 Felly, hi, a chymae nhw i'r ddych Godfair, a chymae nhw'n ddych chi'n mynd i'r ffordd am y Ffynans Cymru o'ch bethau oedd yng Nghymru, i'r effaith yn ddych chi'n mynd i, i'ch ffynans cysylltio gydag bach o hynny o'r ddechrau'r ei mewn o'r mewn cyfynasol o'r ddychrau. Felly, yn gyffinol i'r Ffynans Cymru, rydyn ni'n fyddo i'r hynny o'r cyffinans i'r meddwl â y byddiau o'r ffordd i dr. Ffyrtrwp. Y ddechrau Cymru aethau yn ddaeth o'r ddal, i'r tuillau yma i ddweud yw'r cynhyrchu ddayl o rheslwm y Cymru oligu yn cael eu gwn cyllidebeth i'r Ysgrôn Pwyllfaen Ysgolwras i ddal 2014. dr Cfôr Trewp wedi ddaw'r ddechrau yw'r ddweud yw'r srygu cyphyloedd o'r ddweud ar y llywodraeth cyllidebeth o'r ddweud Cymru. Ond yw'r oedd y ddweud yw'r srygu o'r ddweud yn cael eu ddweud The Parliament's policy of written evidence states that normal practice is to publish all relevant evidence and this basis submission has not been published on the committee's web pages but is available from the clerks. The committee, in my view, has worked on a very consensual and constructive basis this session and is therefore deeply disappointing that any concerns were raised directly with the media around with me, the clerks or indeed at the commencement of last week's committee first. Obviously, members are free to contact the media subsequently so wish and indeed beforehand but I think contacting the committee itself would have been more helpful. However, I hope we can continue to work together constructively under the effective scrutiny which I believe is a hallmark of the finance committee. So moving on first and only item of business today is to take evidence on Scotland's public finances post 2014 from professors David Simpson and Jeremy Pete. Members have received written submissions from both our witnesses so we will go straight to two questions from the committee and I'm sure our guests know how we operate here in the finance committee but what will happen is I will ask questions of the witnesses and then we will open out the session to colleagues around the table. Now I've asked a question to Professor Simpson. Once he responds Professor Pete can of course add his comments subsequently and vice versa so I want this to be something where I'm not specifically asking just to questions just to one individual I want you both to feel that you can interact with each other and it will make for a much more interesting session. We'll try not to keep you the three and a half hours we kept our first panel session so but I'm sure we'll have a very interesting morning today. Okay so first of all I think the first question I'll ask will be to Professor Simpson and it's more or less the first paragraph of your submission which is about borrowing and you said as an opening statement that the UK government will assume legal liability for the whole of UK government debt following Scottish independence. It should also assume moral or political responsibility and that consequently an independent Scottish government need not accept liability for a population share of that debt and in fact you go on to say that under the protective umbrella of the union average living standards in Scotland have fallen in each of the last five years we have become poorer together and if Scotland remains with an union that citizens will continue to be saddled with a burden of government debt for decades to come. Now I'm sure there are some members of the committee who will agree with that others will disagree but if we look at it in practical terms if the Scottish government and I know that their intention is not to go down this line but if they did decide to do that what would be the impact on the ability of an independent Scottish government to borrow on the markets? Well I would I'm not a lawyer but I would suppose that if you don't have a legal liability and you don't pay then that doesn't constitute a default. I think however that the matter would be negotiable I wouldn't expect the Scottish government to pay nothing. I think it I think the official position has been declared as an equitable it will assume an equitable share of the UK government debt on independence. Now the question is what constitutes an equitable share? Now I would argue that that's a very subjective judgment and not quantifiable but my paper is really designed to say why I think Scottish negotiators would should take a fairly hard line on the question of what the size of this equitable share might be. Okay but I mean how do you think I mean given the fact that the Scottish government is looking to have an amicable relationship with the UK over things such as for example a possible currency union etc. This kind of hard line you're talking about do you think that it's actually feasible in terms of how it could be delivered? Do you think that that's something that the other side of the argument would be even willing to countens? I'm not quite sure that I followed I'm sorry I'm slightly hard of hearing. I couldn't quite follow the last couple of sentences of what you said. Sorry I apologise. No no it's my fault. If the UK government act would the UK government be willing to negotiate with a Scottish government based on this kind of hard line that you're actually talking about does it not need a situation whereby both sides are willing to compromise even at the outset if we're going to have a kind of amicable arrangement which includes issues such as potentially currency sharing? Absolutely agree. I think there has to be there will eventually be an amicable outcome but I think that that doesn't mean to say that you start from a position in which you give up everything that you would like to have. Amy Jeremy. Good morning, convener. By way of background let me say that I think that we can all agree that Scotland and the rest of the UK will be far better off if we had made better use of the oil and gas revenue resources in the initial period and had built up a fund in the way at least one other Scandinavian country did and I was fascinated in reading the evidence of your last session that Gavin McCrone has yet to be revealed paper in which he did recommend the establishment of a fund at the time. So yes we'd be much better off if that fund had established. Yes we'd be much better off if we hadn't built up the public and private debt during the period leading up to and following the recession and therefore what is a concern for all involved at the level of debt has reached where it is. However I very much agree with the gist of your first point which is that I do believe that the markets would take a pretty dim view of Scotland seeking to reduce its liability for the debt substantially as part of the negotiations. The UK has the credit rating it has because it's never defaulted, never come close to default and I think Scotland does a newly independent nation would have to establish its own credit rating. It would start with potentially a somewhat higher cost of borrowing as Angus Armstrong and others have demonstrated than is the case at the present and it would be wishing to achieve credibility so that the cost of borrowing came back towards the UK level as rapidly as possible. Being seen to default or wishing to default and that I think is what it would be deemed by the markets would put that passage towards lower borrowing costs at risk and therefore I think it would be counterproductive. I also agree that there's going to be a very difficult negotiation over a currency union and as I've stated in my paper I do believe that the currency union is the best option for Scotland and potentially the best for the rest of the UK and I would far prefer to see effort put into achieving that end even if it does involve accepting an appropriate share whatever that may be of the debt and appropriate arrangements to reimburse a Majesty's Government for the borrowing that they have agreed to take responsibility for in the first instance. Why would the markets consider Scotland as defaulted if in fact the Treasury has legally accepted responsibility for the debt which of course has run up over these many decades and most of it in recent years in fact? My understanding is that the Treasury has taken legal responsibility for the debt in the sense that it will be the party that repays to the markets as and when debt becomes due but that is on the expectation and the firm understanding that they would in turn be reimbursed by Scotland in the event of Scottish independence on a basis agreed between the two countries so that Scotland was meeting a proportionate share of the cost of servicing that debt which would then be passed to the Treasury even if the Treasury had legal responsibility in the first instance. I agree that if it were the case that the negotiations ended in a disharmony and disagreement there might be a view taken that in some sense Scotland had not played fair with the rest of the UK and that might have or might not have some impact on market sentiment. Excuse me however but what you have to understand is that the question of the Scottish share of the UK debt is just one in many elements in the whole negotiating part if you like and if I can give you the example of Ireland when Ireland after 1922 it negotiated away in its entire share of the UK national debt in exchange for moving the border further away from Belfast so it's all negotiable that's the point that has to be made but when you start in negotiation you start by trying to make as strong arguments as you can and not by starting by saying okay you know we'll give you everything you want okay. Of course one or two of our witnesses said that the Scottish Government's 8.4 per cent you know population share for example might be too modest and that because Scotland's got a greater GDP per head we should contribute a higher share within our population I take it that's something you think should be completely discounted. Well as I said these things are once you recognise that it's a moral or political claim rather than a legal claim then you recognise that these things are subjective and different people will hold different views and that's how things that's how you get to a negotiating situation. I mean my view on that last point is that the question of whether it be a population share or a GDP related share is very much a matter of negotiation and discussion that would come out as part of the overall process but I would repeat that what matters is the perception of the markets rather than the actual firm legal position and if the markets perceive that Scotland is not acting appropriately with regard to taking on a fair and reasonable share of debt that is what will influence their thinking rather than going to the fine detail of what the precise legal position is. Okay now Jeremy I'm going to switch to your paper just now and I'll jump between the two actually as we go along depending on the subject and in a particular whim of the moment but I'm going to ask about currency union Jeremy and you say in your paper whether conditions under which a continuing currency union might be agreed permitted sufficient flexibility to Scotland in the fiscal and monetary fronts developing priorities and policies. Do you think that a currency union would give Scotland more or less flexibility in these areas than it has at the moment? I think it would probably be roughly the same. I think what one would find is that if there were to be agreement on a currency union then there would be a requirement whether this was 100% necessary appropriate in strict economic and financial terms there would be a requirement for monetary policy to remain the province of the monetary policy committee looking primarily if not exclusively at the interests of the rest of the UK and at the same time that there would be fiscal constraints imposed upon Scotland which would be tight and binding so far as the overall balance between expenditure and revenue is concerned that I think would be inevitably part of the package whether it goes beyond that to introduce constraints on individual elements of fiscal policy I think is significantly more uncertain but I would doubt that they would permit changes for example in corporation tax which would be deemed to advantage Scotland over all or parts of the remainder of the UK I think it's going to be a tough enough process to agree a currency union given what has been stated politically thus far as it is and I think that the great conundrum is that while this would be preferable for Scotland to have that stable and fixed exchange rate continuing and it would enable a stable story in which the early days of independence could take place that might come at the price of yielding up flexibility on monitoring fiscal policy and potentially on some particular fiscal instruments which might be difficult for a new Scottish government to accept so as ever with these things will be trade-offs to make would the advantage of the stability and the continuing exchange rate security be acceptable as a trade-off against the loss of flexibility that could have been achieved in the event of an independent Scottish currency that's the type of discussion that would have to take place well there are 17 countries in the eurozone at present I mean do they none of them have those kind