper I think that's true and that's based on the OECD ranking and it's the same correlation the countries ahead of us tend to be more prosperous could you repeat that the countries ahead tend to be more prosperous I think that's true and perhaps that goes back to June's thing, is it because they're somehow placing greater emphasis on pensions and cutting back on health that may be the case I've not done a an empirical analysis of that with analysing the different variables but it stands to reason that if you have more wealth in your nation more wealth per GDP the measure I tend to use then surely you have more wealth to dispose of in terms of increased state pensions to share could be another way to share, well absolutely my argument isn't necessarily increased state pension immediately and in independent Scotland we could and that's for this committee and for parliamentarians and electorate to decide but what I'm saying is it's not it's certainly in my view would be no worse and certainly we would have the powers to do something better or different and we would have a risk profile our age demographic and so on Thank you Thank you Let me just quote something from your paper Scotland could in time consider the attractiveness or otherwise of policies of other countries for example offering tax relief on work and private pension contributions based on age Can you just expand on that about who would get greater tax relief younger people or older people I'm not making a view on that it's up to the parliament to decide that but what I'm saying is you could consider topics such as that you wouldn't have to be stuck with what we've got at the moment you could look round and make as I said earlier it's a chance for positive rethink if that's what you want to look at what other countries do what other countries policies are at the moment this parliament you have absolutely no capacity to do that so for me it's an opportunity age could be you give older people more tax relief as they're approaching retirement boost their fund or you could be use it to encourage the younger ones to invest more early you could use it how you wanted but it's just an example I put that in it's just an example of something you might want to consider but clearly you've given it some consideration so which one would you advocate I have no view on that at the moment I've not done a full detailed study of the economic modelling surrounding that I can see advantages for encouraging young people who tend not to save very much partly because they tend to be on lower incomes when you're young don't have as much disposable income having said that I tell all my students now because you get the benefit of compound interest or compound growth of your fund if you start earlier and it grows much faster grows over a longer period it's much more powerful but you could argue that as people are approaching retirement they need to have more of their income freed up and you could allocate your age-related relief to them more it's an idea it's a positive thing that you could consider my point is you can't just now well this group can't this Parliament can't you described the recent changes I don't know if they were your words or you were quoting them from elsewhere as the Lamborghini reforms you were pretty negative I got the impression you were pretty negative about those reforms I asked the First Minister at First Minister's questions which of those reforms he would reverse and he didn't suggest that he would reverse any of them would you reverse all of them? Which ones? All every single reform in the last finance bill? The one you touched on most was the fact that you don't have to purchase an annuity and I think you described it or you were quoting someone else called Reckless Would you reverse that policy? I didn't use the word Reckless that was the pension fund institute or the OECD head of pensions would I reverse that policy? Personally my view would be I would favour a government that did reverse it personally but that's not I don't have the power to make those decisions so I do think that Roedd yn dweud i dda i'r pwysig o'r bethau roff, oedden nhw'n mynd i'r prifysgol, oedden nhw'n meddwl i'r llwyddoedd, a dweud i'r llwmpau a'r crwys i'r Lamporgini, oedd oedd yn dweud i'r prifysgol. Rwy'n meddwl am y crysis, a'n cael ei gwaith bwysig, ac rwy'n dechrau i chi'n fawr oedden nhw'n meddwl i'r prifwsedd. If we were to become independent you would want to see that mirrored in an independent Scotland. I could see it being an equitable and sensible thing to remove that one, the ability to cash your lump sum in now. I think the people that will perhaps disgruntle or the better off, and that's okay, but it might be beneficial for the country to have a new ties in constraint going forward. So that people can't spend all their pension now and leave themselves with nothing like her on. I'm sure there's many people who are sensible with their money. I'm sure there are many wealthy individuals who are very sensible and will manage that without a problem. But for me there's two issues. There will inevitably be some people who don't manage that. And secondly, the future governments, future elected governments will not have that income stream coming forward. Again you were pretty critical about the decision, I forget whether it was 1997 or 1998, but you described as the pension raid and you said that hasn't been revoked or reversed by any UK government subsequent. If we were to become independent would you be calling on an independent Scotland to reverse that decision? I might. I might consider that to be helpful to pension savers, but it would have to be in the raft of other policy decisions as well. We would need to have other reviews of other aspects of pension provision. So it wouldn't just be take that away, take that away. We've been talking about a range of possibilities here today. That could be part of the mix. Again I'm not a campaigner for, I don't campaign to MSPs telling them what I think they should do with their pensions. I give a personal view of what, I guess is what you're asking me if I was in power, what would I vote for and so on. I do criticise the raid on pensions. I think that's been heavily criticised. It's not my words to use raid that's been used by other people vociferously by many. It seems to me if you want to help people to have a better pension pot from their private pension you could relieve them of that tax. You can tax them or give them relief in other ways as has been happening. And you could decide to do that if you were a Parliament, yes. You could. The other one you suggested was you want to see a redistribution between richer and poorer via tax relief on pensions. Again is there any indication either in the white paper or elsewhere that that is on the table at the moment? I'm not, I don't think so perhaps you can correct me. I'm not an advocate, I'm not here as an advocate for the white paper particularly. For me, for someone who can afford to put £40,000 into pension fund annually and get tax relief at the higher rate for me that seems quite generous to the better of people. I consider myself to be well off, I am above average earnings as electorate in Brunapier but there's absolutely nothing I can do in terms of putting anywhere near that amount of money into pension pot annually. So my question then is who is this constituency group who have the money to be able to put £40,000 into their pension pot and why are they, if they're so wealthy, why are they getting full relief on that at 40% or more? So for me, that to me personally seems somewhat overly beneficial to better off in society. Finally, if I may convener, the Scottish Government produced their pensions paper entitled Pensions in an independent Scotland, 109 pages produced at the tail end of last year. Is there anything in that paper that you think will make private pensions in Scotland better so that we're being independent than they are currently? My understanding from the white paper pensions provision is that we inherit a system, there's going to be a bit of negotiation, it's a fair amount of transition sorting out what goes where and as I said earlier, I don't see the need for a massive overhaul immediately but what I do see is the benefit of this Parliament yourself having the power to do things according to what you think is better for the Scotland's pensions and what's better for the Scottish people. At the moment you have no power over that just now, you're happy for that to rest in London and I'm arguing that I think you should have the power to have a say on that and be able to do something differently. You perhaps have your own views of what you would do differently than what your colleagues in London are doing just now. It's not my job here today to ask you what they would be but if you had the power here I guess my question is, and obviously you don't have to answer me, is what would you do in Scotland if you had the power over that? Pensions expert giving evidence in front of the committee, let me close just with one question because there is a hint being put forward that you think we would be better as an independent Scotland with pensions. That's nothing I've said, I'm saying we could tailor our policies towards what we need. There's an opportunity to do something different. You could do exactly what they're doing in Westminster if you want, if that makes sense to do so and I'm not criticising everything Westminster's done, I think auto-enrolments are a great idea. We could do that as well, just because we take power here doesn't mean you somehow stop doing what's good about the current system. I think this dichotomy between if you think power should rest here somehow means everything down there is bad is wrong. What it does give you is a power to keep what's good but also do something differently as the need requires. Whether that's about immigration with the aged thing or keeping younger people in the country and so on. To me that seems to be more beneficial than having to accept a one size fits all policy that's coming out of Westminster. I'll close with one question, I'll return to the paper. You're saying we might be able to do things better or we might be able to do things differently. In the published paper from the Scottish Government, which was a pretty comprehensive paper on pensions only, is there anything in there that in your view as a pensions expert will make Scotland better for private pensions? There is because we would be able to perhaps do things that suit the people of Scotland in terms of their private pensions. You can adjust tax rates but only if you have the fiscal power to do so. My view as I've said today is more egalitarian redistribution but that might not be the will of the Scottish people. But as it happens you can't do anything just now. So yes I do think there's things in the white paper that are going to help private pensions because it will be this Parliament that addresses that. You can choose what's best and presumably acting in the interests of the people who live here. Not 50 million people who happen to live elsewhere with different economic, different demographics, different risk profile. I'm sorry to press but you said there are things in there that would make it better. If you have power to change things, you can presumably do things for the better. So the broad principle of the white paper, forgive me, is that this Parliament should have powers over these things. So whatever the detail is. The thing that you've got to remember is the white papers for presuming this is what a Government, if it was an SNP Government would do. Who knows it might even be a Conservative Government or a coalition, might be a Labour Government. You would have the powers to do something then. So that is the SNP's vision of what they would do where they elected. Now again, I'd be delighted to hear the views of the non-SNP parties as to what their pension provisions would be should Scotland vote yes. I haven't heard anything on that yet. I have asked that question before. Other than the broad generality, are there any, I'm not talking about the white paper here, I'm talking about the specific pensions in independent Scotland. As a pensions expert, are there any specifics within that paper that will make pensions in Scotland superior to pensions in the rest of the UK? I can't claim to say there's specific items. Which paper are you talking about, the white paper or pensions in independent Scotland? It's pensions in independent Scotland published September 2013, 109 pages. There are, in terms of the fact, you will have powers to do what you need to do. Are there any specifics in that paper? As a pensions expert, you must be familiar with that paper. Are there any specifics in that paper? I can't say the word a pensions expert is the words you're using. That was never words I've used myself. So you can push me on that but that's your description. I've come here with my personal knowledge, my work experience, the studies I do in my work. But my argument to you is, what would you do in a yes-fault if you could choose to do what you want? I don't think I would, I would put myself into saying it. I'd rather not go into the detail of that paper now because I haven't read it for a while for first of all. Thanks, we'll leave it there. Thanks, move on. John, to be followed by Michael. Thank you, convener. You referred to the OECD in the fact that the UK pension provision at the moment, the average person might receive 32.6% of their final salary and like Austria would have 76.6%. I mean, I'm just wondering is there a right answer in there as to is there a kind of agreed figure that should all be aiming at like 50% or 2 thirds or is there not? I think each country's unique and has its own electorate what they are happy to vote for, prepared not to vote for. I think to be honest I've never thought that they're thought about having a magic figure that is one percentage of your salary should be your pension. I do know that living off the state pension in this country, I think many of people would sign that very hard if that was your only provision. But there are many people who do so. I mean, presumably 32.6% if you're a millionaire is okay, you can live on that. But even 76.6% if you've been on the minimum would actually not be enough to live on. So it would vary. Yes, it does vary. I guess you would have to look at figures for living wage and, you know, there's an argument going on around that just now. What do you actually need minimum wages and cutting it now? That's why we're seeing food banks and so on. So I'm not in a position to put a figure on what the magic number percentage of income you should be retiring on because some people won't need more, others don't. But I guess the two pronged approach of those that can save should be saving. And fallback state pension there, you know, for, sort of, catch all for everyone, is a valid one. The figures we've been looking at in terms of Mercer and the OECD, the OECD figures are to do state pensions provision. And my only point is that we shouldn't be, we shouldn't be sitting here thinking, we are Great Britain, we've got this fantastic pension. We just don't and there's reasons for that. But, you know, I don't see from the figures we've read and the report from Bell and so on. I don't see why Scotland would be dramatically that much different. Yeah, there's slight differences in age and we've talked about some of the indicators of taxes paid and so on. But I don't see why we can't do it when other countries can. That was a good area. I was interested in what's wrong with the present system. Presumably, if we stayed in the UK, then we can try and make the UK system better as well, albeit we don't have a huge amount of influence. But, I mean, we've talked a little bit about how the richer people seem to be getting quite a lot of benefits by way of tax. What can we do at the bottom end? I mean, you've mentioned the living wage and the minimum wage. I mean, presumably if somebody is in the minimum wage, they cannot possibly save, really. Even the living wage, as I understand it, I mean that's what somebody needs to live on. So, presumably, we're also saying that on the living wage, people cannot save. So, presumably, am I right in saying, would you argue then that we need to increase the minimum wages in order that everybody could actually save? I haven't actually thought about that question before. I think it's even for people, I mentioned young people earlier. I don't know, I just think from my own experience when I started out, Ernst and Young in 1990, I think my salary was £9,250, which I thought was quite good at that time. But I certainly didn't say if I didn't have much left over after all the bills were paid. So, I would argue even, I know what salary I'm on, is that we're universally lectured or salary. That's well above average. Even people well above the minimum wage and the living wage, I would be surprised if they can save very much, to be honest, as it stands. So, I'm not even sure raising the minimum wage might be a good argument and it might be morally the right thing to do. I'm not sure it will have much impact on pension savings. But I'm basing that on supposition and I've not done any empirical studies on that. The other thing is just to accept that not everybody is going to have a funded pension at some stage. I mean, we've got this mix at the moment. I think you've argued that other countries have more of their pension provision as funded. But it seems to me that we're never going to get to the stage where 100% of people are funded. I mean, should we be relaxed about that as to how much is funded and how much is not funded? Just accept that for quite a large chunk of the population, you know, it is our duty today to pay for today's pensioners. Just to clarify something, when you're looking across Europe, I think what I said was that the UK has more bigger percentage of people with funded pensions, private pensions, than the state one is falling down. Which, just as a slight aside, does make you think if you've got a funded pension, you're inevitably going to be in the better off group. So that does lead you to the next thing. Well, what are our responsibilities to retired people, the aged and so on, without who haven't had the wealth to invest in a private pension fund and get to actually for 40-50% at 40 grand a year, whatever the changing rates are. So, you know, we're back to equality, we're back to your views or the public's views, the electorate's views on equality and distribution of wealth. I've never described myself socialist in my life. I think many people know that. But equally, I do believe that you have a moral obligation to people and the poor and the weak and the vulnerable, and that's personal view. So, I think to fund state pensions at something that's sensible is something I would obviously agree with and continue to agree with. On the personal pension, I mean, you've mentioned the point about the admin costs that, I mean, my father also worked for one employer all his life. So, presumably the admin costs of his pension were fairly straightforward, whereas a lot of us, myself and younger, have got various pots around the place. Does that mean that the admin costs tend to eat into these things? But private pensions... Yes, if I've got three or four. Yeah, if you've got three or four pots, as I have, because I've worked in industry, eight years in one employer, I've worked in Luxembourg as well. I've worked for major financial institutions in Scotland. And yes, I have several pension pots as well. And this is something that's just occurred to me from my personal experience, that I don't like having different pots. I'd rather consolidate them, seems to me, to make a bit more sense economically. But the charges are severe when you move your money. And I don't actually think there's been a huge amount done to address that. And it means you will be taking small amounts of stream from different pots, each one taking management charges, trustee charges, custody charges. It can be very expensive, as we know from the discussion around pension fund charges that's been going on in the last few years. That's not helpful in my view. I would love to see a provision whereby you could consolidate your pots without being hammered for it through charges. You suggested that the Dutch have a model where they pool a bit more instead of just all individual pots. Is that something you're aware of or can comment on? I'm not an expert on that, but I would certainly be interested in that being looked at as a future of private pensions. I think I'd be very helpful for an awful lot of people. That's great. Thanks so much. Thank you, Michael. Yesterday at the Welfare Reform Committee, the chair of the expert group which was set up to look at welfare change said that you can't transplant different systems from other countries into Scotland, that Scotland would have to have its own system. It would have to develop its own system and there would be huge transition periods, transition costs involved in doing that. Obviously there would be some benefits as well in doing that, but he said it was not appropriate to transplant from one country to another because Scotland already has a particular system. We have a different culture. We are not the same as other countries. We are not starting from a blank slate. We are starting from where we are. And where we are at the moment, you know you can look at it, you can analyse it, you can assess it, you can find fault with it or you can approve it. But companies, private companies who are involved in that market, especially in pensions like Standard Life, get £240 billion of assets under management. In looking at the potential for an independent Scotland, they have put in place a contingency to put parts of their operations outside of Scotland because of that uncertainty. So while we might look towards an independent Scotland and say we could do this or we could do that if we were starting from a blank sheet, that might be possible, but we are not. If there was change, there would be an impact on that change. Standard Life moving its assets to headquarters in parts of the rest of the UK would have an impact on GDP. So the question I've got for you is starting from where we are, do you see the risks involved in affecting the current pensions arrangements and what are those risks? You've mentioned the welfare committee there and I thought perhaps your question was to do about welfare for a start. Because they were talking about the demographic changes and the demographic changes affect pensions as well. Welfare provision is impacted by people's income, whether that's in retirement or working age or whatever. So all of these things have to be taken into consideration. A quote from the chair of the expert group, an expert, looking at welfare implications for an independent Scotland said that it is not possible to look elsewhere for a model and then transplant that model into Scotland because we're not starting from scratch. I don't believe we are starting from scratch either, I agree with you there. I believe we're inheriting a situation, as you said, that is as it is and what we've got to do is take that and work with it, either keep what we want, keep all of it if we want, but change what we want to as well, as a normal government tends to do. So, yeah, I agree with you, we're not ripping up. It's not like a ground zero or a complete starting point from a blank sheet. What we do have is a possibility to change things in a way that suits the people that live in this part of the country, this country rather. So, yeah, you refer to standard life there. I seem to remember the same thing being said and done by Scottish widows. Before devolution 1997, Mike Ross, I believe, wrote a very large two-page spread in the Scotson to which I responded. He said it would be damaging to his business and the jobs would go, not one job went. And I worked for them for several years as well since devolution. We kept the same structures, we kept everything in place. We changed some part. You're talking about independence starting a new country with a new system separate from what we currently have. So, why do we believe in when they talk about a small change like devolution? Why would we believe in when they say about something so small? Why would we believe that now? That's the first thing. The second thing here is my experience of business, standard life. I've never worked for them, but I've worked for very similar companies, Lloyd's, TSP, Scottish Widows, State Street Bank and Trust Company, JPMorgan, Chase Manhattan as it was before. And there's no way if there's a yes vote on September 18, they are going to have the packing crates round moving out. First of all, where are they going to have their building to accommodate the 3,000 people that they employ there? They're not moving the headquarters, they just need an office. What's your aspect, Chris? It's a... Or you can answer in a minute. Secondly, I know some of the fund managers at Standard Life, they've come up from England. Why are they here? Because they like the lifestyle here. They like sawntring across the meadows on their way to work. They don't want to go to Basingstoke now with their families, kids at school here. That's the second thing. Where are Standard Life going to get all the expertise up if they're going to upship? My last question is, why would they? What advantage is there? What is it they're running away from or escaping? Just to put this in context, if you look at the notes in the accounts where I think where you've picked up on this Standard Life made their big thing, it's a few lines like that. And they're just saying they're of course serve the interests of the shareholders no matter what happens to whatever government. It cost about £100 to set up a new company, a shell company. I can set up a company in London now registered in England. It cost me £100. It's not a significant investment for them to say we've set up companies in England. You can set up a legal entity for a few quid. So I'm not actually sure why everyone's going, oh, they've started moving. They haven't. And as with Scottish Widows, I don't believe they will move reason for them to. So if you look at the board and the person who said those comments, if you look at their affiliations, who they've advised, David Cameron, you will find that we're not exactly talking someone who is utterly impartial. Has your current business looked at moving around someone since you were a member of Business for Scotland when you assumed that you had a business? No. I've worked for Businesses. I'm in both. So you advise people in terms of promoting independence, but it's questionable for someone at Standard Life to advise them. If you're questioning my credentials, because I actually work for Universe too now. You were the one who said that the person at Standard Life should look at their credentials and who they've advised. I'm not saying I'm impartial, I'm giving you my own views and using my experience in business over 20 years. You can take that if you want. You can accept that or not. It's entirely up to you. That brings to conclusion our questions. Thank you very much for giving evidence to the Finance Committee this morning. I'm going to suspend for five minutes just to give members a natural break and stress of links. Folks, we'll just start off in a wee minute or so. Right. We will now continue your consideration of Scotland's public finances post 2014 by taking evidence from Professors David Heald and Alan Trench. I'd like to welcome you both to the committee. Again, members have copies of written evidence provided by witnesses, so we will go straight to questions. Now, as normally happens in the Finance Committee, I will start with some questions and then I will move on to the members of the committee to also ask questions. What I'm going to do is, rather than jump about from paper to paper, as I normally do, I think this time what I'll do is, Professor Heald, I'll put some questions to yourself. Professor Trench, you can comment as well so you can have a wee bit of interaction. That's worked pretty well up to now. We have had one session that lasted three and a half hours. It happened today, you'll be glad to know. But we'll get straight to it and of course colleagues will come in as well. First of all then, Professor Heald, in paragraph 2 of your own submission, you say that and I quote, expectation has been aroused in side Scotland for a better devolution deal while temporarily, in my view, the voices outside Scotland that denounce its excessive privileges are relatively subdued, is that you believe a temporary phenomenon that will re-emerge post September? One of the things that surprised me since devolution is that the kind of criticism of Scotland's position has always been there but it's never really really reached a peak. People kind of focus on the identifiable expenditure figures published annually by the Treasury and they also blame Barnett formula for the position of the North England within England whereas it's completely relevant to the position of the North of England. It's gone pretty quiet at the moment but I think you'll find that after the referendum if the answer is no it will actually re-emerge and I think there's a kind of code language which you see in some of the evidence that's been submitted to this committee that when people talk about the reform of the Barnett formula it usually means that Scotland should get less public spending and one of the things which I was very critical of during the previous Labour Government was that when there was plenty of money around when vast quantities of money were coming down the Barnett pipeline there were proposals that I made with Ask the McLeod about how you could actually hold to the Barnett formula in a way which would satisfy Wales and Northern Ireland that was not done and basically the Labour Government just suspended just froze all debate about the future of Barnett so I think yes, I think we're to critical because no, I think we're to critical juncture critical juncture and the kind of Gerald Holtam's Holtam commission inquiry was relatively mild its language but there's a paper by him and another member David Miles in the first of times that suggests Scotland should lose 4 billion pounds I would expect a lot more articles like that in future This is a very large question set of questions there's a question of how the Barnett formula works on which David is probably the greatest expert there's a question of the political pressures that exist in England and in other parts of the United Kingdom particularly Wales for reform of the Barnett formula and there's a question of what's likely to happen post referendum to take that last because I think it's probably the most pertinent there's certainly a concern out with Scotland about the level of funding that Scotland gets and it is frankly quite hard to justify if your criteria are based on things like relative need that said I see somewhat regrettably I have to say no sign that anything very is very dramatic is likely to happen we have explicit commitments in both Conservative and Liberal from both Labour and Liberal Democrat parties in their papers setting out options for further devolution saying there shouldn't be any change to the Barnett formula the Conservatives have taken a similar position in the press conference they're not in the Strathclyde Commission report there have been repeated assurances by the Prime Minister and various other UK ministers including the Chancellor the public finances are stabilised which would appear to be some way off so at some point when public finances can be deemed to have been stabilised on that basis there may be an issue but there really isn't any clear indication of any likely change despite significant political concerns I say in parts of England and particularly in Wales about the present arrangement Ruth Davidson said in 12 March 2012 and I quote I do think that there will be a review of Barnett after 2014 and basically Arthur Cymru said in 27 November last year that Barnett's future will depend on the outcome of the 2015 general election so that's moving away from the referendum but there certainly are murmurings are there not there are many murmurings I advised a House of Lords select committee that reported in 2009 and recommended a different approach essentially a needs-based approach to funding through the block grant there are a large number of murmurings but there's no sign that that's actually anyone's official policy I understood it was a lived-in policy into the last election well it isn't any more it would seem if you look at the Campbell commission report okay I'm sure that'll be explored further as we go on but I want to go back to yourself Professor Heald in terms of your own paper when you look in paragraph 6 you say the Treasury has unchallenged power and then in paragraph 7 you say there's a transparency deficit that is undesirable now and unless removed we would make major devolved taxes unworkable I'm just wondering if you can explain that to us the reason why there's been less controversy about Barnett since devolution is that in the 2000s there was just vast amounts of money coming through Barnett in my view too much money coming because the devolved administrations couldn't actually absorb the amount of consequentials that were coming from health and education in England so the fact that because there was plenty of cash people didn't pay much attention people didn't pay much attention to the Treasury control of it the Treasury broadly in my view has actually followed the rules in the statement of funding policies that's issued at the times of most spending reviews but the point is that the document what actually happens in the operation of Barnett is not actually put in the public domain the data that I give you in my memorandum is a result of a whole series of freedom of information requests the Scottish Government about tracking the evolution of Barnett and you'll see from that table Barnett is only actually part of the picture the point is Barnett is deeply embedded in the UK public UK public expenditure system which the Treasury controls and the reason for the quotation the paragraph you gave me is that in a period where until 2010 there was actually lots of money around less focus but if the Scottish finance minister secretary has got to stand up and propose eight Scottish income tax for example, higher than the 10p which is the Kalman tax which is the Kalman deduction you got to have an absolute clarity that the Treasury cannot make offsetting changes now there was a logic during the 2000s of Scotland actually using the tartan tax in a negative direction because the money was unabsorbable and it built up in end-year flexibility but the point is all the political advice received by ministers was not to do that simply because the system was not transparent and the Treasury had plenty of levers whereby could actually punish Scotland for actually using the tartan tax in a negative direction so if you've got the tax powers and the tax powers become more significant and at least they're significant in the sense that you have to have a tax resolution now and it's absolutely fundamental that all the numbers concerning the operation of Barnett are immediately put in the public domain and it doesn't require academics to subsequently dig them out through freedom of information requests 10, you know that a precondition of the exercise of significant tax powers is that there is full transparency about the funding system otherwise the tax powers will become unusable, subject to mockery vulnerable to gaming by the UK Government and to disintegration of the administrative infrastructure for assessment and collection and you go on in the following