of tight levels of fiscal rules that you're kind of talking about so why would there be such a tight control between Scotland and the rest of the UK relative to for example the eurozone well they're first for the eurozone of course there is one interest rate and one monetary policy and there are increasingly tight fiscal rules at the aggregate level that are in place and there are constraints on individual countries and Ireland's been mentioned already there are concerns about the corporation tax rate in Ireland and whether that is going to be acceptable to the European Union going forward so the same debate has taken place in the European Union about rigidity of fiscal policies and aggregate terms and the extent of flexibility that will be permitted to individual member states so far as individual regimes are concerned so I think the same process and the same debate applies but I would just argue that it's going to take quite an effort to encourage the political parties at Westminster to actually agree to negotiate on the currency union and I think they would require fairly significant concessions on the part of the Scottish government to achieve that end. The only effort that's required to persuade the parties Westminster is to have a just vote in September because the salient point about the currency union is that in the event of a yes vote that will be the best option for the rest of the UK and that is why that cabinet minister who is apparently anonymous but I think we all know his name said of course there will be a currency union not because it's in Scotland's interest but because it's in the interest of the rest of the UK because the Scottish market is I think I'm right in saying the second largest market for the rest of the UK after the United States so it's purely hard headed reasons will make currency union the preferred option in the event of a yes vote now as to the restraints on overall monetary and fiscal policy yes Jeremy's quite right but what he forgot to mention is that these restraints would be reciprocal that they would apply equally to England and the rest of the UK now that might seem like something tough for them to swallow but in the climate that we're entering into in which I hint out in my paper of debt being a perennial spectre at the feast I think that a number of think far-seeing politicians would actually welcome constraints on fiscal policy because it gives them cover against the clamour of those in their own party who would wish for extravagant spending to be continued. Jeremy you can go on in your paper in the next paragraph to the one I quoted from to say that a move would appear necessary by Scotland either into the euro zone or establishing new and distinct Scottish currency so you're kind of arguing for currency union for stability but then you're saying that almost inevitably we would move on from that position do you think there's a lot of assumptions being made there? Certainly are a lot of assumptions being made I agree and let me say I agree with David that almost certainly the continuing currency union and it is a continuing currency union we're in a currency union now would be the best outcome for the rest of the UK as well as Scotland but unfortunately hard-headed logic doesn't always apply in political discussions but what I'm simply saying is that if after a period of independence the severe constraints on fiscal policy and the constraints on monetary policy were deemed unacceptable then there would have to be a move to an alternative. Now why would that happen? One possibly of that happening would be that the economy is diverged that Scottish Government introduced a variety of different policies which took it in a different direction from the rest of the UK that the position on oil and gas revenues make Scotland susceptible to different forces than the UK the remainder of the UK and it could be that the monetary policy becomes increasingly inappropriate and the issues on fiscal policy become different for Scotland than they are seen while being part of a currency union so under those circumstances it may be that the Scottish Government would wish to uncouple itself from the currency union in order to allow the development of monetary and fiscal policies specific to Scotland which was seen in the best interest of Scotland as an independent nation and at that stage they might be ready to move either to its own currency or to consider if circumstances have changed in Europe a move to a euro's end. So yes a whole host of assumptions I'm just trying to think forward to whether a currency union if achieved will be something acceptable to a Scottish Government on a long-term basis and I suspect there may be circumstances in which it would not be acceptable on a long-term basis. And you've kind of ruled out sterlingisation of course which Jo Armstrong touched on and she was giving evidence what can you just give us some further detail as to why you're against that you talk about stability being one of the reasons? Well I'm not the greatest expert on sterlingisation on a currency board but from what I have read and from speaking to people in different parts of the financial sector in elsewhere I just don't believe it would be seen as a stable and continuing position for a country as substantial as Scotland and I think there would be risks that the Scottish financial sector would see that the currency relationship was uncertain there were risks of changes they might wish to relocate some of their activities into the rest of the UK given that for many of these companies they sell many more products in the rest of the UK than they do in Scotland the markets might not be convinced that this was stable and they might charge a premium on interest rates so I just find it unlikely to be a valid option. John Kay appears to have changed his mind on this but I do believe that this is less than likely to be a viable option and in practice the stark choice will between a currency union and an independent currency. David? David? I don't think at this stage I want to add anything to what Jeremy said I think. Okay let's go back to data women it's just about the issue of quantitative easing Dr Jim Cuthbert talked some length about quantitative easing in the role it plays in terms of debt we already had a kind of brief discussion about you know Scotland's share of debt what it might be post independence if indeed Scotland votes for independence but should the £375 billion that's been put into the UK economy through quantitative easing be included in that figure because Dr Cuthbert argued that it's not real debt and if you know there's no interest paid by the Treasury for example because it's effectively circulating within its own system so what's your view on that should any to get debt negotiations include or exclude quantitative easing? I mean I read Jim's work with considerable interest and it was a novel argument to me but one I found very powerful if the quantitative easing funds are not costing to service and if it ended up with them being effectively written off then there is no cost to that debt to the UK Government and I don't see that that would justify any cost to a Scottish Government post independence so if those QE funds are just sitting there and not being there's no interest falling due and if in due course they are written off as part of the process in years to come then I quite agree with Jim that it's wholly inappropriate for them to be included and for Scotland to be paying a cost for servicing debt that no one else is paying for. I don't think I need to add anything once more to that. It's good to have some consensus actually. I'm not sure if it will continue. Just one last point before I open up to colleagues round the table and it's to myself. David on this occasion I mean you talk about the you know the the kind of recession that we've gone through not being a global recession but effectively being made in London and Washington effectively by the Governments of Blair Brown and Bush. Sheenae you've said and I quote the financial crisis began in that year was neither external nor global we're referring to 2007. Our discussions about finances post 2014 are not just about what happens if Scotland becomes independent. What concerns do you have if in fact Scotland remains within union with regard to the public finances? Sorry I didn't catch the last sentence. It's just what concerns do you have about the state of the public finances if Scotland remains in the union? I see yes well the answer is that my concerns are more or less expressed in the body of the paper because then we would we would be in the same boat as the rest of the UK which at the moment is looking to me as if it's heading for some very rough weather indeed because in addition to the published explicit debt there are all these other liabilities which are not taken account of in published accounts which include things like state pension obligations, the public sector worker pension obligations, the increases in future health care spending and indeed increases in all government spending which would exceed those that can be paid for by revenues raised under the current tax regime and as I said the I've quoted research by an American economist who puts these numbers very much higher five times higher than the accumulated past debt. Now even if we only take that's only very rough estimate it still gives us cause for concern and what it means in practical terms is that I think that even when the present planned increases in taxation and cuts in the public expenditure which are laid out between here and 2018 are completed I think we shall find still further the need to either increase taxes or cut public expenditure or both simply in order to keep government debt within limits that are acceptable to financial markets. I think David's paper and this question that you've raised and he's responded to just underscores the importance of looking at various scenarios the long-term outlook for the public finances. At one of your sessions you discussed the IFS figures and witnesses and members reinforced the point that these were projections rather than forecasts but I think it is very important that we do look longer term at what could be the story over a period beyond five years looking at what's going to happen to expenditure given health issues given demographic issues and what's likely to happen under various scenarios to finances to get a view of the long-term health of the public finances and that is one of the roles of the OBR at the moment at the UK level is to produce that longer term forecast and the IFS also takes this on and I think in Scotland that would be as important if not more important than in the UK as a whole because in an independent Scotland there are issues about demography which need to be examined there are issues about an aging population and the story on health there are issues about what's going to happen on the tax side given various stories about what happens on north sea oil and gas there are so many uncertainties and different paths that could be taken in the longer term that just examining these and looking at potential implications enables the government to get a feel of where what the risks are and the uncertainties are and therefore to plan the public finances not just looking at a two three-year period but taking account of those longer term elements and I think that is critical and it is important that some of that be done by independent bodies rather than wholly within the administration. Did you believe that there are risks and uncertainties regardless of the outcome of the referendum in terms of public finances? Of course there are I mean they absolutely I mean but I think if one has an independent country then the public finances are a matter that will be of even more importance both for the management of the economy and for the development of economic policies and within the relationship with the markets that is the case for Scotland as now I'm not doubting that these I'm not saying the risk and uncertainty is dramatically increase I'm just saying the importance of understanding them and looking them is enhanced and I think that especially if the Scottish Government as with no doubt will be the case wishes to change a number of policies and in order to understand how changes in those policies could play out in the longer term context I think would be important to help policy formation and to make decision making as sound as it can be. I'm going to open out the session now to colleagues around the table and the first person to ask questions will be Malcolm to be followed by Jamie. I mean I want to ask about debt but since Jeremy Pete's raised the currency question can I just have one question about that I mean I know that both of you say it's the best option for the rest of the UK although you'll know that Ted distinguished economists who preceded you at this committee took a different view and of course all the UK parties take a different view and in a kind of way Jeremy Pete gave some of the objections that we know from the famous if not notorious note of Sir Nicholas McPherson he was concerned about in terms of not being something that would last you raised that possibility Jeremy and also in terms of the terms would be unacceptable to the Scottish government so shall we say that there is certainly no unanimity around the views you've expressed but I suppose I'd be interested in more of your view about the terms that might be demanded but also I'm interested in your saying it's in the interest of the rest of the UK because of transaction costs but surely if that was the case the UK would be banging at the door of the Euro which we know is the exact opposite of what the intent so transaction costs are clearly not the only or even the overriding issue here for the UK government. That's certainly the case and I don't disagree with any of the comments you made they enhance the difficulty of the discussion but I think that for the rest of the UK and the National Institute have looked at this in their latest paper I think the the advantage are of continuity of the relationship are very important it matters more to Scotland because a higher percentage of Scotland's trade and business relationships are with the rest of the UK than is the converse so it matters more to Scotland than it does the rest of the UK but for the rest of the UK as the convener has stated Scotland is the UK's second largest market there are so many companies which span the borders and operate across the two that continuity of the exchange rate relationship and removal of any risk of transaction costs of any questions of VAT being payable payable for cross-border trade if certain conditions apply all of that makes it much more comfortable and much more straightforward for the rest of the UK to continue in the currency union than for an independent currency with all the currency risks and uncertainties and the costs to to prevail as to why this applies to the UK currency union but not to the UK joining the eurozone well we're talking about the status quo at the moment we're talking about the position that is the case with with the rest of the UK and Scotland and the currency union moving to a eurozone would mean the UK gave up independence of monetary policy would mean that the exchange rate moved as was appropriate for the whole of the zone run just for the UK and would mean moving into circumstances where the stability and security of the eurozone was was uncertain so I don't think the same arguments have the same weight in the context of whether the UK might enter the eurozone as in the case of the benefits that would apply to the rest of UK for a stable relationship as part of a currency union with Scotland I would just like to once again I'm sorry to embarrass or disappoint you agree with everything Jeremy said just an answer to this specific point the question yes I think there would be a gain in our rather a reduction in transactions costs on trade between the UK and the EU and the rest of the EU if or the rest of the eurozone if the UK were to join the euro but these benefits are outweighed by the kind of factors that Jeremy alluded to whereas the whole point about the idea of a european or of a UK currency union which is a rather unfortunate term in my view because it implies something new whereas the whole point about it is continuation of what's happening now in other words business as usual that's the main reason for wishing to have a currency union just formalizes what the status quo is move on to debt I mean I think in a kind of way this is a bit academic because if if the Scottish government refused to take have anything to do with the debt as Jeremy Pete said I think that would have rather a devastating effect on interest rates but let's take David Simpson's paper in the terms that he puts it that there is no moral case for Scotland taking on the any responsibility for the debt I did find this rather an astonishing view because well let's put it this way do you not think Scotland has benefited in any way from the spending that has come from the UK government I agree it would have been better to have an oil fund in the 1970s but you know that that's history now is it not the case in more recent times that Scotland has benefited let's just give two examples this this parliament benefited enormously in the early years from the the public expenditure of the Labour government that you deplore and more recently of course the Scottish banks were bailed out and in fact the biggest increase in the deficit was in order to bail out the bank so surely Scotland has benefited from that and in that sense that undermines your point that we have no moral responsibility in relation to the debt I hope I didn't give the impression that I said we had no moral responsibility for any of the debt if I said that I do apologize I think I said I hope I said we have no responsibility we shouldn't accept a moral responsibility for our per capita share of the debt in other words I think that we should bear that would be the starting point of the are UK negotiators and any in the negotiations and I don't think that we should start by accepting that I think we should say well the Scottish government has gone so far as to say would accept an equitable share and I'm just saying that we ought to be careful about agreeing what that equitable share should be and that in our negotiations we should be very clear about some of the reasons why we might not wish to accept a per capita share. Do you want to comment on that Jeremy? I personally believe that it is effectively inevitable that Scotland would find itself responsible for servicing some of the debt that the Treasury has taken responsibility for and the extent of debt that it was responsible will be part of the negotiating process. I don't think the pure economics would be the only factor I suspect that the discussions would be as much political as part of an overall bargaining process as anything else. Thank you and of course earlier in your paper you go into the history of how the debt was accrued I mean none of us want to have too much debt although I believe in historical terms it's not necessarily such an alarming figure I noticed look at well I actually had figures going back for about 150 years but for example in 1932 it was 177 percent of GDP and I suppose in relation to that is it not the overall level of debt that matters and was there not? I mean you make a particular point so I have to respond to this of attacking the Labour government was the level of debt in 2007 before the banking crisis not in fact lower as a percentage of GDP than it had been 10 years previously? It might well have been but the point was that having accumulated having had a period of growth that ended in 2007 one would have expected the the budget deficit to be much lower than it actually was in other words there's a structural we moved from a position in 2000 of having a structural budget surplus to a position in 2007 of having a structural budget deficit and that I think was the period in which the public finances were really mismanaged. Well I mean I think I don't know whether you had that view at the time certainly no other political parties either in this parliament or the other parliament had the view at that time because of course there were rules being followed it was mainly the build-up of capital expenditure which I think was three times greater investment expenditure in 2007 than 1997 and there was very little of a current budget deficit and do you not think and again looking to this parliament that in fact there was a great need to have an expansion of public expenditure at that time because of the state of the health service and some of their public services? Well in retrospect yes one could certainly argue on grounds of need that these expenditures were desirable the question is where they affordable and the answer is that they would have been affordable if the UK economy had continued to grow after 2007 at the rate at which it had grown from 2000 to 2007 but as we all know it didn't and the the lesson of this is that we we cannot just make the optimistic assumption that growth will always be there to provide the revenues that we need to pay for the increasing costs of our public services. I do agree with that last comment I think that if one goes back to 2007 the assumption and expectation at that stage was that we had secured an environment in which growth around the trend would continue virtually indefinitely that we'd managed the monetary and fiscal policies of our economy in such a way that stability was ensured three percent growth would continue that would mean that a structural deficit of that order of magnitude was manageable but unfortunately we we were complacent we didn't allow for the huge build up of private debt that took place which along with the banking crisis led to such a rapid and deep deterioration in our economy that the public finances which in retrospect were slightly loose at the time became severely damaged and one went into the the deep and dark days that we all know about so it was the combination of maybe marginally loose at that period along with the the deepest recession in in economic history in the UK that led to the outturn where debt and annual deficit levels were at wholly unacceptable rates it's the history is there and with the benefit of a hundred percent hindsight one would say yes there should have been a lower structural deficit if you want those public expenditures for good reasons then you have to tighten by raising tax revenue in different areas yes you should have constrained the housing boom yes you should have constrained credit card borrowing and household debt increases in one means or another possibly with tighter monetary policy we were allowing the the boom to develop and the bust inevitably followed that with the benefit of hindsight one could see all that went wrong and it's easy to look back now and see what went wrong but at the time we believed that we'd cracked it we knew how to run the economy and always going to be sweetness and light for the indefinite future sadly that's wrong and it just for me that reinforces the view that you always need to look at the risks and uncertainties you never assume everything is secure and stable you have to look at downsides as well as upsides and you have to take account of that in policy making when you say we you would accept it wasn't just the politicians about the economists that nobody really saw what was what was coming down the track and would you also accept that the largest contribution to the deficit was the banking crisis and you know in that sense i feel that your paper is slightly unbalanced well first of all i want to say that i personally didn't see the crisis forthcoming was part coming partly because i wasn't looking it's not my was not then and isn't really now my area of specialism however i want to say in fairness to those people who did see it coming and did and and did say so at the time that they need to be mentioned one of them was the bank for international settlements in Geneva which little regarded bank which is a sort of central bank or central bank who are continuously sounded the warning there was warnings also from the european central bank and there was warnings from our friend vince cable who asked a very pointed question in the house of coins which i can send to you if you want and we received a brush off so there were there were a few people who whose eyes were on these fairs who were concerned about the unsustainability of the housing boom in the period up to 2007 and i don't feel that we i don't agree with the idea that somehow these events are things that just come out of the blue like meteorites from outer space i think it is very clear that these events have got traceable causes and these causes are misapprehension about the nature of economic activity and the nature of money the effects of monetary policy in particular that phrase which is often was then often repeated no return to boom and bust now that in turn gave rise as i've said in my paper to an under provision within the treasury for the possibility of a recession and with the consequences that made things worse but the recession itself did not come from outer space it was man made it was made in white hall and as well as in the city of london it was made on washington as well as on wall street and this is now subsequently been extremely well documented and anybody who thinks that we live in a world in which there will be no return to boom in bust has simply never read the most elementary books of economic history which show very clearly that a cycle of boom in bust has been a feature of capitalism since at least the middle of the 19th century. Thank you. Jamie to be followed by Michael. Thank you convener. I want to focus at your paper. First of all and the convener highlighted this part of it as well. You write under the protective umbrella of the union average living standards in scotland the fall in each of the past five years we've become poorer together i suppose that begets the question how much poorer and you go on you say if scotland remains within the union then its citizen will continue to be saddled with a burden of government debt for decades to come so in the context of a no vote in september is it your perspective we're likely to continue being poorer together. Well we