paragraph I'm going to say raising own revenues in quotes cannot legitimately mean receiving the revenues generated in a sub-national jurisdiction through the application of a centrally set tax rate to a centrally prescribed tax base, this creates no political accountability their assigned revenues even if not labelled as such Yes, I mean made clear in the first paragraph I've got a long record I've been in favour of devolved taxes and I still am but the point I keep making is the devolved taxes have got to be usable I don't see any point in having devolved taxes I don't even admit their descriptions devolved taxes if the system within which they operate makes them actually unusable so for example in the context of Calman the Scottish Government has got to notify HMRC by 30 November of the previous year of what the Calman tax rate will be that isn't actually publishing it but I just cannot believe that can remain remain secret but given the UK budget not until the end of March beginning of April and how much money you get from the tax and the actual consequences of the household depends on the UK decisions in the March-April budget the tax power will become difficult to use so one of the points I make at the end of memorandum is if fiscal devolution is going to work initially for Scotland and possibly also for Northern Ireland Wales later it requires big changes at the UK level so there's a there's a paradox if the answer is no and there is more extensive devolution particularly more extensive fiscal devolution it's actually ironically Westminster and Whitehall that have got to change the most Is there anything that's likely to happen? I spent 21 years as the specialist advisor to the Treasury Committee to the House of Commons the whole experience left me pretty depressed about Westminster and Whitehall I think there is a kind of fundamental problem in the UK though I do believe you need strong finance ministries the Treasury and the Chancellor the Exchequer basically dominate UK fiscal affairs Westminster is pretty marginal pretty marginal to that so it requires a recognition by Westminster and by the UK Government that to actually have fiscal devolution in significant income tax powers whether that be Kalman or whether it means the whole of income tax or some kind of compromise on that there has to be a basis for which the Scottish Government or the Wales Government the Northern Ireland Assembly Government can actually plan the use of the tax powers without concern that subsequent UK changes will actually subsequent changes to the tax system at the UK level will actually compromise the operation of the tax powers one of the things that astonishes me is that over a very short period we've moved from a position where about 1 million people pay the highest rate of income tax to a position whereby about 40% about from 1 million to about 4 million pay the higher rate now the higher rate threshold because of fiscal drag kicks out at a level of income that I do not regard as particularly high so the interaction between decisions taken about decisions taken about the threshold at which you start to pay income tax and the threshold at which you start to pay the higher rate are actually fundamentally important to the operation of anything other than a complete devolution complete devolution of income tax whether the Westminster and Whitehall can reform themselves I don't know but I do think this is a critical juncture at which the issue is going to be surface much more in political debate Best of Change is a bit where they can it's wherever there's a willingness do you think that's something that's possible I certainly agree with my own academic work and my own advising work that there has been a pretty broad reluctance within Whitehall particularly to embrace the sorts of changes that were necessary concomitants of devolution That said I think that the referendum debates have triggered much wider levels of thinking and reflection about this than there have been and that the commitment of conservative Lib Dem Labour parties to significantly enhance forms of further devolution are going to have quite a significant effect one thing that's very clear about Whitehall's willingness to change is it depends first and foremost not on bureaucratic inertia but on political will we saw that quite dramatically in the debates around what became the Scotland Act 2012 that fairly attenuated proposals that have come from Labour in 2009 turned into much more far-reaching ones under the coalition in 2010 because of the sorts of lines that were taken by ministers in the incoming government and I think that that's a process that is quite unlikely to be replicated assuming a no vote after September If I might could I just say a couple of other things for picking up on what Professor Heald was saying I very largely agree with what he said I in particular about the nature of the block grant process and budget constraints and how that will work with devolved tax powers and I think there are both some big questions about that and some issues about transparency and data I think though that Professor Heald is more sanguine than I would be about how the Treasury have complied with the Barnett formula rules it's much easier to comply with the rules when you get a chance periodically to rewrite them and that's an opportunity that the Treasury has and it has used The most dramatic example of that has been in relation to the 2012 London Olympics and the consequentials that should have flown from that which was a decision made around the spending review in 2007 and there are blog posts on my blog devolution matters that detail this in great detail and they'll be available I'm glad to have to send details to the club if they want. We've seen rewritings of classifications of public transport largely in South East England schemes like London Transport Crossrail that have had the effect of in that case of reducing the consequentials that were available to Scotland rather than reducing it which had been the case with the 2012 Olympics and business These are decisions that get taken in a rather hasty and rather transparent manner at spending reviews when the State of the Funding Policy that document the operation to manual to the Barnett formula one might call it gets written and I think that that's a process that badly needs review and has done for quite a long time Could I just come back The one point I forgot to make is that I would disagree with my co-witness I think that broadly it has been followed what I would draw the committee's attention to is the 607 million pound deduction from the previous year's spend to get into the SR 2013 baseline which is table one of my memorandum Now there is no the best of my knowledge there is absolutely no provision anywhere for some Barnett consequentials to be regarded as temporary and hence revertible Now whereas the Olympics and the Cartel Review of Prisons are actually mentioned in a footnote so really the difference between me and my co-witness is really about quite how you categorise them but given the period and what's been happening elsewhere in UK public finances over that period I still stick to my judgement that broadly the rules have been followed I am concerned about suddenly you get this new classification of Barnett consequentials being temporary or one off because I never heard that expression in the context of Barnett consequentials the distinction between permanent and temporary that was new to me when I got the numbers for what actually happened at spending review 2013 so I think this is a good example of why we need more transparency at the time not transparency when you actually get the numbers much later so when the decisions you've taken with the Westminster Parliament and the Scottish Parliament should actually have the numbers to see what's actually happened Professor Hilder you said in paragraph 9b of your submission that the expenditure based financing system with broad expenditure switching powers is congruent with the reality of the UK public expenditure system the 16% of the population living in the devolved administrations were sufficiently marginal to UK political debates for some spending legacies and policy deviancy to be tolerated at Westminster and Whitehall can you expand on what you mean by that I think that the one of the points I make in my memorandum is that though some people call Barnett a needs formula it isn't a needs formula it's an adjustment formula but contrary to some of the other evidence you've received there's a perfect rationale for the Barnett formula the freedom to spend of the Scottish ministers how they spend and the Parliament's own powers crucially depend upon the block grant nature of the spending system if you had a system which was built up in a disaggregated needs assessment you run very serious dangerous that you start getting more earmarking and ring fencing of particular kinds of expenditure that block grant nature and the fact that Westminster can't intervene Whitehall can't intervene in the composition of Scottish spending has allowed Scotland to follow its own policies one obvious one is about higher education tuition fees which are not liked, put it mildly at Westminster and Whitehall but because they were within a block system the Treasury cannot the Treasury cannot cannot intervene the other point is I also in my memorandum explain why the Treasury actually quite likes Barnett in a certain sense what it means for the Treasury is it doesn't have to get involved in the detail of Scottish programs because previous Secretary of State for Scotland before devolution were actually quite skillful before Barnett and before devolution were quite skillful at getting Scotland share and then running separate arguments about why Scotland needed more for various reasons so from the Treasury point of view they concentrate on England on the big English programs health, transport, law and order justice work out the spending for those departments put that into the Barnett calculations and they get a number for the three devolved administrations it avoids a lot of face to face negotiation about devolved policies in three jurisdictions about which they don't really know very much where to disadvantage so one of the other reasons why Barnett has survived is simply because there are practical advantages to the practical advantages to the UK Treasury as well I would certainly agree that one of the attractions of Barnett is its practical advantages to the Treasury as well in a practical level actually to a devolved finance minister including devolved finance ministers who don't do as well as the Scottish finance minister because it gives you a stable and predictable revenue stream I would also particularly agree with Professor Heald's comment about disaggregated needs assessments if you were to go down the route of something like the 1979 needs assessment which was highly highly detailed not only is that a very time consuming exercise but because it makes a detailed assessment of needs in relation to roads and transport or other particular fields that is very likely to lead to a day factor reinventing one of the merits of the sort of approach outlined by Gerald Holtham in his commission's report is that it gets away from that because you're using a small number of high level indicators which cut across service fields so it again produces a block of money of which it's very hard for an individual devolved minister to say this is my share I require it it actually enables a wider cross government decision that said I think there are one of the problems with the present Barnett formula arrangement and I know this is a point on which Professor Heald disagrees with me is that in fact I think there is a day factor link an implicit link between public policy in England and public policy for the devolved administrations that is less acute a problem for Scotland because of the relative generosity of the formula that means that there is quite a bit of room for manoeuvre within the present arrangement it is much less more strikingly so particularly for Wales but it applies here as well because changes in the block grant of course can be reductions as well as increases and if those follow changes that are made in the block grant because of changes in the meeting they will follow through so the block grant for all three devolved administrations was reduced when the UK government decides that it's going to abolish the teaching grant for universities for humanities and social science subjects so a large chunk of the existing teaching grant grows for what are now considered to be non-priority subjects that feeds through into a reduction in the block grant for all three devolved governments which increases the strain that is felt by pursuing different higher education policies that's likely to be the case in the future and one has to point out that the effects of austerity have not been hugely felt so far in spending terms they've been overwhelmingly born by the local government budget in England and therefore by consequential shares of that for Scotland and Wales which are limited because of local taxation but also most particularly because of the way that the two largest devolved spending areas have been ring-fenced in England health and school spending have both been ring-fenced within England and if that were to cease to be the case after the next UK election then again that's likely to have consequences for devolved budgets Professor Heald, you said today in paragraph 13e and I quote the relationship between the devolved taxation system and social security is critical both in terms of system functioning and political credibility so I'm just wondering if you can expand on that for us please this one of the questions you've got to ask yourself about income tax is the right tax in a devolved system right major tax in a devolved system is how far you can go with devolved control over rates before you start worrying about the interaction with a benefit system the tartan tax power on the whole people thought that wasn't too large the common tax is superficially a bigger power than the tartan tax though in practical terms it might not be because political constraints probably put quite a narrow band on how you can change it if for example you devolved the whole of income tax you've then got a question about the relationship between national insurance contributions and income tax and you've also got the question relationship between the kind of benefit system the social welfare benefit system and the tax system there is some some of things have happened in the last four or five years have led to some bizarre marginal rates of personal income tax at the UK level for example in context of withdrawal of child benefit in terms of removal of the personal allowance 100,000 and also in terms of pension contributions so you've got certain spikes in the income distribution and you've also got the question of the relationship between tax thresholds, tax rates and universal credit the politically most visible sign of the kind of issues is obviously the so-called bedroom tax the question is for example the Scottish Parliament took over the whole of income tax you've got into an area where you cannot neglect the issue between the interaction of the income tax and the income tax rates and the benefit system otherwise you get lots of publicity about bizarre marginal rate structures where people are actually losing a huge proportion of additional income the other point I would make is that if you've got an income tax power and this comes back to my fact point I made earlier that it's the UK that has to change if income tax is devolved but national insurance contributions are a UK decision you then get the question is that the UK government cuts income tax in England cuts income tax at the UK level contributions at the UK level so unless there's some kind of functioning concord act between the UK government and the devolved governments you can just imagine the kind of difficulties that you'll get into there's certainly scope for an interaction I don't think that those problems are by any means insuperable and I think that they come about because of the difficulties that there have been in running a simplified tax system we have a notoriously complicated tax system perhaps not as bad as that in the United States but it is nonetheless not particularly good one of the things that informed the work for the funding divo more paper was reading the Merleys review which was the very comprehensive attempt to assess what a simplified tax system looked like carried out under the chairmanship of James Merleys for the Institute of Physical Studies published 18 months, 2 years ago and there are ways to resolve all those issues as Professor Heald says they would require ensuring that you had some effective clarity of lines between the roles of these various functions and the roles of the respective governments but that's perfectly superb Professor Trench actually in your paper starts off quite helpfully by saying I'm chiefly concerned with implications of a no vote so it's quite focused on that regard you've said that you talk about VAT and you say retaining the receipts from the tax would give the Scottish Government both a direct interest in ensuring economic growth and a way of reaping the fiscal rewards for doing so that would help make a measure like universal childcare much more affordable and practical so I'm just wondering if you can talk a bit more about the potential for assigning VAT revenues one of the things that one the work on funding divo more started as an exercise to apply the lessons that can usefully be learned in a UK context and taking into account what would seem to be good fiscal and good tax and administrative practice from the many other federal and decentralized systems around the world because I was profoundly unconvinced by people who said we can't do that here it's too difficult as if the UK is in its arrangements and people are somehow less able to deal with these things than the Swiss, the Canadians, the Australians, the Germans and so on one of the big problems one comes to is that if one's to try and ensure that there is a significant degree of responsibility in the hands of developed government there are a limited number of taxes with which one can do that and several of them are not suited for devolution under any circumstances so there are significant difficulties with both employers and employees national insurance contributions for example and looking at VAT is attractive because devolving some form of sales tax is a very common approach used in federal systems so countries like Canada and the United States routinely have sales taxes at the level of the sub-state government and taxes and the receipts of taxes like VAT are very commonly used to fund state level government in countries like Germany and Australia now EU rules mean that you have to have what the EU regards as a single VAT across your member state the same rate of VAT has to prevail on a particular class of items, how you class items is a matter for national discretion but the same rate has to prevail across the whole of the territory of the member state so then independent Scotland you could quite happily set the rate of domestic fuel lower than the 5% that it presently is or higher if you were so to wish and likewise you could for example do something with the present zero rating of items like tax or children's clothing or you could choose to reduce the headline rate or increase it these are all decisions that are open to you they're not open if you're trying to devise a decentralized tax structure within a continuing United Kingdom nonetheless VAT is a very attractive tax to look at assigning the revenues of because it's a relatively stable tax in the short to medium term by the standards of taxes it's not volatile, some taxes are very volatile some aren't, income tax isn't very volatile VAT isn't very volatile corporation tax is very volatile so that's one attraction it's also over time a growth tax so it provides a secure rather than less secure basis for devolved funding and it would be hard to imagine circumstances in which you wouldn't have a sales or VAT a tax or VAT of some sort indeed it would obviously be a requirement for an independent Scotland if it were to be a member of the European Union in any event this is a tax that you need to have and you need to have at a certain level and the receipts of it are a very useful useful source of income now assignment of tax is generally regarded as an unattractive option to pursue and there are some good reasons for that assignment involves an asymmetric, in particular assignment involves an asymmetric transfer of risk it means that you bear the burdens of fluctuations in the revenues that are generated by the tax without the ability to use the rates or incidents of the tax as levers for stimulating economic behaviour or mitigating that revenue risk in my view is more acceptable in relation to VAT than in relation to any other tax principally because it's a relatively stable tax and one of the advantages of assignment is that you're able then to draw direct benefit from a successful economic policy if you're able to use the other levers regarding economic development and quite a number are in devolved hands not all by any means but quite a number are in application and financial assistance industry which could evolve cash grants, site preparation variety of options if you choose if you're able to use those to stimulate economic behaviour that enables you to benefit to reap the benefit of that as well so that strikes me as helping make the asymmetry of that risk again significantly lower and to create an incentive in securing prosperity for everyone's benefit I'm deeply suspicious about arguments about assignment because I think it confuses I'm not saying assignment might not have some rule within a system but if you want to get the accountability benefits you've got to have taxes that people can actually change basically what you will do with tax assignment is you get the amount of revenue that follows from the UK government's decisions on the tax base and tax rate I'm dubious about these growth effects particularly with reference of something like VAT the you become you basically take the risk of you take the fiscal risks of revenues falling short falling short without actually having the policy of levers it also confuses the debate because you start getting arguments about what proportion of funds are quote financed by the Scottish Parliament end quote but if you've been financed by taxes which you've got no control over at all I see no accountability benefits benefits so the crucial point is you need taxes that you can actually do something about otherwise you will end up with an all on island situation after the government of island act 1920 where in principle Stormont had lots of powers in practice it basically couldn't actually change it couldn't actually change its taxes so the danger with Kalman tax or a kind of post referendum all of income tax or something in between is basically you get a system where you have to pay the administrative costs and have the compliance costs on households in the private sector to use it so I think that the so it's not that I'm necessarily against assigning VAT if it's very clearly part of a system that has got the constitutional protection for your rights to vary the tax and if appropriate alter the tax base but pretending that saying that x% is generated in Scotland when in fact you have no policy control doesn't strike me as getting the kind of benefits that people seem to think you will get from devolved taxes Can I just come very quickly back on that I would emphasise that the devo more proposals regarding VAT assignment were part of a wider package that included the evolution of income tax and a number of other taxes which is designed to help ensure that there is a wider degree of genuine tax control and accountability but also to move beyond simply talking about accountability and ensure that there is a sustainable financial system which is rooted in something I think rather more far-reaching than that, I have to say might be a rather limited criterion I'm just going to ask one further question because obviously time is marching on and my colleagues have been very patient I want to let them in and that's just again on your own paper Professor Trench and you're talking about funding devo more you say in terms of implementation of fiscal devolution paragraph 20 you say it is worth noting a programme for further devolution that would take around 15 years to implement at least Yes Well as I say in the next sentence some steps can be delivered relatively quickly in particular devolution of income tax I think is going to be much more straightforward now than it would have been five years ago because the implementation of the Scotland Act 2012 deals with a number of the key issues that are involved and perhaps even more than the legislative changes and doing things like identifying Scottish taxpayers is making HLM revenue and customs address the issues of fiscal devolution in a more thorough going and substantive way than it has done up till now and that's a necessary step to move toward anything further than that. Assignment of VAT receipts if that's done can be done relatively quickly there are issues about exactly how much is attributable to Scotland and that's something on which work would need to be done and that would also necessarily I suspect be an iterative process it would develop over time in the same way that all this... Oh these steps are relatively quick steps to take these in my view are probably in the order of three to five years now other measures are likely to take rather longer for example one of the options that's canvassed in funding devo more not one that's been embraced at least up till now is the idea of devolving employers national insurance contributions payroll taxes that have incurred for that now that would only I think be appropriate if a devolved government were taking on a major role in relation to social security in any event but if one were to do that that involves really quite a major reconstruction of the national insurance system the routes of which go back to about 1910 and it's not been through any significant change at all since 1975 and even that was comparatively limited that's a really big administrative thing to do so that's the sort of change that's likely to take quite a long time another much more minor option that I recommend is that corporation capital gains tax in relation to land transactions should be devolved again that's a fairly significant change that would be necessary in how CGT is assessed and charged and collected so you would have to do a fairly significant change to the rules for CGT that again so that's not a straightforward step so if one were to seek to implement those sorts of recommendations in full I think one's into a fairly lengthy and complicated process because as we know Scotland Act 2012 shows us this fiscal devolution is not something that is quickly accomplished the I think the point I would want to stress is if you think about if one's talking about income tax the Kalman tax doesn't affect savings income or dividend income if you were going to devolve the whole of income tax I think one of the issues you've got to worry about is actually the possibility of a tax arbitrage between income tax and corporation tax there was an issue in the 2000s when the lower corporation tax rate encouraged a lot of new incorporations so that if the possibility of arbitraging between income tax and corporation tax and also the issue of arbitraging between income tax and income tax and capital against tax which is usually taxed at a lower rate so there are complications about the relationship between a Scottish tax system and the rest of the UK tax system that applies to Scotland that require careful thought but I've got great sympathy with the chair's point that if you're going to do things you clearly have to do them quite quickly because the critical juncture I was talking about at the beginning about arising after a no vote won't last that long so that one of the things that would be very important would be probably to get the Kalman tax implemented and actually get the income tax running while the legislation was put forward to actually if the settlement's going to go beyond that to actually do that so speed would actually be quite important so things that you could do quite quickly would actually be important to take the wind of opportunity that would then exist Thank you very much for that I'm now going to open up the session the first colleague to be asking questions will be Jamie to be followed by Malcolm Thank you I think you did feel that there is an appetite for cutting Scotland's funding in the context of a no vote that could become more of a reality I suppose the question I have is could the UK Government achieve this without officially or formally altering the Barnett formula could they use another means? If the numerical operations of the Barnett formula were actually public at the time it's done the answer is no it couldn't do it without attracting attention so my minimum my minimum requirements is far more transparency immediately about the operation of the Barnett formula I've been trying for 20 years to get the numbers in the public domain that actually are the comparable English spending which actually drives changes in the Scottish spending because they're not the same as the numbers in the identifiable expenditure in the public at specific analysis at white paper the Treasury pretends not to understand the question for 20 years now that's something that's going to be done you're going to know exactly what spending in England is actually driving Scottish spending so in terms of Barnett if it's not transparent there are things that can be done without attracting attention a delightful coverage of what happened and I think it was in 1984 when John Redwood now an MP was an advisor and the National Archives papers actually show how they were trying to do it quietly without anybody noticing so it's true particularly if you've got the tax powers and the finance minister's got to stand up and justify actually having a Kalman tax rate more than 10 or less than 10 you've got to have the guarantee that there's no off-setting adjustment made at the UK level now so that's keeping Barnett the other part of your question was probably the biggest disagreement between the co-witness myself is I do think that there will be big pressure post referendum and to in the case of a no vote to actually have a review of Barnett and when people talk about review of Barnett they usually mean cutting gotten spending because they've already decided before the needs assessment takes place that Scotland currently gets too much I mean look at the other evidence that got presented to this committee for this session so I think that it is going to be a very difficult context but I don't see the Scottish Government agreeing to a quick and dirty needs assessment particularly one controlled by the Treasury the alternative you've got are the Australian type very detailed system which is actually very expensive controversial but has been running for a very long time or the kind of few indicators few indicators but of course once you start generating a number that is advantageous to Wales or disadvantageous to Scotland and Northern Ireland Scotland and Northern Ireland are going to argue so you'll find people what starts a simple system actually becomes more and more complicated particularly as the jurisdictions that are getting damaged by these formulas start arguing you only have to look at the history of local government distribution in England to realise how political these things become the short answer to the question is that because of the nature of the Barnett formula is a fairly opaque process and we know the Barnett formula itself is well known but how it's put in operation so the short answer is yes they could cut it if it wasn't transparent the answer is they could but it should be I mean I would just regard it as a fundamental there's no point the Scottish Parliament should forget completely or income tax powers if you don't get transparency about the grant I want to come to that because you also going to say more devolved tax will mean the block grant is smaller but its role will mean critical the Scottish Government would have to be ready for extremely tough financial negotiations and you just hinted there that the Scottish Government shouldn't agree a process if it isn't to it's liking and this is an issue we're grappling with just now because the two smaller tax that have been devolved but the real issue here of course is and I suppose this comes back to the same issue with the paradox you've talked about the changing culture needs to be at the UK, the Westminster level but the real issue surely is that power under devolution power has retained at the UK level and you can negotiate all you want but they cannot at the end of the day impose whatever system they so choose can't they clearly under devolution system a lot of power states at the UK level there becomes a distinction I would make the distinction between what can be imposed secretly and what can be imposed but it's actually in the public domain what has been imposed and I think that is actually a kind of, that is actually an important difference very clearly devolution even full fiscal devolution is not independent very clearly certain powers are retained but I would argue that there are benefits in this for the UK because I think that there are important senses in which the UK has mismanaged its taxation system I've already made the point about the drift of far far more people into the higher rate which I regard as undesirable and coming closer to home Scotland like England hasn't had a council tax revaluation in 1991 basically destroying the credibility of the council of the council tax as a very important form of local taxation and the other thing you've seen in both Scotland and England has been while we're all talking about the benefits for democratic accountability of having more tax powers both the Scottish Government and the UK Government with respect to England have basically been removing the council tax discretion of local authorities either by legislative provision about referendum in England or by just playing around with the grant system so yes I think that the very clearly is an important cultural question for the UK Government but I think there's also an important cultural question in Scotland as well You've referred, Professor Heald referred to your position on the Barnett formula Professor Trench and in your paper you say no part has any commitment to change the Barnett formula after an oval and I thought that was interesting because we know that the Strathclyde commission which I understand you advised the to the creation of a committee of all the parents and assembly of the UK to look at representation, financing of the revolve bodies and manages fair to all parts of the United Kingdom I would have thought that would have involved looking at and reviewing the Barnett formula I also cited the Campbell commission paragraph 131 that states the Liberal Democrats have long believed the Barnett formula should be the place that David Cameron has previously told the Herald newspaper that the Barnett formula cannot last forever the convener cited Ruth Davidson which she has said that she thinks that we have a view of Barnett after 2014 and Alistair Carmichael has previously told STV that we, the Liberal Democrats, do want to see Barnett scrapped so should we just ignore all these people and just taking face value that the party wants to scrap the Barnett formula to decide