touched on this a couple of questions ago. I think the outlook for the UK as a whole is fairly rough over the next several years. Whether that will return whether that will be reflected in absolute decline in living standards I would hesitate to say because the one thing I do feel confident about is I think Jeremy shared the same view is that economists have no special view of the future have no insight into what will happen next year nobody if somebody tells you what a level of the stock market will be one year from now do not believe them they do not know and economists equally cannot predict what the levels of interest rates are going to be in one year's time let alone two three four five so we cannot foresee the future however all I would say is that from what we do know about economic activity the prospects are for a much tougher period over the next five to ten years than we have perhaps been accustomed to enjoying up to 2007. First of all this question of uncertainty and difficulty of forecasting is absolutely right one of my favorite sayings from I think it was Eddie George was there are two types of economists those who don't know and those who don't know that they don't know and I those that don't know that they don't know are very dangerous animals so if anyone comes to you and says they have absolute certainty this is going to happen they can explain with detailed econometric equations why don't believe them they don't know we can all hypothesize we can all talk about different things that could happen we could try to want we can try and understand what's going on and how that feeds into the process but no one has absolute certainty. Returning to the question of the decline in living standards it has been an extended period where GDP has fallen we may this year get back to the level of GDP pre-recession we won't get back to the level of GDP per head in the UK for some time longer because the population has grown considerably over that period and so GDP per head will still be below where it was pre-recessions David says in his paper that average wages might get back to pre-recession level in perhaps 2019 certainly we have not seen real wages moving upwards until just now maybe for the last month or so there's been some increase it's been a very very tough period and we are now growing at a much stronger rate than we have been for a number of years whether that is sustainable depends on the view you take as to whether it is balanced or whether it is over dependent upon consumption funded by a combination of positive views about the housing market and payments for banks for their excesses in lending in different ways. I'm not convinced we're 100% sustainable yet I worry that we haven't got the growth in investment corporate investment we haven't got the manufacturing sector the exporting sector back to where we would wish it we have a way to go before we've got the type of balanced growth that we can relax a little on so yes I hope that we'll get back to the level of GDP per head next year or wherever yes I hope we'll get gentle increases in average earning rates over the next few years but personally my view is whether Scotland is an independent nation or part of the UK this will be a very tough five years ahead and one which is going to require very tight policies in order to progress towards a more stable and sustainable environment but even when we get there given the lessons of the past we have to continue to watch out for risks continue to watch out for unexpected and undesirable events and continue to be very conservative with the small c in the way we deal with economic policies and public finances. Professor Simpson in your paper you also talk a little about revenues from Scottish waters in the North Sea which I'll turn to in a minute but I thought it was interesting Jeremy Pete talking about how it would have been much better if we used oil and gas better in the early years and you referred to Gavin McRone's report that he revealed to us here at this committee we now know he prepared that in advance of the cabinet the UK cabinet that Jim Cuthbert referred to when he was here on 15 December 1977 where the cabinet minutes of that meeting state above all the creation of an oil fund would play into the hands of the Scottish nationalists for who it would become a major political target and Jim Cuthbert's perspective is that this is explicitly why we'd not get an oil fund which he can perhaps comment on in a minute but in your paper Professor Simpson you say despite oil tax revenues from the Scottish waters of the North Sea having contributed some 160 billion pounds to the UK's checker since 1988 every family in Scotland has ended up with a debt of some 50,000 pounds and you contrast it with Norway which has a sovereign wealth fund that in 2012 was worth some 450 billion pounds or about 200,000 pounds for each norwegian family to me that leads to the obvious question you know what lessons do we draw from these experiences for the future um did you want me to say any more on that well indeed means that the question is given that this has been a historic experience and of course this is history there's nothing we can do about that that has happened but surely we can draw lessons from that experience for the future well i hope so i mean i agree with Jeremy that the future is the next five years is going to be exceptionally tight under whatever arrangements of governance we have however i would hope that these would not be so tight as to not leave room for at least the beginning of the establishment of some sort of oil fund i think it's significant that i'm of all the countries that have had oil as a significant part of their wealth only the uk and iraq have failed to establish an oil fund so i would hope that it would be an early priority of a scottish government to do that if i can make a couple of comments first of all i i entirely agree that it would have been desirable to establish an oil fund at the time that north sea oil and gas revenues were booming this would have been a far better approach and we as a nation uk and scotland have suffered relatively from the failure to take that step and it is i i'm not aware of the exact circumstances in which the cabinet decided but i heid what you said within trust um but i wouldn't note that over recent years scotland has achieved a higher level of public expenditure per head than is the average across the uk as a whole while the level of non oil and gas tax revenues has been roughly the same as at the uk level Llywodraeth y cyhoeddff שא�nig o gwyllustu am gweithio y Cyhoeddfohon yma yn cael llunio cyhoeddfod y bydd y cyhoeddfod yn llwy ooedd llwys, ond annan am y gallu gyhoeddffyr a'r llwyf wahanol wahanol'r cyhoeddfod, yn cael dy ddigon o ziefnol, rydym ni wedi bod ychydig yn ni'n deall gael y cyhoedd fath o gwyllustu am gwyllustu am gweithio yr y cyhoeddfohon. Rwy'n gwneud cyfnod, rydyn ni'n mynd i'n mynd i fod yn dod yn y dyfodol, rydyn ni'n mynd i ddweud i'n defnyddio'r cyflwyngiau. Rydyn ni'n ddim yn gwneud i'r gwybod i'r mynd i'r llyfradau, amgylchedd i'r pryd yn Gwilfeydd cyfnod yn Llyfrgell, ar y llwysc o'u wneud y brinsbryd hynny o bapodol wedi y ddefnyddio hynny, yn bobl yn ddau'r par fryd ar y sgwr yn idyn y llwyll, ond mae'r rhannu llwyll o'n cysylltu, os y gallai rhaid o ddaf o'r rhaid o'i ddau'r llwyddiol, y gall enthusiasts go below the expectation, then the government would have to compensate elsewhere in its tax or expenditure plans in order to manage through. So that's slightly unbalanced approach to managing the public finances, as oil and gas revenues vary against expectations would allow an oil fund to begin to be built up Fe wneud i uwch yn y gwaith yn ystyried yn y ffordd rhaid oedd y rhaid o'r gwahanol. Mae'r fawr yn y mwrdd y Ffordd Gwmfyrdd yn ymgyrch yn gartio'i gair. Fe wneud i gaf eu gwirioneddau rhaid o'r gwaith yr Ffordd Gwmdd yng ngherwydd. Fe wnaeth efallai y prosiectau dros y ffordd. Mae sy'n ffordd i gael ar y roi'r penodol o'r beth. Ac oedden nhw'n cael ei roi i ddangos gwahanol i'r mod i wahanol i'r gennychu i ddweud o unrhyw bethau newydd o'i ddweud? Yn rhodol sy'n gychydig ymel gyffredinol, ydym yn ni i chi gwneud yn hawddio mwy ffordd cyflas, sy'n amser yn golygu ar y cyfaint o'r hunainol eich cyfrachol, o'r siwgrwmp yn ychydig gael gwondol ac yn ygweliadau er mwyn oes unrhyw o'r gwahanol ydi. Rwy'n cymwyno'r gwahanol gael'r bwyllfa yn y gwaith cyfal familiarol, sy'n bryddoch chi'n fynd i gael gael gael gwahanol? Mae gael gael gwahanol eelly i'r hyn o'r creu ysgy啲 ac oherwydd, mae'n gweithio yn eu ddechrau, a'r gweithio'r gweithio'n gweithio i'r gweithio. Oherwydd, mae'r cyfwil o'r creu, ond, mae'n gweithio yn rhywbeth yn cyfwil, ..rational someplace.. ..on the vienshawd analysis and on an evidence basis.. ..and having that in the public domain.. ..and judging decisions by Government against the backcloth of that information analysis.. ..would, in my view, provide some constraint on decision making.. ..and also the public to understand and to consider whether they supported decisions.. ..that were being taken by governments. Y Llywodraeth Cymru, can I just comment on Jeremy's citation of the higher public expenditure figures in Scotland over a number of years? These are frequently referred to, however, as everyone must be aware, public expenditure on anything, whether it's in the public or the private sector, is merely a measure of inputs. What we really need is a measure of out-turns or outcomes, and I think it's fair to say that over the last 10 years or so, in the public sector, there's been much more attention, has moved to outcomes, whether it be in health or in education or in other areas, despite the obvious huge difficulty of measuring these things, but at least we're trying to measure the right things. And until we do that, I'm not at all impressed by measures of input because we don't know how much of that input resulted in good outcomes and how much we're simply wasting. I just don't know. Just to add to that, I mean, I had a very valuable and informative discussion with this committee last autumn, I believe it was, on the national performance framework when I came in my days at the Day of Human Institute with a group, and I think the NPF is a wonderful creation. And I think more emphasis on exactly what you've described, David, on determining what are the desired outcomes for a Scottish Government and measuring the extent to which they're being achieved across a variety of activities is very important. And I think the NPF is something that Scotland should be very proud on and should be much better known and should be much more influential in the way that decisions are taken. Thank you for those answers, gentlemen. Turning to your paper, Jeremy, you mentioned that further fiscal devolution is both feasible and desirable if there is a no vote, but you would acknowledge and accept that there's absolutely no guarantee that that will happen? Yes. I had the great joy of chairing Nicola Sturgeon and the leaders of the four other four parties represented at Holyrood at a series of events in January and February. And I was really quite excited when Willie Rennie announced that he was asking Simon Campbell to speak with representatives of the other unionist parties at Westminster and Holyrood and see if they could come together to form a view on a package of further devolution measures including further financial devolution that they would all agree upon and that they would give some undertaking would be put into practice in the event of a no vote. I thought that was extremely valuable because it would allow those voting in the referendum to have a far clearer idea as to what no meant, while at the same time we were trying to determine as fully as we could what yes would mean. Unfortunately, the Campbell 2 plan, as I think it was called, did not come to fruition. We've seen some propositions from the three parties as to what they might do, some more substantial than others and as you say with absolutely no guarantee that any of them would actually come into fruition. So all I'm expressing there is my view that further devolution including further financial devolution is perfectly feasible and also desirable, but you're right, nothing is guaranteed. Unfortunately, the three parties and the Westminster and Holyrood representation does not appear to be united on what the way forward would be, so we wait and seize as to what might happen and we don't really know what no means. Thank you. One final two-part question in relation to a council union. The first pose is quite an it, maybe could be felt to be sort of academic point, but I've been quite frustrated when those who question a council union have made the point that this will be a loss of sovereignty to Scotland. It seems a peculiar argument to me and I don't know what your perspective is because clearly in such a set of circumstances and I think Professor Simpson made the point that as well it would be fiscal policy cups for the rest of the UK, as well it would be two sovereign entities pooling sovereignty together, so by comparison with Scotland's current situation it would actually be an act of sovereignty and it surely couldn't be described as a loss of