whether you are going to take at face value those various statements which are expressing varying views and the other I was actually missing one view actually you are quoting rather selectively because you are not including the many ministerial statements of current UK government position which is no change in the Barnett formula until public finances are stabilised which has been stated so often that one loses count of the statement in the Labour Scottish Labour's devolution commission report which says no change to the Barnett formula and the fact that the Campbell commission says that there would be no change in the short term can the Barnett formula last forever anything can change absolutely there can be no guarantee written stone that the Barnett formula will last until the end of the planet earth that is simply impossible the Barnett formula has proved to be a remarkably durable mechanism and one suspects that at least some of its features would need to be replicated in any grant system that is again a reflection of the reality of the United Kingdom and of how the UK government works but as I say I just simply don't see any appetite to make these sorts of changes a significant part of my working life being with Welsh issues and the pressures in Wales situation in Wales are obviously entirely different to those in Scotland but life would have been made an awful lot easier in a Welsh context if there had been if there were any sign of a willingness to make alterations in the Barnett formula and they're simply not forthcoming despite a lot of work and a lot of political pressure being exercised that simply never come on to the table I would say would daily love to see it and they're doing their utmost to secure it The Labour position I say I select I quote a one quote I forgot to select there's Eddie Balls who has also said that of the Barnett formula it's never intended to be long term it needs to be looked at again he's the shadow chancellor he's Labour's prospective chancellor again should just ignore that so your perspective is that because they're saying one thing now an advance of a referendum assuming that when they look at it that it necessarily gets changed assuming that that is even what happens and come at the conclusion that it doesn't need to be changed I mean as I say my own view is that that the Barnett formula is for many administrative and constitutional reasons inappropriate to the situation that we now have I'm really quite surprised to see someone from the SNP speaking out in favour of the Barnett formula which was essentially a mechanism devised to allocate funds to the Scottish government which is a politically distinct government with a very distinct political composition to Westminster when the roots of the Barnett formula lie in a mechanism to allocate funding within a single government bound by collective responsibility at a time of remarkable austerity that's where the Barnett formula starts very different circumstances to those that we have now if the SNP is really going to start urging that perhaps a devolution ought to be unpicked well I think that would certainly be a headline for our colleague from the press behind me I'm not particularly advocating anything I'm advocating independence press I'm actually looking at your I'm looking at I'm looking at your evidence and your position seems to be that there will be no review of the Barnett formula after all that's what we're looking at today and I would just counter that there seems to be I hope we can invite Professor Heal to comment in a minute as well he seems to take a different perspective and there seems to be a lot of evidence out there that it is being looked at I see little evidence that there will be that there will be any significant change You take a slide I have no idea what would happen but I would fear that there would be a significant challenge because I made the point earlier that when people talk about review of Barnett they usually mean cutting Scotland's public expenditure that's usually what it means it's code language because the people who make that argument generally have formed a conclusion based on the existing evidence that Scotland is overfunded that's basically what drives it 12 years ago I suggested how you could alter the Barnett formula by altering what it converges on in a way that would actually help particularly help Wales the Labour Government just closed down all debate on it so I think that it's a bit I regard it as one of the examples of fiscal mismanagement in the UK as with council tax revaluation we've now got ourselves an enormous problem because no government dare revalue council tax council tax base because the changes, particularly in England would actually be really dramatic in a geographical sense Barnett, if there have been more transparency about Barnett and people have been willing to discuss it you could have easily made a relatively small change to Barnett which would have actually been beneficial to Wales the other thing that wasn't done was think about the English regions because it's actually bizarrely Barnett is actually blamed for the economic conditions of the northeast of England and the reason why the northeast is being hit now and a former director of finance of Newcastle City Council say that what's actually happening in local government terms in the northeast is actually worse than happened in the 1980s and Barnett gets the blame and it's nothing to do with it so managing the system we could have avoided actually having the potential crisis potential crisis after the election in terms of whether we should trust what people say now I would say no I do rather remember tuition fees in England before the last election indeed so your perspective is unlike Professor Trench where people talk about reviewing the Barnett form it's not so that they can come and say that's a perfect equation it's not going to be changed it's because they want to cut the amount of money come to Scotland I would give it given if you read the rest of the text in which people propose a reform of the Barnett formula review or reform of the Barnett formula that is a fair interpretation I think the other point the people who say there's no logic in Barnett forget the fact this is an attempt to make asymmetric devolution work for 14% for 16% of the UK population the centralisation of the UK is much more intense than the centralisation in other states of a similar size so you can criticise Barnett from first principles but what you've got to look at is what functional role Barnett plays and what I've argued is what functional role it's played is give this parliament and this government its autonomy about how to spend a fixed budget and actually give them stability about what that funding, what that budget is and my view is if you give the fact that the parliament and government has got reasonable predictability about the future budget that is actually a beneficial consequence so when people say there's no logic behind Barnett I think that's wrong I think that there is a case where Barnett ought to be managed or the name changed or something but it doesn't mean to say the idea that a needs assessment will be simple the idea that once you find out as people expect that Scotland is another island or overfunded the adjustment process will be easy I think it's just wrong by no question of a me convener again from your paper Professor you say all three from UK parties are now committed to further forms of devolution in the event of a novel but would you accept that essentially those proposals have come from the various branches of those parties and whether or not there will be further devolutions reliant on the UK political level and I know you have yourself been somewhat critical of their handling of the devolution of further powers you mentioned your devo matters blog I know that you are fairly critical of the UK government in terms of its failure to take forth the Cameron commission recommendation on the devolution of APD and again the Strathclyde commission you advised made the call for the devolution of that so happens with David Gawke a UK Treasury minister before his this was an area we were able to explore with him and it was pretty clear there was no commitment from him from his government and given that it's his party's commission it made the recommendation that you thought there might have been there was no commitment to see the devolution of APD and he called the commission merely a welcome contribution to the debates hardly around the endorsement of his own party's position on the commission I know you can't answer for him but I suppose the point I'm making is if they're not likely to devolve APD it doesn't seem realistic is it that they're going to substantially devolve anything else well I wouldn't agree I mean APD I'm just looking it up is a comparatively small tax it's about according to the institutional gyrs in 2012-13 it was about it was half a percent of total non-North Sea tax revenues so it's a very minor tax it's not in any sense a significant source of revenue it is arguably useful as a policy lever and the evolution of it was thought by Cowellman and recommended by Strathclyde commission on that basis given the overall concerns that have tried to secure a wider package for secure devolved funding I wouldn't worry a great deal about 0.5% when there are much larger sources of revenue that are under discussion so that's the point isn't it if they're not willing to devolve something so minimal why would we take it in faith that they're going to devolve anything substantial it's both legally intricate there are I gather some state AIDS issues involved there are also some quite complicated issues about airline regulation and you might have noticed that this is particularly concerned for southern England particularly concerned about where runaways get located in southern England so as is quite often the case with these sorts of issues you get tangled up in a wider debate it's not it isn't it can't be the main thrust of these discussions there is as I said in response to the convener at the beginning of this session a key reliant on the sorts of political will to drive these things and I see signs that suggest that there is a political will present that I have regretted not seeing in the past and I see that from UK party levels as well as from the Scottish parties well let's not make APD the thrust of the question then I suppose the question is you would accept this as a reliant on the UK political level that's the nature of devolution I mean you seem to indicate that there's well but there's there's no guarantee here is there there's no guarantee we're going to see this devolution well there are the political guarantees from each of the individual parties and from the statements that the three Scottish leaders made collectively a week or so ago while I was overseas and I mean the Lib Dem position of course was drawn up by Min Campbell a former leader of the party at UK level I gather there were extensive consultations between UK and Scottish parties in relation to the framing of the Scottish Labour Devolution Commission and I believe there's very clearly very significant support from the Conservative party for the Strathclyde Commission as was shown by the Prime Minister when the report was published UK minister before us he referred to the Strathclyde Commission as a welcome contribution to the debate you don't view that as certainly I viewed it and others might as just kicking it into the long grass the last time I looked the Prime Minister back rather ahead of the Executive Secretary to the Treasury in the political order the Prime Minister better have a word with Mr Gawk then hasn't he because he was here giving us evidence and he wasn't sticking to the message then was he better record for Mr Gawk I think one of the main issues that's emerged from both of you this morning is the importance of transparency in relation to the Barnett formula and I noticed that Alan Trench referred to this in connection with funding devil more and he said the issue of suggestions about greater transparency and greater scope for impartial intervention and review of decision making in relation to the formula we're all dealt with there now I know you'll be shocked to hear this but I haven't actually read chapter 7 of funding devil more and I wouldn't ask you to give a full account of it but it would I think be helpful to us if you could kind of in a few sentences given that it's emerged as perhaps the main theme of this morning if you could sort of at least assure us that there are concrete ways of dealing with that problem and no doubt to suggest ways of doing it as well Chapter 7 of funding devil more which I would be happy to read for the benefit of the official record if members would so wish is headed institutional implications of reform and it looks in particular at two specific issues one are arrangements for tax collection and the other is wide arrangements in particular for the remaining grant element and funding devil more talks about a very different approach to grant to the Barnett formula and I would draw your colleagues' attention to what it says in I think it's chapter 6 chapters 5 and 6 on that point as far as the institutions are concerned I think there are some very strong arguments to continue to use HMRC as a tax collection agency particularly well for VAT I think it's inevitable given EU rules and also for income tax because otherwise you significantly increase complication for taxpayers you're likely to lose many of the benefits of the PAYE system which are huge it makes life very simple for taxpayers but it also makes tax collection both cheap and effective for government our system is rather good for all the problems that exist within HMRC on which I suspect you're better informed than I am that said I think that means some changes in the governance arrangements for HMRC which would include things like quite possibly appointing a member of the board of HMRC so that it becomes accountable to all the governments on whose behalf it collects taxes rather than simply being an agency of the UK government that happens to hand over a chunk of the revenue that it collects to one of them and I think that there also there needs to be some sort of independent body established more generally to review the system and in particular to carry out calculations in relation to grant and manage that transparency and I think that the model the best model that I've seen comparatively for that is that of the Commonwealth Grants Commission now as he had mentioned earlier the Australian approach and on the level of how the grant is calculated I entirely agree with him it's a system that's wide open to gaming that's quite expensive to run is really very unwieldy but the role of the Commonwealth Grants Commission as an institution is impressive it's an independent commission appointed partly on nomination of the states partly on nomination of the federal government the members are impartial independent once they're appointed as is the chairman and it provides advice to the very public advice very formal advice to the federal tretyer the federal equivalent of the Chancellor of the Exchequer who has never been known not to act on that advice so although it is technically an advisory body it is extremely authoritative advice and any departure from it would be very conspicuous and be likely to trigger major sources of political dispute so I think that that ends up being about the best approach that there is to be found around from around the world and it's one that I think would work well in a UK context anything more about transparent how we actually achieve more transparency Professor Hildur is that basically the Chancellor of the Exchequer has got to tell the Treasury to do it I mean the kind of we come back to a point that came up earlier Scotland's 10% of the population of England yet as with the six nations we actually think of ourselves as equal to England and so in a sense Westminster Westminster and Whitehall are to some extent inevitably dominated by a London a London and UK agenda I think that the crucial point that we agree with that we need something like something like a territorial checkerboard to actually manage the mechanics but I think crucially to make the tax devolution work the UK has got to bring its budget forward so the UK has got to bring its budget forward there's no reason why the UK has to set its tax rates at the end of March so if the UK budget came forward around the December time at the time of the autumn statement which basically is another budget every year it would be much simpler to coordinate the tax policy at the UK level and at the Scottish level and the more interfaces you have between taxes run by this parliament and taxes run by the Westminster parliament that becomes very important so transparency is not difficult there's two things about transparency one is the information has got to be put in the public domain at the time and secondly, there has to be sufficient background explanation so that it's actually accessible to people so saying it's published in some obscure place on the Treasury website or on page 321 of a budget document doesn't actually help, necessarily help so it's going to be up front and in time so it's a political will question Well I think the other main theme of this morning is also a political well question obviously just to what extent Barnett would be changed soon if there was a no vote and I agree with Alan Trench on this and like him I think the views of leaders leaders of political parties are what we should be looking at rather than some others that have been emphasised and I suppose the other thing seems to me that feeds into this is because we are and again we believe on a no vote that would be more fiscal devolution that that in fact in itself in the short run I think and possibly the longer run actually helps to entrench the Barnett formula because firstly you have obviously a smaller block grant in the context of fiscal devolution but secondly when you're in a period of transition like that you need to have stability in the grant mechanism in order to make the fiscal changes work which is why I think you have the kind of no detriment commitment so I mean would you agree that in fact in the context of more fiscal devolution in a kind of way that is a reason why there will not be some dramatic change to the grant mechanism during that process of change I think that's well I think that that will certainly be an argument that would have a lot of attraction to both UK ministers and UK officials whatever its merits might be here and as I say one of the great virtues of the Barnett formula system is that it produces stability and predictability in public spending for all the problems of transparency that there are it's nonetheless better at that than many other systems moving to a system moving to greater reliance on own tax revenues is necessarily introducing an element of volatility and I suspect one wants to be able to manage the risks of that I suppose the other thing that we talk a lot about in the context of further fiscal devolution and particularly in terms of the income tax powers we're getting is the block grant adjustment and obviously there's I think an agreed kind of formula for that I mean how does that interrelate with these discussions about transparency of the Barnett and so on because there would seem to be some relationship between the two Indeed I mean Professor Heard has been touching on this regularly during this discussion that mechanism certainly and I entirely agree with him needs to be very very clear and it needs to be as transparent and mechanical and automatic as possible once it's agreed and put in place because otherwise you run into the difficulties and the dangers of having a soft role than a hard budget constrained and that's disadvantageous I think on both sides it certainly is likely to lead to difficulties in the mediums and longer term and this is actually one of the reasons why in the medium to longer term there are arguments to look at to review the Barnett mechanisms whatever one does with the quantum of funding those mechanisms are likely to get quite creaky if you get to the point of significant tax devolution because you're going to be using an increasingly notional idea of the Barnett formula the block grant as it would be under the Barnett formula which as Professor Heard has been explaining is something that's quite hard to measure about which there's a lot of doubt when one gets into actually ascertaining what's going on on the one hand and on the other you're then going to be talking about what will necessarily be notional estimates of what would be tax revenue if tax decisions in Scotland had not been made and so when you've got that level of notional calculation going around there can be some quite significant issues I think coming back to accountability and transparency and the mechanism that's outlined in funding divo more is an attempt to get round those and key to that actually is some periodic mechanisms for review to avoid exactly the situation that we've been that the Professor Heard's been discussing regarding council tax and the absence of revaluation these things go badly wrong when they are simply not not kept in good order and they're periodically maintained and reviewed in order to work So just two final points to Professor Heard one looking forward and one looking back you refer to NHS expenditure in England projected to 4x9.1% Well that's real-time age adjusted which is an interesting concept but I mean surely the fact of the matter is that because of the health expenditure in accordance with inflation that actually works to the benefit of this Parliament in terms of the significant amount of consequentials that flow from English health expenditure There's two parts of that One of the advantages of the system for Scotland has been that the big cuts in local government in England and cuts in education as a whole and law and order and justice have been significantly offset by increases in English health So the Cabinet Secretary for Finance had the option of not penalising local authorities anything like as harshly has been done in England So it's been a very good example of the fact that things came into a pool of money which was a Scottish decision about how to spend it has actually been a significant protection I mean, I just I think it comes from the Institute of Fiscal Studies but the concept of age-related health it seems a bit misleading really because it's still increasing in line with inflation which we all know is not enough but it still actually helps the budget of this Parliament I forgot that point when I was answering I think that is a pretty big signal to the Institute of Fiscal Studies that they don't think the UK plans are sustainable that's taking through to 2018-19 which is beyond the kind of any detail plans being available because spending review 2013 only covers 2015-16 I think they're trying to send a signal about actually that is actually not sustainable and I mean very clearly that they're making the point that even with the ring fence in real terms on English health expenditure the actual effect of what in the jargon is called the relative price effect that costs got faster and in health then the economy is a whole and also the population composition has changed I think the IFS are trying to signal just quite how tough the kind of plans are even with protection so I think there is a signaling thing going on that after the next election the projected forward plans are going to be extremely painful it's mainly a point about health and the nature of health expenditure which would be the same whether we were part of the UK or independent I mean there wouldn't be any difference in that my final point is looking backwards which was the interesting point you made about temporary barn at consequentials but I don't know, I mean I seem to remember arguments about the baseline stretching back but surely the point there is that that would also simply reflect a corresponding fall in the English baseline so it's not really a change to the Barnett formula in that sense because there would only be a change to the Barnett formula if there was a relative advantage to England rather than Scotland I mean there is in terms of the Olympic example but in terms of changing the baseline I mean people are always arguing about changing the baseline but it's not really a change in the Barnett formula is it I understand your point relative to England but it is a way of the treasury imposing cuts on future budgets without actually being quite open about what is actually happening but I agree it doesn't affect the Scotland England relative if the reversal goes back through the formula in the way that the regional maps came through the formula I agree with you Jeane Freeman followed by Michael Thank you Professor Trench you equate a no vote with a rejection of full fiscal autonomy is it fair to say that you believe that divo max could never be achieved under a union I think that to the extent that full fiscal autonomy is necessarily part of that maximal form of relationship that would involve the UK government being responsible for Scottish for defence, foreign affairs international aid and conceivably immigration but nothing else in relation to Scotland that's incompatible with the union and that a no vote in the referendum is also a rejection of that option So would you say that the plans put forward by the no camp or the no parties really is devolution for devolution's sake I mean it's it would transfer some powers not necessarily because of financial getting it right financially but politically Well I can't comment on what will actually happen in the future after a no vote process that will follow a no vote but certainly what funding divo more was trying to do was to find a workable has been doing is to find a workable model for further devolution I don't know what devolution for devolution's sake means what's very clear to me looking at the evidence most particularly from Scottish social social attitude surveys over a decade is that Scottish voters like devolution and they want more of it they want extensive self-government within the union not outside it that doesn't appear to me to necessarily to include divo max though conceivably it might but that I don't think is acceptable on the other side of the equation so the question is finding out how one can establish a workable scheme that broadly speaking corresponds with those preferences of Scottish voters that is also compatible with their other preference to remain within rather than outside the UK I think the other point I would make is that what to remember Wales and Northern Ireland Scotland and England are remarkably alike on average in for example GDP and fiscal capacity but Wales and Northern Ireland are actually much poorer so you can actually run fiscal devolution as far as Scotland is concerned without worrying too much about equalisation of tax bases but the potential yield per head of income tax for example in Wales is very significantly below the Scotland and England levels so that one of the things which will come out in debates after the referendum would be the question about how does what one gives Scotland affect what is in future possible for Wales and Northern Ireland and there is an important sense in which Wales and Northern Ireland have been carried along by Scotland over the last 20 years but very clearly not only are Wales and Northern Ireland much poorer than Scotland Wales in particular is much more economically integrated with England than Scotland is in terms of running a tax system the Halsam Commission has got a wonderful diagram showing what proportion of the population live within 50 miles 25 miles or 50 miles from the border so that basically the English Scottish border is not highly populated so running a separate tax system in Wales is much more difficult but still I think that in terms of what Scotland should be thinking about is what is good for Scotland but also what the implications are in terms of a possible extension of certain parts of that scheme to Wales and Northern Ireland If I might just add that's an explicit part of the design of the Diva Moor project it's been deliberately designed to try and work out what's workable across the UK as a whole not simply in relation to Scotland but with the expectation Scotland would be first in line but not necessarily the only part of the UK in line Given that Professor Heald you said earlier that you had been I can't now remember the context but you were pushing for recognition or some changes for the last 20 years and clarity over taxations and so on Would you say then that devolution in Scotland and then the advent of the SMP majority government has actually forced all of these issues to be seriously considered and that in a country with a very complicated tax system which is desperately I believe in need of change that this is a fantastic opportunity for that The problem in the UK is that people tend to want Scandinavian levels of public services for American levels of taxation that's a fundamental problem and one of the issues about fiscal devolution is that I notice that there is a kind of something of a misalignment between people wanting to spend more and actually wanting to reduce taxes that aside I think your basic point is right I think the fact that the SMP majority government bringing around a referendum has actually brought this back on the political agenda but very clearly this argument is being going back to the 70s about what the right way of funding a devolved Scottish Parliament would be as I've said right back to the 1970s I have been an enthusiast for tax powers when there was virtually nobody else keen on tax powers for a devolved parliament but the point I'm making now is although I still remain support for tax powers on the system as a whole as a whole works so your point about this being a window of opportunity I agree with this may well be another push in the same way the term 18 years of Conservative government in the 1980s and 1990s actually was the push to why the Scottish Parliament happened in the first place just finally you've mentioned at one point with reference to the Barnett formula a kind of irritation politically I presume with the fact that the Scottish government has not imposed tuition fees I mean is that not the whole point of devolving funding that one country makes different priorities I couldn't agree more with you however the way it's seen in Scotland is that variation always involves more expenditure in Scotland and people have then made one further step and argue the reason that Scotland can afford it is that Scotland's overfunded in the first place that's the logic behind the position I was describing Do you ever correct them? I think that there's been a successive Scottish governments have been nervous about having the issue open not least the fact it is going to be if there is a needs assessment it will be a little bit of a little bit of a question I think that there's been a need assessment and the Treasury since the 1978 one published in 1979 there have been some informal exercises and some rather more systematic exercises with the Treasury on needs assessment so if there is a needs assessment it will become an incredibly time consuming exercise contrary to what for example, Gerald Holtam thinks I think that once it gets started it will get legs of its own and it will be a quite a long and painful process That could not be avoided with a yes foot I'm not here to express constitutional preferences Thank you Thank you for your evidence so far it's good to hear from experts this morning You mentioned earlier about the desire to have high levels of public expenditure at low levels of taxation Professor Heldon in your paper in relation to the implications of extra tax powers At point 12 you make four what you say are highly relevant observations the fourth of which at point D it claims that lower tax rates could be self-financing through higher economic growth should always be treated with suspicion but that's exactly what's on offer to us at the present time we're told that regardless of any fiscal deficit that Scotland might have we won't need to increase taxation we can continue to spend more because there is a magic bullet co-operation tax which will solve our growth problems and solve all of our financial problems should we treat that with suspicion? Yes, I think that we should always treat I mean when going back to Ronald Reagan in the US when people start arguing that you've got to get enormous supply side effects from reduced taxation you should be suspicious One other thing that what you may do is you may as with Ireland and Luxembourg you may attract corporate tax domicile so what you may get what you may get is significant increases in your co-operation tax revenues without much real benefit real benefit to the economy I get very annoyed at people on posters for example having comparing GDP now GDP is a useful concept but you've got to understand what's involved and the countries like Ireland and Luxembourg have enormous differences between gross domestic product per capita where they're enormously high and gross national income per capita where their levels are much more much more suppressed because there are claims of foreign residents on the production in the case of Scotland, North Sea is a very significant example where the incomes generated in North Sea a lot of them don't actually come to Scotland because the people that work there aren't necessarily Scottish residents and the companies are foreign owned so a well designed tax system and Merleys report has already been mentioned a well designed tax system may have beneficial effects on the economy but playing around at the edges either with co-operation tax which everywhere is going down rapidly anyway so you can't reproduce the Irish Merkle with co-operation tax because the trend internationally of co-operation tax is to fall quite dramatically and with their passenger duty you may get some recirculation of journeys from English airports to Welsh airports to English airports but the extent to which a real economic benefit or basically just a transfer is something you should be careful about I don't think I have a lot to add I think that the hazard with co-operation tax is exactly as Professor Heald says that you get what's known as brass plating to little economic utility and that applies whether you are devolving it or whether you're exercising it within an independent state We've heard an evidence to this committee before that even if we have this argument around lower co-operation tax that the margins that have to be extended in order to get the benefits if there are any benefits have to be quite extensive the Scottish Government are proposing a 3% difference between the co-operation tax rate whatever it is across the rest of the UK that they would maintain a level more than that but the evidence that we've been given is that the difference between Germany and Ireland is something like 18% and still the difference is not significant in terms of attracting inward investment so is that the type of levels of difference that are required before we can see any financial benefit from co-operation tax in relation to competition I think that's certainly part of it I mean Professor Healds mentioned the Irish Miracle it's fairly clear that the Irish Miracle was dependent on a number of factors one of them was a skilled English speaking workforce and a young workforce another was that the Miracle more or less coincided with the completion of the European Single Market so Ireland was able to mark itself using that combination of incentives as a very attractive place for particularly North American corporations