sovereignty, certainly not with Scotland's current position I would have thought, that's maybe a sort of academic point you can comment on that if you will, but for you specifically Professor Pete, I'm aware at the economy energy and tourism committee express some disappointment that there hasn't been willingness from the UK government to have technical discussions about the possibility of a council union wonder if you could talk a little bit about that. Well first of all I deliberately in my paper and I hope in the first answer I gave on the currency union refer to a continuing currency union because this is effectively what it is under somewhat different circumstances but it's a continuation of the union we have at the stage on the currency front. Secondly as I've said in terms of sovereignty there would be less in my view scope for independent economic policy decision making, certainly macro and possibly to an extent micro under a continuing currency union that would be the case with an independent currency. So there is a loss of independence ability to be independent on policies in the continuing currency union compared to the independent currency. Thirdly so far as negotiations are concerned I do agree that it would have been desirable probably not government to government but with the at least the Bank of England the first instance to discuss some of the important issues around how a continuing currency union would work in the event of independence. I would have expected that to be the first steps. I've read very carefully what the government of the Bank of England has stated. I've read very carefully what the permanent secretary to the treasury has stated. Their nuances are somewhat different from what the Chancellor and others have said and I think that one can't take from either the governor or the permanent secretary that never ever could there be under any circumstances a currency union. There are a lot of issues a lot of concerns a lot of things to be thrashed out and just like some other areas people don't want to talk about things until after the independence debate but that means we're in a situation where just as we don't know what no means we really are uncertain about what yes means and independence with a continuing currency union would I think be very different in the way it impacted than moving down some of the other paths so I would have welcomed further negotiation it's not going to happen even at a technical level so we have to try and do the best we can without having that negotiation taking place. Could I just add something I think much is made of the constraints of our currency union and in particular Jeremy referred to the limitations on monetary and fiscal policy but I think we have to be realistic and realise that for a small open economy like Scotland it doesn't matter what currency arrangements you have your independence in terms of flexibility on monetary and fiscal policy or efficacy is fairly limited and that's not only true of a small economy even the United Kingdom which is a large economy is subject to the disciplines of the international financial markets in terms of determining the long term medium term even rate of interest so I don't think we should get hung up about questions of overall macro level fiscal or monetary policy but I do wish to slightly differ from Jeremy in suggesting that there would somehow as part of the monetary union have to be constraints on individual tax policies I don't see that that would be the case at all I think there's no reason that I can understand why Scotland or anybody else who's in a country union couldn't have whatever particular rates of tax on particular services or commodities or income range that they wanted to the only constraint is on the overall on the overall budget balance and on the supply of money and their rate of interest that's the only constraint and as I say these constraints are fairly academic anyway. If I may just add to that first of all I think that it may not be necessary from economic and financial analysis to have constraints on individual elements of fiscal policy but I suspect as part of the negotiation the rest of UK might wish to see some constraints imposed if they thought policies such as lower corporation tax might damage parts of the economy close to or competing with Scotland. It's not a matter of should but would I think is the way that I might see it happening and so far as Scotland is a small independent country I that's absolutely right a very useful paper from Professor David Skilling for the Scottish Government a year or more back just did emphasise that small independent countries have to run very tight monetary and fiscal policies and that's particularly the case when they're dependent on a volatile and somewhat uncertain revenue stream for a high part of their revenue so yes Scotland would have to run a tight ship with an independent currency but other elements would be unleashed in a way that wouldn't be the case with a currency union so yes tight monetary and fiscal policy but it would be able to work its way through that looking entirely at the interest of Scotland rather than being being reliant upon the UK to make decisions on interest rates and to set specific constraints on the fiscal side. Okay, Michael to fall by Jean. Thank you very much convener and to try and sort of follow this theme of drawing lessons. I'm always keep mindful that often we compare apples with oranges and it's a dangerous thing to do and to continue the sort of fruit based metaphor to also not to cherry pick but I'm sort of tempting fate by doing something very close to that by looking at Professor Pete's paper in which he quoted the observer who said that the only terms which a currency union would be feasible would be ones that no self-respecting nationalist could accept. We've just had a discussion about the suitability of a currency union, what the implications of that would be and you suggested earlier that even if we were to have a currency union at the outset and there's some argument around whether in the event of a yes vote people would accept that in amicable terms we should continue with a currency union. At some point we would be faced with the potential of having to to break that currency union because we come divergent economies and that looks very similar to me to the situation that happened in the Czech Slovakian situation with the Czech Republic and Slovakia both amicably wanted to go their separate ways, they amicably wanted to continue with a currency union but it lasted barely weeks. Can we draw comparisons with that and if they are what comparisons can we draw? Well I freely confess I haven't studied the Czech of Slovak currency union but my understanding is that the reason that it found it so quickly was that in fact one of the parties I don't know which one made it fairly clear that it only regarded it as a short term arrangement and that it wanted out fairly soon and once of course once the markets picked up on that then that was over that was my understanding it might be wrong. I don't think in the case of Scotland and England there would be any desire on the part of either party to break it up in the short term. I can see in the long term as people have talked about if the paths of the two economies diverged fairly dramatically or significantly then let's say the Scottish government might think in terms of starting its own currency but I would have thought that was really quite a long way down the line and you have to remember that going back to the only credible comparable experience we've had which is when Ireland left the UK in 1922 it stuck with the pan sterling from then until as late as 1979 and it did so by the way without the benefit of a formal currency union but at least it did so and so I don't think that there's any reason to suppose that there should be any speculation and indeed I'm struggled to actually see I don't know enough about the Czechoslovak thing but if you have a continuation of the status quo as we have here in the UK I struggled to see how financial market speculation could break it up but maybe there's something I'm missing I don't know I think that it is whether the two conundrums one is how you decide whether the terms of a currency union would be acceptable where the extent to which one would have to yield a degree of independence on economic policies would that be acceptable in order to achieve the continuing currency stability and what that would mean for trade and potentially for the financial sector et cetera so that that is a trade off as I've said before and the observer I quoted believes that the terms will be so strict that they would not be acceptable and you'd end up with a form of independence so light as to be virtually unnoticeable as a change in terms of the ability to make policies but that's that would come out as part of the negotiation but it's there as an uncertainty and there is always the risk that the outcome could be one that caused a very difficult decision to be made I mean Malcolm Chisholm also mentioned this issue of of how long a currency union would last and questioned how I can be discussing the the need to move away from the currency union yet the same time except that to be a stable arrangements it is difficult I think the Czech Slovak problem from my limited understanding of it was different first of all in the terms that there was no long-term expectation secondly that the two countries were so different and that it was very clear to the markets which was the strong member and which was the weak and if they broke out which way the currencies would go so you had a one way better now of Scotland and the rest of UK were in a currency union and the old sector was doing very well which which way would the currency go if the currency union split up if you hadn't with the Scottish currency be stronger than the pound or weaker than the pound I don't know a lot would depend on the policies a lot would depend on what was happening to to the offshore sector etc etc so I think that it would be necessary to have a perceived commitment for a considerable number of years and I think David is right it's saying that the divergence of the economy of that was the cause for moving to an independent currency would be some years down the turnpike rather than the very short term and I think that would allow the markets to see a currency union as stable for an extended period and be aware they would have plenty of warning of that will will likely to change and be able to make preparations and give Scotland time to establish its credibility in such a way that moving to an independent currency would be something that didn't cause the markets to take fright which enabled a rational and manageable process to an independent currency if that was needed so I think it's very different from the Czech and Slovak I also actually think it's very different from Ireland which you know that is 92 years ago and I think economic circumstances are slightly different and financial circumstances now than they were then so I think Ireland is a fascinating case and it was very generous with the United Kingdom to allow Ireland to go independent with no debt not sure if it knew it was doing it at the time but I don't think one can expect the same generosity or the same stability without a formal currency union has happened when when Ireland went its own way. Well I don't I don't pretend to be an expert on Irish history but I don't think it was a question of generosity. I think it was a necessity that they wanted a peaceful settlement and the Irish want a peaceful settlement and it was done in exchange as I say for moving the border which only goes to show my point that the question about currency union and debt and everything else is all going to go into one great big melting pot and I for one would happily give up our claim to Barrick and Carlisle if in return we could cancel our share of the UK down. That may not be sufficient for the UK Government this time around. Yeah because moving the borders on Ireland worked well. The situation though that you've outlined in terms of conceiving a currency union and wanting to have a currency union in the best interests of both parties still leads from your evidence to the conclusion that at some point the divergence will create a force which will see Scotland one way or another going to its own currency plan B if you like but we don't have a plan B. We're told that it will be a currency union. That's all that's on the table. How important an issue in terms of the stability of that currency union to the financial sector to the markets to those who would be assessing Scotland's debt ability and credit ratings. How important is that plan B? I don't think there's a plan B for the simple reason that there's an implicit plan and a half whichever has been talking about which is that even if and I don't believe it because I can't believe that a government would cut off its nose despite his face that in the very very unlikely event that Westminster decided to do that and as I said I just don't believe that it would nobody else believes it either in south of the border. If it did then there's also there's the option of simply continuing to