to do business and gain access to this dramatically expanding European market in a relatively friendly way because they had access to English speaking workforce number one that trick has already been pulled and it's likely to be a one round exercise so Scotland would not be able to replicate that number two we all know how that story has ended and part of the problem was that the economic boom that it triggered turned into a real estate boom that went spectacularly badly wrong and both affected both not only private finances but also public debt as well from bank bail out so Ireland gives you I think more lessons for caution than lessons for optimism and as Professor Hill says corporation taxes are declining tax over the long term this is one of the reasons why I think assignment to VAT is of the options available a very attractive one it's a growing tax growth tax rather than a shrinking one that's why in Australia the GST was deliberately sought by the states to be the underpinning for the redistribution system for their funding because they wanted access to a tax that was growing over time what happened shortly after the present form the system was introduced was that because tax receipts had been increasing so dramatically through the GST the federal treasurer tried to get his hands on them and had to be fought off because he decided that the deal that they'd offered was not such a good deal after all but he was fought off and the states continued to benefit from the increase of that pool of revenue it's an interesting argument we've discussed this previously and had evidence that VAT would be a better use of tax-raising powers to benefit Scotland but we have to do that in the context of the UK being the member state of the European Union and the example you've given us there is of Australia so the problem that I would foresee is would the European Union permit such an arrangement are there examples of that in other European Union states? The Australian system as such would be perfectly capable of being applied elsewhere if the conditions were right I don't think that the Australian model is right in the UK context because the UK has decentralised much much more spending responsibility than the Australian system and it's a significantly more unequal country than Australia is Australia is a remarkably homogeneous country with a couple of pockets of quite serious poor tax performance and high spending need one of them is Tasmania which is reasonably but not very popular and the other is the Northern Territory which is very empty indeed and otherwise Australia is really very homogeneous it shows some patterns of change over time which is also a contrast to the UK in which states are the more prosperous or the less prosperous but if you wanted to import that model because the GST is a consistent tax across the whole of Australia subject to certain fairly limited adaptations I don't see why you couldn't as a matter of principle impose that in the UK Thank you, Gavin to be followed by John Thank you Professor Trench paragraph 20 you talk about the timescale of implementation I know the convener who asked a little bit on that first she clarified that the 15 years would refer to capital gains tax and national insurance you felt the other measures could be implemented relatively quickly just for the record what do you define as relatively quickly for income tax first of all? I said earlier 3 to 5 years I mean as I say I think this certainly as far as Steve Omore is concerned this is a program not a simple one-shot arrangement one other aspect is perhaps worth mentioning as well as I mentioned is alcohol and tobacco duties and I think particularly from alcohol there's a very strong case for devolution of tax there to get around some of the problems particularly that minimum pricing introduces and because the social problems that arise with alcohol consumption in Scotland but there are real difficulties with doing that they arise from EU law and it also has to be said from the Treaty of Union because the Treaty of Union said there has to be a single level of excise duty within the new United Kingdom now and the EU rules are fairly significant there are two ways you can address that is what is the sequence of bodges and work around to try and mean that there is a tax charge that inflates the price that therefore brings revenue to the public purse as part of the mechanism for using price to discourage consumption and that's a convoluted way of achieving a goal that I would rather achieve directly if one could the direct way of doing it would be by some sort of supplemental sales tax but that conflicts with the EU rule for a single VAT now I suspect that that's one of those rules that if in the right circumstance if the game were played in the right way might be capable of being changed it would be a significant change at EU level and one would need to play the EU game very astutely and recruit the appropriate allies but there are a number of European member states, EU member states that do have interest in fiscal devolution and I wouldn't regard that as being a lost cause at the outset however difficult the path to ending it might be In terms of the time scale for the assignment of VAT is that a similar time scale to the income tax one so probably three to If anything it could be done much more quickly I think the real obstacle there is because it's the tax will continue to be collected by a single agency the question really is working out the appropriate apportionments in relation to Scotland and the mechanism for apportionment and we have of course figures in Jersey that are based on an understanding of how much VAT revenue is attributable to Scotland but those numbers would need to become much more robust and the mechanism for calculating them capable of agreement and agreed between the governments involved Thank you In terms of, one of your reasons for suggesting VAT is that you describe it as not a volatile tax now obviously one can study the figures but how volatile is VAT when compared to say income tax can you give us just a rough estimate of how we compare There are some figures for this that you will find on table 4.3 of funding divo more that try to show this in relation to VAT income tax and corporation tax at UK level and for Scotland, Wales and Northern Ireland The short answer is that it is it's more well I'm hesitant to say definitively because the numbers which I used at that point were the best numbers we had they're now a couple of years out of date the methodologies have changed and it depends very much on one's talking about a recession as deep as the one we've been through when exactly you start and when you stop because that really can introduce quite a significant skew in aggregate broadly it's roughly about as volatile as income tax one of the things I was intrigued by and thought was a very useful fact while working on funding divo more was that they run on different cycles that that VAT receipts took longer to fall than income tax but came back somewhat later and that means that actually the two taken together help balance out each other's volatilities so as part of a package of funding that strikes me as a way of actually using one tax to help manage a risk from another in a way I think is quite attractive ought to be attractive in the point of view of finance minister You talked about VAT you believe is going to be a tax that is growing in terms of the revenues collected is I suppose it's hard to say predict too far into the future but is that one that's going to grow in the short to medium term and the long term or is it one that you just you can't predict what happens but do you think it's broadly one that you see growth in perpetuity? I don't know about in perpetuity but I think it's fair to say that in the medium to long term that taxes like corporation tax are under really serious pressure on the worldwide scale and that the burden of taxation is shifting toward indirect taxes like VAT Professor, I hope just briefly on that point I mean you talked about you said we ought to be cautious I think about assignment just to be clear are you saying you would be against the idea of assigning VAT or are you saying be cautious about and make sure it's done as part of a package I think you said you don't have the same accountability factor The point was there comes a public confusion about whether you actually the revenues you raise that you have control over revenues that you don't have any control over the assigned VAT what would have no control over the amount of revenues you get and if you get a recession like in 2008 you're going to have to have quite deep borrowing powers because obviously what one doesn't want to do is adjust your spending sharply downwards during a big recession like that so very clearly if you have assignment you have to have some kind of borrowing mechanism which might be a genuine an external borrowing mechanism or it might be within the funding system of the relationship with the UK government The point I keep making is that I worry about people's enthusiasm to have more tax powers but then ended up with a system where the tax powers are unusable they ossify the minister of infrastructure collapses and when the finance minister wants to use them upwards or downwards you find you can't actually use them I may have happened a couple of years ago in Scotland I'm grateful for that I was particularly interested Professor Hildon in you talking about the Scottish rate of income tax the current suggestion that a deadline of lay often would be set on the Scottish government and Scottish parliament outlining what that rate would be we've obviously touched on this as a committee and I think we're going to be doing future work on it over the next year or so in terms of trying to get round that issue clearly you could bring the UK budget forward to November December as you alluded to you could delay the Scottish budget or change the deadline to say that you don't have to tell us in autumn that you can tell us in the weeks leading up to the budget I suppose there are different ways round it how much thought have you given to how we might solve this problem and I just wonder if you have anything else to say on it because I think it's pretty important I think the point I was making is that once the Scottish parliament decides to use the tax power differently from the Kalman 10 you immediately get the question is what is the UK Government going to do in March that's going to affect either the yield or the political acceptability of it one of the things the Office for Budget Responsibility says is the income distribution in Scotland is actually quite different from the income distribution of England particularly if you take London and South East in the sense that Scotland has got fewer very high taxpayers and more people who are low taxpayers so the actual distribution of where the revenue comes from is different so any decision taken about thresholds and about whether thresholds are indexed for example is going to have significant effects are also I made the point that in the public mind there isn't as much distinction between national insurance which as an economist I would regard as a tax anyway and income tax so what the UK Government is going to do Gordon Brown when he was Chancellor of the Exchequer was quite keen to say I'm not going to put income tax rates up but he did actually put up national insurance contributions so the Scottish Government's budget calculations and the political credibility and acceptability calculations were raised up my view is it would be hugely beneficial to the UK to pull the UK budget forward and that would enable a sensible debate to take place in Scotland and in the UK about budget changes because Chancellor survived in the UK Parliament on pulling things out of a hat without any kind of parliamentary considerations and significant mistakes in UK budget policy the 10 pence rate introduction and the 10 pence rate cancellation were both in my view misguided policies but there is a pressure on the Chancellor to do something the Lamborghini exemption for the so-called Lamborghini case of people not having to put their pensions into newities in another one there's great pressure for the Chancellor in Westminster to actually have something exciting to put in the budget now I would regard a good budget as one which was not exciting but that is not the political the tax system has to be managed in the medium to long term so what you run the danger of is getting remarkable amounts of silly churn and I think that bringing the UK budget forward getting some kind of proper parliamentary process at Westminster where the Chancellor actually comes with a draft budget there are some things on the tax side you very clearly cannot announce in advance because people would evade or avoid but quite a lot of things you can so there would be a much more serious debate at Westminster in terms of what was going to happen to thresholds rates and I say that the remarkable successive governments obsess about not putting up the basic rate of income tax at the time they've allowed fiscal drag to take 3 million more people into higher rate at what I would regard as relatively modest levels of income so I think that bringing everything forward bringing everything forward at UK level bringing things forward at UK level and actually having a serious parliamentary debate about it but obviously part of the political power of Chancellor's involves not telling people what's going to be in the budget If I might just add one point I quite understand the concern about the impact of UK level decisions being taken that then impact Scottish public finances because the tax decisions already being taken in principle the approach that I understand has been agreed for making the tax adjustment in the block grant the so-called index deduction route is supposed to allow for those changes in the tax base as well which then in turn has the further advantage if it works properly of reducing the significance of the guarantee of the no detriment principle because it shifted it to what ought to be an arithmetical figure because you're looking at the overall base not particularly a component to that so is in fact another question and it's something that I would strongly recommend your committee look at but that is the principle that lies behind that approach to making the reduction in the block grant to allow for the Scottish rate of income tax Professor Heald a good budget is one with nothing exciting in it is a quote I may borrow if that's okay at some point going forward Just finally then again Professor Heald in your paper you talked about as the weakening of local government at least from a financial point of view in that their tax powers compared to say 10, 15 years ago are lower now than they were this is an issue that I guess will have to be addressed in Scotland whether we become independent or not it's an issue that will have to be addressed in England, Wales and indeed in Northern Ireland I just wonder if from your point of view have you done any work on this specifically about how it might be addressed at this stage flagging up the issue I'm simply flagging simply flagging up the issue my knowledge of local government finance has deteriorated over the years but if you want a property tax is a perfectly sensible tax for local authorities but the political system above local authorities is going to not make the power unusable so the power setting council tax has become objectively unusable for local authorities and that can mirror my concern that the use of a devolved income tax might become unusable as well clearly what's needed in council tax is a revaluation there needs to be a regular cycle of revaluation the I thought that all the discussion four years ago about mansion tax was completely misguided because you could very easily break top bands of council tax up incidentally most of the benefit of that was going to a very limited number of local authorities which would probably have to go through the equalisation system anyway there is a political problem because whenever you do a council tax revaluation people will assume that their bills will go up a lot of people's bills are going to go up very significantly because of the misalignment between value existing bands and the property market reality so you've got to have a mechanism at the scotland level and a mechanism at the england level which will probably be quite tight central control for a period to make sure that make sure that average tax rates didn't go up and because it's 20 will be 25 years before anything's done at the minimum damping process to make sure people don't get hit with a really big increase are going to be over a long term thank you this will be glad to know that I'm the last committee member to ask questions Professor Trench listening to you and you've talked about a lot of different taxes over the last couple of hours you were pretty positive about controlling that because it's growing and controlling alcohol duty because also there's a social issue in there which we need to address in scotland and neither of these can be controlled under devolution because of the European Union rules so are you actually saying that that would be a strong argument for independence that's I'm saying that if what we're trying to do is to finance a devolved government within the UK given how the UK works on the various constraints that the UK has these are the means this appears to be the best mechanism for doing it and these are the difficulties and this is how you might address them because the decision about whether Scotland should become independent or not is being taken above certainly above my pay grade and I suspect above yours by the people of Scotland Thank you Professor Heald you mentioned in paragraph 14 about the kind of some of the frightening prospects of cuts in UK expenditure have we got any actual figures on these as to what you specifically mentioned the NHS 9.1% reduction what that would mean in England and what that would mean to the Scottish budget well the there are no number because of the election because of the UK general election spending review 2013 only dealt with one year so there's only segregation of spending for one year but there are totals for the next three years and those numbers are things which the Institute for Physical Studies and Office for Budget Responsibility have actually projected forward given government statements about both the totals and the protection of health and schools expenditure I think there's an element in those numbers that the OVR and IFS are flagging up questions about the actual sustainability of those numbers whether it really is possible to reduce public expenditure in those areas by so much I think there's a kind of political flagging going on going on there but if that does happen that will actually produce with the continuation of Barnett it will produce negative Barnett consequentials but the UK as a whole is facing a moment when it has to decide about whether it wants to pay taxes or whether it wants to go to a level of public spending last seen I think IFS said in 1948 as a proportion of GDP despite the fact that we know from all the fiscal sustainability projections the demographic change a proportion of older people and the effects on health expenditure mean that there's going to be intense pressures and one of the things which has happened in Scotland is that the Scottish Government has softened some of the sharpness of what's happened in England by the fact it's had the expenditure of flexibility so there hasn't been the Scottish local government might think it's had a bad time but compared to what's happened in the industrial cities in England it hasn't had anything like it's bad at time and that has been part of the advantage of actually the discretion that Scotland possesses The choice over which we have little control by a future UK Government was to reduce expenditure that inevitably flows through to Scotland as you've just said by the Barnett formula so we would be hit by both the actual cut and then on top of that potentially any Barnett changes so it would be the two things It's come through as Barnett changes Sorry, they come through as Barnett but if Barnett itself was reorganised potentially You mean Okay, if something takes the place of Barnett and it is assumed that Scotland is presently funded to generously there will be that as well, yes There will be two things there will be a real cut plus the Barnett reorganisation Okay, thanks Professor Trench A welfare once or twice in your papers I think first of all a paragraph 5 You seem to be kind of assuming that welfare is not something that could really be devolved to any greater extent or you're maybe just forecasting that you don't think there's an appetite for it As you may know we've done quite a lot of work through the IPPR project on welfare as well and published a report early this year called Devo More and Welfare that addressed these issues in some detail and recommended devolution of some benefits including notably housing benefit and attendance allowance and a power to provide supplemental work for devolved governments to be able to provide supplemental benefits cash benefits if they wish from their resources but also recommended that if Scotland remains in the UK that there needs to be as part of that an ongoing social union that embraces key elements of the redistributive welfare state interventions and also benefits like job seekers allowance and the disability and incapacity benefits and that that I think has to be part of and again it's another implication of a no vote that remaining in the UK means that there remains substantially a UK wide welfare state and there would be with particularly the power to supplement welfare under this model a very extensive scope for Scotland to provide more generous levels of welfare benefits if it saw fit but that those rights that would be part of the social union would exist across the UK and be held in common for all UK citizens whether they lived in Scotland in England, Wales, Northern Ireland so that is the essential presupposition there and it quite hard to work out how you would devolve more benefits other areas of welfare even if that were desirable outright it would be quite problematic in a number of ways to do and would impose we thought asymmetric risks given the nature of welfare spending and the ability of the larger government to manage those because it's got access to a wider tax base if I could come in there is I think over the last few years a challenge to long standing concepts about territorial legalisation in the UK I've emphasised them in the context of England the south east London and the south east transfer significant revenues to the rest of England and the people in different areas are more questioning about their transfer to poorer areas than they were before in a way you could argue that at an individual level people are well off are more questioning about transfers to people who are less well off the point I would make is that there is often controversy in Aberdeen and the north east of Scotland about Aberdeen not being as well funded as Glasgow for example about who actually gets the money so there are equalisation issues at a UK level but also equalisation issues within the UK specifically coming back to your question about welfare I don't really quite know where the line exists but I do have some sympathy with the view that the kind of national insurance and social security probably do belong to the higher level this is a kind of very troublesome issue troublesome issue in Belgium where most of public services are most of public services are devolved but the social security is actually still operated at a federal level but under challenge so there is a question of how far you go and as people individually and territorially start wanting to keep what they kill and there becomes more reluctance to actually make those geographic transfers that's the area I was kind of interested in because this idea I think the argument seems to be that the welfare side is so fundamental to the UK it has to be kept centrally but some people would argue that for the NHS as well and yet the NHS has been devolved and I think we are seeing some differences in the way the NHS is going and I mean on top of that even within welfare although it's not devolved the two largest parties here agreed that we didn't like the bedroom tax and 50 million was found to kind of deal with that so there's a desire to go into that area why is the NHS and the welfare different? Well it's partly that you are where you are and the NHS was devolved in large part because administration of the NHS was a matter for the Scottish office whereas welfare has been in the hands of the DWP and its predecessor department since the welfare state was created but Scottish health service or the NHS in Scotland was always administered by the Scottish office and devolution built on those routes I suspect that many people think that the way that the NHS in particular was devolved was probably not the best way of doing it simply in the sense that some sort of high level definition of what the NHS should be about might have been a good idea to have been written into the settlement so that you would have defined the purpose of the NHS as being to provide universal care free at the point of use whereas as matters stand it would be completely open to the Scottish Government to abolish the NHS to abolish the NHS if it wished to there's obviously no political will to do that but that's a choice that would be open in Scotland as it is in England the difference of course is that in England there's access to a wide range of other policy levers to shape and implement some sort of replacement for healthcare and that would be much harder to find in a Scottish context to use your example of the welfare of the bedroom tax or the bedroom subsidy or a way through but you had to find a rather intricate way through and that itself involved a measure of legal accommodation from the UK Government in order to make sure that could happen what I'd like to see is a much more straightforward way to be able to accomplish similar end and that's the purpose of the supplemental welfare power some welfare being transferred but not just not the whole thing indeed and as I said key to the divo more model is the idea that there is a power to provide supplemental welfare so if Scotland decides that UK levels of welfare benefits in some particular area are inappropriate it's able to find the resources to supplement those Can I just come in on your question about why the NHS is different from welfare I think that psychologically people do distinguish between cash benefits and services in kind it might not be entirely rational that people make that distinction but there will be kind of very strong political opposition in the UK and in Scotland to actually differentiate old age pensions according to which part of the UK you live so there are some things where people even though the purchasing power of old age pensions actually varies a lot depending on where you live on the cash cash transfers I think there is a reluctance to actually depart in the same way that you would get political opposition to a regional minimum wage lower minimum wage in Glasgow and Newcastle than in more prosperous parts of parts of the UK Living wages regional is it not because it's different but the minimum wage isn't the living wage at the moment is a kind of voluntary type mechanism so there is a reluctance to go that way whereas clearly it has already been said that Scotland always had its own administrative institutional structures for the NHS but this relationship between cash and services is obviously a difficult one my instinct is that you don't devolve welfare to a Scottish Parliament but there will be lines there will be areas where you might take a different view where there is a clear connection for example housing benefit where a very clear connection to a devolved function you may well manage the system much better so there are areas where I think the choices are quite difficult but I would be sympathetic to certain things but I still think the unified social security system is actually quite an important part of that union if we said to Scottish pensioners do you want to stay with the UK pensioner or would you take a pound more from the Scottish Government I bet they'd all want devolution but the obvious question is how are you going to fancy that Pemmo that's the point everybody is very keen on spending more money but nobody tells me how are you going to raise that extra money and funding the Pemmo would let you provide an extra pound to Scottish pensioners if you wished I think the administrative costs of an extra pound would probably exceed any benefit You mentioned to Professor Trench in paragraph 20 the national insurance fund I mean there's this whole misconception that people think there's a fund sitting there with all their national insurance contributions in it I mean you've also going to have argued against Scotland handling national insurance maybe and income tax together and yet it seems to me that by combining the two that would be a huge step forward we could simplify the system that would actually help business if it was simplified I don't know how much you know about the nature of the national insurance fund it is as I found I have to say when I started this work I knew very little about it because like Professor Heald I regarded national insurance as essentially a tax under a slightly different name that was in some vague way tied to the contributory principle that we all knew was not very serious what I found when I dug into this was that there is this entity called the national insurance fund and national insurance contributions both employers and employees are paid into it this is in contrast to every other source of tax revenue whether it's capital gains tax corporation tax income tax whatever which are paid into the consolidated fund and the consolidated fund could be regarded as the master account for taxation and the way that the developed block grant works is that there is an appropriation to the secretary of state who made by an appropriation act at Westminster and the secretary of state then passes that into the Scottish consolidated fund which is established under the Scotland Act 1998 and that's the accounting mechanism the national insurance fund stands wholly outside this structure or very large outside this structure it is a separate fund the national insurance contributions are paid into it and paid out of it are various national insurance liabilities except that first the national insurance liabilities are defined in an odd way that derives from the statutes that created our structure of national insurance but doesn't correspond to modern understanding of it so there is a contribution made to the NHS for example to cover certain maternity services that is paid out of the national insurance fund even though we understand the NHS is being funded out of general taxation and second because in something like three years out of five there is usually some sort of deficit in the national insurance fund it is that deficit is made up from general taxation because behind the national insurance fund stands the consolidated fund now this account of how the system works is is not the same as our conventional understanding of what the system actually ought to be and in order to redress that you would need to make some really quite extensive administrative changes as I said earlier changes that were made to the national insurance fund were made in as long back as 1975 and they themselves were fairly limited in extent so once you get into this it is a long and complicated story and a longer story I think you are putting the case for the whole thing needs a serious look at quite apart from independence and devolution I mean do you think the whole thing needs a serious look at I think so and I would note that work by others at IPPR has recently been talking much more about the nature of the contributory principle and how that should be operated in relation to the UK welfare state so there is a much much wider debate and the moment one starts to get into the debate about restructuring the national insurance fund one is also into these much wider debates and apart from anything else I think there is an appetite the timescale on which it will play out I don't know and I would not want to see a scheme for substantial enhancement of devolution held up pending resolution of these very complicated matters that have been shelved for a long time and possibly for quite good reason enhanced devolution is too pressing to allow for that finally I just wanted to touch on I mean we have talked about Barnett and how much resources Scotland should get and based on needs and all sorts of things but are there other factors in this equation for example Scotland contributes more therefore Scotland should get more how about if Scotland votes no we should get a kind of bonus or a thank you for that a loyalty bonus how about a nuclear weapons bonus for holding them and the extra risk involved I'd go for about four billion a year for that surely there are other factors in here if we're looking at future finances other than just purely need well do you know more is not simply about need there are a number of other factors and do you know more tries to address quite a number of them I think that things like a loyalty bonus or a nuclear tax but a nuclear weapons bonus are essentially part of are really not on the cards and I'm not sure that they were advanced entirely seriously the idea that Scotland should receive more because it contributes more assumes that that's what so and that's a fairly debatable point but in any case I think one could say that's pretty much where actually Scotland already is and that's not the rationale for the system but that is not the way it's meant to work but it does appear to be where Scotland presently is and whether that remains the case into the future is going to be a matter for further discussion I suspect I mean that's a territorial political question if you look at two federations that look quite similar Canada and Australia if you get natural resources in Queensland and Western Australia you do not benefit from them except in the economic base you benefit but you don't benefit from tax revenues because they'll be equalised away by largely equalised away by the Commonwealth Grants Commission in Alberta in Gondres the fact that the oil province is Alberta means that Alberta is incredibly rich and Alberta for example has much lower income tax than many other Canadian provinces clearly one of things that distinguishes those two examples from the United Kingdom is that they are massive countries they are massive countries with big distances which make the tax system a lot easier to operate in certain ways but it's a political question that if the resources if the oil is in Scotland does Scotland keep it if the oil is in Shetland does Shetland keep it very clearly that's a political question and you can point out international examples where partly because of constitutional provisions when the oil was found Alberta keeps it and Queensland doesn't OK thank you very much for that it's concluded questions from the committee I just want to see if either of Professor Heald or Professor Trench want to make any final points I'm just giving Mr Gilberton his opportunity to come and pay a favour for you Thank you very much for that I mean I have to say your evidence has been the first class so that further ado I'm going to suspend the meeting till the public and the Fisher report to leave as we decided to take the next three items in private so I'll just have a caller to make a recess