maintain sterling on an informal basis without an agreed arrangement with the rest of the UK now that would actually be in many ways to Scotland's advantage because it wouldn't be constrained by the type of agreements that we're talking about to as far as budget deficits and monetary controls are concerned but I think that everyone who's looked at it agrees that the best solution would be an agreed monetary and fiscal arrangements which we call accounts union and I'm perfectly sure that's all how. We've had the question raised of sterling isation previously my concern is that if there was no perceived security on the currency arrangement that not only would there be a risk the markets would determine that that justified higher costs of borrowing for Scotland but also that there would be the risk of capital flight and of corporate flight because there would be seen as a lower risk solution which would be to locate funds and indeed activity within the rest of the UK if that's where the major markets were and there were risks that an independent Scotland as part of a currency board or sterling isation arrangement might be subject to volatility is high interest rates and uncertainties so I am I am not sure that that is an outcome that will be stable and in the interests of Scotland which is why I would to vote considerable attention to trying to find a currency union solution that is acceptable to both parties given the implicit logic that David has repeated that this would be in the interest of the rest of the UK as well as in the interest of Scotland if the right solution could be found whether we need a plan be at the outset it's probably much easier for me as an independent commentator to talk through the prospect of moving to an independent currency and the fullness of time as the economies diverge then it would be for the Scottish government I think it would be appropriate for the Scottish and UK governments to indicate that the currency union was a relationship they anticipated continuing for an extended period of time even saying that at least for 10 years or whatever it is that that would continue but I am just pointing to the logic of if you have different policies if you have a different path for the economy if you have different priorities within Scotland as compared to the rest of UK over time it may become desirable to break the tie with sterling to accept that leads to a different outcome on the exchange rate and but do that in order to look to the interest of Scotland in the new environment when one had established credibility for the management of the economy when one had the confidence of the markets and when the financial sector and others were secure that this was a Scotland that could and would run its own affairs fully in a way that they found satisfactory and they wished to be part of. That's really helpful and understanding the potential scenarios but looking backwards and again looking at Professor Simpson's paper he asked how did the UK get into this situation? Again it's easy to speculate about what position Scotland would have been in. Remember it's not easy to speculate but we could speculate about what position Scotland would have been in had it been an independent country in 2007. The indications from people like the First Minister who thought that the UK banking sector was gold plated in its regulation and he wanted to have a lighter touch regulation. We could argue that we would be in a worse position than we were with being part of the United Kingdom but the reality is if you look at the smaller countries that did exist as independent states at that time, Irish bank assets were 4.4 times Irish GDP, Iceland's bank assets were 9.8 times Iceland's GDP, HBOS and RBS alone were 21 times Scotland's GDP. We wouldn't have been in a very strong position would we? There are two points there. First of all, if Scotland, it depends how long it has been independent for, if it had been independent since say 1990 it would have built up a fairly healthy oil fund to cushion us against any such fluctuations. I agree in a way it's impossible to speculate. How would an independent Scotland have conducted its affairs in that time? The first thing to say is that it's too late when you're in a crisis to try to think you can get out of it easily. It's like, bit like being drunk and having a hangover. There's no real cure for a hangover. The only cure for a hangover is not to get drunk in the first place. So the only cure for a recession is not to have the preceding boom. And that's a lesson which I think painfully we're learning, we're learning now as the commentary read in the papers all the time about people worrying about whether the present housing boom is getting out of control or not. Because everybody realises the damaging consequences of that happening again. Now that wasn't actually rocket science to know that even in 1990, not to let things get out of control. A way back in 1950, was it the 1950s, the very distinguished chairman of the Federal Reserve Board William McChesney-Martin said famously that the role of a central banker was to take away the punch ball when the parties started to get going. Now what happened in the 19, in the early part of the decade of the 2000s is that central bankers, not only in Washington but in London did not take the punch ball away. In fact they topped it up quite regularly and that led us into the situation we're in. So the relationship of that to your question is this that we had a prudent Scottish government in 2007, we would have been in a good position. If we did not have a prudent government we would have a bad position and one of the criteria of prudence by the way would have been to have a had in place legislation providing for what happens in the event of the insolvency of a bank. A couple of comments if I may, I mean I felt that having RBS and HBOSS had quartered in Scotland was extremely important at the time when they were genuinely had quartered here and when the wider effects on the wider economy were really substantial when decisions on procurement were made here, when they used the services of Scottish lawyers, Scottish actuaries, Scottish accountant etc etc when there was a courier structure so high flyers could expect to stay within the Scottish labour market and progress. That was very good for Scotland because it provided high value added high skilled people who would work in those organisations move out to start their own businesses, develop the rest of financial sector. The overall impact was large. Now those days went before the recession. The central gravity of RBS as I stated in this committee a number of years ago moved down south and likewise with Lloyd's HBOSS. So we don't have the benefits of the headquarters effect in the same way as we had. We do have though as long as they are formally headquartered here the risks in the event of Scotland becoming independent and those risks as you've suggested are a substance and ones that could be potentially damaging even in the lower state that these banks now are. So what I'm interested in is having a stable and secure banking sector that is delivering for Scottish households and Scottish companies the services they want in a manner that relates to their interests and that understands the environment in which they're operating that to me is what matters. So having a smaller branch office as some people call it of RBS is fine provided that is meeting the needs of the Scottish economy delivering investment funds when appropriate making sure that the household needs are dealt with on a sensible risk averse but appropriate basis. That's why I want a diverse Scottish banking sector. That's why I welcome the arrival of new banks whether they be Tesco or Virgin whether they be Santander and HSBC developing their activities in Scotland. I want a wide range of banks all of them looking at the interests of the Scottish business community large and small and Scottish households. That's what matters. How can we achieve that? And if that involves the head offices formally moving down south, so be it if that involves the risks of investment banking exiting Scotland so be it. Let's have a banking sector that serves the interests of the customers in Scotland and let's also encourage the rest of a financial sector that has done remarkably well over the period following the banking debacle which has enabled the financial sector to remain strong and important within our economy. So let's look at what matters for Scotland under independence or under the status quo and let's particularly focus on meeting the requirements in a customer focus manner for the business community and the households within Scotland. My final point can be there. I'm agreement with Malcolm and Jamie on the desirability of an oil fund. I think it's regrettable now that we didn't make that decision. I think the consensus is that that decision should have been made and I agree with Jamie that when you know advice comes from civil servants it should be taking as such and not rejected on the basis of party politics or party interests in fact we would debate in such a similar situation this afternoon in the Parliament but we do know that Norway did set up an oil fund but Norway still remains Norway it hasn't become Nirvana. Norway with its oil fund has the highest or amongst the highest rates of personal debt in the world. Healthcare is not free. 28% of employment is part-time employment in terms of the Jenny coefficient at rates higher than the United Kingdom in terms of wealth inequality and it doesn't invest in capital in the way that we do in this country. We have a motorway network for example which Norway doesn't have and doesn't aspire to so we do things differently with our money here than they do over there although they have an oil fund and that brings me back to the point I started out with you can't compare apples with oranges and you can't cherry pick in order just to create the impression that all would have been well had we had an oil fund it would have been beneficial in certain respects but it wouldn't have solved a lot of the problems if the political attitudes towards financial sector and the banking sector had continued in the way that it did is that correct? I'm sure you're right I mean it's I wouldn't say for a moment that if you have an oil fund all your problems are solved obviously they're not it depends on a lot of other things but I would say that if I would rather be a minister of finance in Norway than a minister of finance in the UK or even in an independent Scotland let's be put it that way I think you have a much easier job I worked in the Scottish office straight years under Gavin McRown and it was not uncommon for one to do analysis and either the minister or a senior civil servant and to say well thank you Jeremy that suspended piece of analysis and we're very grateful for the work and the effort you put into it however the minister has other priorities which has also to be taken into account and therefore we are going to do something totally different from what you've suggested that's that's part of the way life is but which is why I suggested that when it comes to making sure that one cast the light on decision-making the transparency is important not necessarily transparency from the civil servants I think there has to be a constraint on civil servants going out and publishing what they want to or ministers going out and publishing whatever they want to civil servants whenever is the case but that is why I am very positive about the establishment of something like an office of budget responsibility and also the development of a capability like exists at the Institute of Physical Studies I think that having the light cast by these bodies in the OBR case officially in the IFS case with a reputation that is robust and strong is extremely important so if one had had a body of that ilk and that reputation commenting on the need for an oil fund and getting that out into the public domain stimulating demand coming before this committee if it existed and saying look this is the justification for going down that route you call the minister to account and say why isn't he doing it that to me would have had the opportunity of improving decision-making and perhaps have led to the right decision perhaps not but it would have cast the light on it evidence based informed analysis that enables you to ask the questions and that caused government to account to me is very valuable and that's what's needed in Scotland under this regime or under independence. We've still got three members of the committee who wish to ask questions so I'm actually going to call a recess so folk can have a natural break and get a wee bit of a breather I just want to make one or two week comments just to see if the panel get any response. A couple of months ago Sunday Times run article about Norway said it's get the world's highest per capita productivity and that part-time employment is a choice because people prefer to have higher quality life and actually work to increase an income which is in terms of purchasing power parity 58% per capita higher than the United Kingdom also is an exceptional level of child poverty and in terms of Slovakia since independence in 1994 it's at the highest rate of economic growth in Europe and is the world's highest per capita manufacturer of cars now not having had an industry to speak of before 1994. So to David and Jeremy agree that independence of itself or indeed staying within union of itself will not lead to success it is quite clearly the policies that are enacted either within the union if we stay or that an independent Scotland would actually enact that would make the real difference to people's lives not the constitutional change of itself. I would agree with that very much especially I like the fact that you started off with the word productivity because that although it's a boring sounding word that economists use that's the key to everything else because without improvements in productivity you won't get the growth in total output unless you won't get the growth in tax revenues without growth in tax revenues you won't be able to sustain your public services or let alone look for improvements in the quality of public services. I also agree with you I think it is and I've included as an annex to my paper and note I put to the economy committee in March and in the 30 years I've been looking at the Scottish economy one has this continuing issue of disappointing levels of productivity disappointing levels of new firm formation disappointing levels of growth of firms and disappointing contributions in terms of business development and innovation and I don't know why it's not just a matter of not having the banks funding things it's not cured by having a government bank that pours money in in different ways I think it hugely important to try to understand why there has been this disappointment on productivity what is different in Norway from Scotland we've got this amazing success in our higher education research and development which is not translated into an innovative set of sectors within the economy it's not translated into high levels of business investment in research and development why do we have a level higher education research and development top of the lead table and business investment research and development bottom of the lead table what causes that why do we have a low level of business investment why do we have insufficient companies with the ambition to export the ambition to diversify exports what is going on that prevents all the marvellous attributes there are being translated into a vibrant successful innovative and high investment and high value added sector within Scotland I don't know the answer to that but I'd be far more interested in exploring that and developing that and finding means of changing that pattern than getting bogged down all the time in the constitutional debate this matters to me more than anything and there are means within the existing settlement of exploring it and examining it and I think it is you know there's something going wrong there that I don't yet fully understand and I do think the greatest solution for a successful Scotland will be working on innovation investment ambition and development across a range of sectors that could happen and becoming a high value added high investment high level of innovation economy that Scotland could be that to me would be success I have to say this is an era I was going to touch on if it didn't come up and the questions from colleagues are still to ask them later on but in the meantime what we'll do is we'll have a wee break until about 11.45 a couple of minutes either way depending on how full care go on and the next person to ask questions will be Jean to be followed by Gavin Thank you convener and thank you both very much for the discussion that we've had so far I think it's been absolutely fascinating maybe just to to keep going from where we were during the course of this morning there's been reference made to the kind of advice that might be available and interpretation of the economic situation by the financial the fiscal policy commission or the equivalent of the OBR given what you've said that a few people saw the recession coming but you also said it's impossible to have a crystal ball and see what's going to happen next year well I mean these are kind of slightly contradictory remarks as though if we put enough people working on this plan they could see the future I mean if I think Jeremy Hughes suggested that we really did need to look at kind of a 10 year plan looking at oil looking at so on but on the other hand it's impossible to say what what excitement might happen what discovery might be made what opportunities might arise for a nation for a people for a county for a town so how would you reconcile that? I think that one can't ever get beyond the fact that all forecasts are more or less uncertain one has to accept that but I think what both the OBR and the Institute of Fiscal Studies do in this longer-term arena is to produce, if you like, a public sector balance sheet which goes into the 10 years, 20 years and tries to look at various alternative scenarios for key parameters and to see what impact variations in those would have could have on the public finances whether it means looking at demographic change and its impact on health expenditure or whether it's looking at the various possible streams of revenue from North Sea Oil and Gas under different scenarios and getting a feel of the context and the different scenarios within which that is working I mean this is good business planning, if you like I'm chair of the Board of Trustees of the Zoological Society we have different scenarios if we get a panda baby or if we don't and we plan on the basis of the less optimistic of those scenarios and hope that the more optimistic comes to being but one undertakes one's 5-10 year planning on the basis of looking at central expectations but scenarios around that and what the longer-term work enables an understanding of which are the critical parameters to get a feel of that not to be 100% accurate because that won't happen but just to get that feel and I think that the OBR has various roles at the UK level it produces the forecasts that are used for the public finances which is not proposed at the moment in Scotland but I suggest would be desirable in the event of independence or very substantial fiscal devolution use the forecast for individual budget measures of the cost implications and that's where the proposal from Mr Swinney before this committee what four weeks ago, three weeks ago is that the Scottish Fiscal Commission should comment on the government's forecast rather than providing the forecast for individual elements that's maybe that's satisfactory when the extent of devolution under the Scotland Act is limited I'm disappointed in the amount of resources that would be given to the Fiscal Commission I would like to see them given a little more opportunity to at least comment on the wider forecast and to start the process at looking at the longer term but certainly when we come to independence or very substantially enhanced fiscal devolution I think there is a need for this longer term balance sheet approach alongside very severe inspection at the very least of the government's forecast in a transparent manner that informs this committee and the public and enables them to judge whether there's a degree of over optimism or insufficient clarity in some areas that casts doubt on the forecast for the budget and the implications that has the economy so I'm a great believer in transparency I'm a great believer in scenarios being developed to understand the alternative policy the public finances and therefore the economy could take and I'm a great believer for having very well resourced bodies that can do that that have a status that enables them to be listened to and enables this committee and others to actually be influential and effective in its crucial role within our democracy Do you think that the LBR is too close to the government? No I've got huge respect for Robert Chote and his people we've had the great advantage of having them up every year, sometimes two or three times a year and I've hosted them at the David Hume Institute in the past just as they've given evidence here I don't think you could call Robert Chote too close I mean I think that I think he does a very good job of calling the government to account he also examines whether the particular changes in policy are going to lead to the conclusion that government assumes they will and there have been occasions when the policy has been changed as a result of his investigation or government has accepted his analysis and changed their view on what the implications would be in public finance terms I think he does he has a good track record he has the benefit of using a sophisticated treasury model which again is open and available we need a good model and you've had evidence that there is one being developed under the SRC programme Scotland needs something the stratocline model at Fraser is a starter but we need something of more substance as we go forward no model is perfect but we need something that helps us to look at the interactions and the dependencies as Peter McGregor did with you at your last meeting but transparency matters and I think as we go into if we go into independence and we've got all these uncertainties about the public finances and all these expectations are very tight stories I think it would be disturbing if government produced all the forecasts without at least a very strong search light turned on them which enabled those forecasts to be questions my preference would be for some of this work to be done externally and delivered to government but that looks unlikely but at the very least there needs to be this very strong search light so one has effective scrutiny if I could just add a little to that in my earlier part of my career I was an academic and in that part I did my share of forecasting including scenario forecasting and I've since come to regret it and I'm extremely skeptical about the possibilities of accurate forecasting of economic affairs now Jeremy is right that if you have a unbiased body an outside body you can remove the bias elements from forecast but unfortunately what you can't do is remove the much more difficult element which is you just do not know and cannot know what the future holds and that is true the further you go out even one year from now as I said earlier we don't know what interest rates will look like we don't know what the stock exchange index will look like and as we go beyond that it's even less certain it's not done to the inability of human beings to or rather it's not done to the incompetence or lack of skill of people in devising ways of forecasting it's just due to the sheer unknow ability of the future I just had occasion before I came knowing that I was coming to this committee thinking that question might come up I took the opportunity of looking up a treasury forecasting record and the only study that I came across on google was one made of the period from 2000 to 2009 which was of the budget forecasts by the treasury one year, two years and three years ahead and the results were pretty depressing now that wasn't because the treasury doesn't hire smart people it's just as I said before because of the unknow ability and I'm sure with all respect to the IFS and the OBR that they will encounter the same problem so my first my conclusion would be that before you are inclined to accept anybody's forecast look at their track record now the OBR hasn't been in business long enough to have much of a track record the IFS does and I haven't neither the time nor the resources to analyse their forecasts but I think it would be extremely instructive to do so I do know that there's never been a forecast of demographics for example that was right either we've never I think demographic forecasts are rather different because they're based on biology as much as not on economics so having worked for standard life I'm acutely aware that the whole business of life assurance companies is founded on the predictability of human mortality and mobility as a whole not as an individual you can't say how long you would live or anyone else here would live but taking the totality you can however that's the exception so far as human affairs are concerned which involves interactions between people I'm afraid that in my view will remain for a very long time an impenetrable fog and the only what is the policy lesson of that is the policy lesson I think must err on the side of caution you must be extremely cautious in making your budget provisions and this is where we come back to the oil fund again that if you have a if you've built up a big chest of reserves then you are in a much safer position to deal with unforeseen and unforeseeable calamities when they come along I don't disagree with anything David said in fact it's slightly worse than he said on the forecasting record because we don't even know where the economy is now the data will be revised over the next several years so actually the path over the last two or three years will look very different to economic historians in 20 years than it looks now so it's rather difficult when you don't know where you are in trying to forecast where you're going to be but that doesn't mean that one cannot assist decision making by looking at the issues and the factors and looking at alternative paths that are potentially possible and I entirely agree with David that it leads to a cautious approach particularly in the early years of a small nation I think the other thing that I related to that too in two directions one is that the boom and bust continues I mean we hear what I consider to be quite frightening phrases like back to normal with the economy and I'm not quite sure what back to normal is if back to normal is normal of 2007-08 then that's not a comfortable place to be and how far back would we go we seem, I mean I've run a small business and lived through now three recessions so is that something else that we would just assume that might happen that's part of that boom and bust will continue as long as we go along follow the same kind of economic path that we're on at the moment and what would shift that to make us look at economics differently I mean there are organisations out there who think that we should make quite drastic changes to how we do our economics that comes perhaps not quite so much I think I don't think you would I think when people talk about back to normal what they're looking back to is that period from about, Jeremy can correct me about 2000 sorry 1995-2005 which was an age period of fairly sustained growth low inflation and high employment unfortunately it didn't last and I don't think we truly really understand yet either why it happened or why it didn't last we would all like to get back to it now as I said before the only way that we can avoid significant downturns in the future recessions is not to have the preceding boom and the way of avoiding preceding boom is to have very cautious monetary policy and cautious policy in other words not to run up not to run up big deficits and not to have rapid monetary expansion now that's easier said than done and of course there are always in addition factors that will come along which you can't entirely expect for example there's no doubt that the factor in the financial crisis was not just the loose monetary policies in both the US and the UK in fact that in the bank and community in the investment bank and community there grew up this fashion for derivative instruments which were then packaged and repackaged and traded until nobody knew what it was they were buying and selling and once it became realised that there were some nasty packages floating about it's rather like the old game of pass the parcel when the music stops nobody wants to be holding the parcel and that's got all the bad mortgages in it but nobody knows which one it is and so that was once it became once some of the banks began to realise that some of the people they were dealing with were passing them dud packages then they stopped lending the money and that's what's called counter party risk and that was a I think perhaps a unique element in that particular crisis I mean there as I said before since the middle of the 19th century we have this periodic cycle of boom and bust each time however there is some slightly different elements so there's a general pattern but there's also elements that are peculiar to that particular crisis now what it will be next time I don't know everybody's looking at the housing market right now partly because the housing market played a big part in the last episode but that doesn't mean to say that it will be the housing market it might be something else but as long as we have prudent and cautious monetary and fiscal policies then we should be able to protect ourselves at least from the very worst recessions I believe I agree with what David's saying in terms of back to normal when normal was good I often look back I had 12 years as group chief economist at RBS from 1993 to 2005 I chose my period very fortuitously that was a good time and when I retired was a good time to retire I'm not saying that I would have in any way been better than my successors or others in forecasting what was going to happen and preventing what happened but 1993 to 2005 were very good years for our economy and very good years to be engaged in an economic role there so we have to be careful about what we will in back to normal we certainly have to have conservative monetary and fiscal policies for an extended period boom or bust the housing market yes of course we're paying attention to it now I'm not sure that I would have given top priority to stimulating demand in the housing market I might have given more priority to stimulating supply and helping to equalise the position that way and we certainly need to watch that we're not going back to something like the situation last time round but as David's implied the next problem will be a new one rather than the old one repeated and we've got to learn to be prepared for that and the best way of being prepared is being secure, conservative with a small c and having stable policies the only other point I'd make is that I think for Scotland it is important that I go back to the national performance framework to be absolutely clear about what Scotland wants and if we want a different set of priorities if we want to give greater priority to equity within our population than to growth per se let's be clear on that and then let's consider policies against a clear and precise set of objectives that are Scotland's and that Scotland wishes to measure and wishes to judge performance against rather than just accepting the fastest rate of growth is the necessary the best let's be clear on what our objectives are Just on the point that we left before the break was on your statement about innovation and what is inhibiting the manufacturing growth exports, energy companies and so on would you say that Scotland is an independent country and the two points I want to make about this one one is not kind of relevant but that the say the strength of the pound is perhaps suits another part of the United Kingdom better than it fits with Scotland and secondly that I believe that there's such a thing as a kind of business commercial industrial culture which can exist in any country and that comes with a belief that actually you're working within a unit with people that you know I think the smaller the unit if we look at some of the smaller countries and there how they've come through the recession interesting but also how they do relate to I mean there's a great debate just now about the money for research and development but there can be all the money in the world if we're not using it and actually compared with other countries Scotland is not using academia as it should I think or even just by comparison we don't there are too few direct links understanding the kind of R&D that's happening in the university and how we might use them however I do think that that comes that there needs to be an energy and this is one of the things that I do think will it's difficult to articulate but it's essential in terms of an independent Scotland that actually the energy that's needed for that is possible with a much smaller country and finally because I won't I probably won't get allowed back in again just on your point Jeremy about the debt about Scotland's debt and that whether legally legally we may not be obliged to pay this but you know morally and so on we've had the use of the money that needs to be some payback but I wonder and perhaps question your assertion that the market would be would be less keen to recognise Scotland as an independent nation if it somehow defaulted on that whereas the market defaults on all kinds of things and it's hardly held to kind of some moral high ground three points there I think first of all on sterling I don't think one can blame a strong pound for what's been happening in the Scottish economy and I don't necessarily believe that an independent Scotland with its own currency would tend to see that currency depreciate against sterling on that appreciate I think that's uncertain and I don't think one can say that the value of sterling is wrong for Scotland I think that's a difficult argument to sustain so far as the the culture and the R&D points that you made a concern I think this is fascinating I mean is there a a culture within Scotland that applauds endeavour to be creating and running businesses and accepts that failure does take place and should be accepted and encouraged to try again as happens in the US and elsewhere is there a drive for business people or students leaving university or FE colleges to want to create businesses and grow businesses it doesn't seem to be there to the same extent as one might hope so would an independent Scotland see those animal spirits unleashed perhaps perhaps it would be somewhat different no one can tell but I think it is I sometimes think that in Scotland success and failure are equally damned that it's not good to fail failure is something that isn't accepted as inevitable in the entrepreneurial development and being too successful is only now becoming applauded so I do think the culture does need to be looked at and the R&D point is it fascinates me I think that there is something wrong with the incentive mechanisms for the use of R&D in higher education institutions I was many years ago Vice Chairman of the Scottish Higher Education Funding Council and the round of funding was determined on the number of articles that were generated the number of academic success stories rather than related to is that research being used and if an academic was doing great research on genomes A and B and genomes A was going to get the most articles and genomes B was going to leave to a booming life science business then genomes A somehow took precedent because that was what the incentive mechanisms were set up to do so one needs to encourage academics to want to make best use directly or with others of their work for the success of Scotland and one also wants to encourage businesses to want to use that R&D to want to understand it and it's not yet happening and I think tremendous to have the success in A, G and R&D but disappointing that it's not being translated into the innovation we're looking for how we achieve it I don't know but I think it is something that merits attention and finally on debt it may not be right that markets would act in the way I suggest they would but I think it is likely they would act that way that they would see any failure to take on the level of debt that the UK and others deemed appropriate any suggestion of default or anything akin to that would be likely to lead to markets demanding higher interest rates for borrowing by an independent Scotland how high I don't know but I think it is absolutely critical that in the early years Scotland demonstrates its credibility and its appropriate approach to the public finances into the running of its economy that has to secure its position in order to work with the markets so that it can for its nation I agree with Jeremy's last sentence that I think the single biggest factor determining what rate of interest of which independent Scottish Government will begin to borrow is the market's judgment of the prudence of its public finances and what they see as the prudence of whoever then is the minister of finance I don't agree with Jeremy at all about the question of there being any connection between whatever share may be negotiated in our notional share of the UK debt and any question of default because as I said there is no question of default and I don't really think the markets will think like that but I agree I don't know and so we just have to wait and see more important is the point which you raised about culture which Jeremy touched on as well and I don't like him I don't have a simple answer who does to the question of culture but I do think there's one factor which may link economic success with constitutional arrangements and that's the factor of confidence and I think one of the reasons why we have an observably lower rate of investment in innovation among Scottish businesses is that we just don't have enough people with confidence about the future we don't have enough entrepreneurs who are prepared to take risks and that being the case I don't think we can wait until such people come along by natural selection I think we have to create an environment in which we attract people businessmen, entrepreneurs from all over the world to come here and we've got to make an economic environment that's attractive to them Gavin to be followed by John First question is for Professor Pete in your paper the second page you talk about the role of the fiscal policy commission and you say this clearly the role of the FPC in the context of the Scotland Act is limited it will be examining the Scottish Government's estimates for revenue to be raised but even in this limited context a few voluntary hours input seems all as does the sum available to buy in external input I wonder if you can just expand on that viewpoint please Well all I've seen at the moment is the paper from John Swinney and the discussion that you as a committee had with him but my understanding is that there are to be three members who will work on a voluntary basis and the sum I think is it £20,000 made available for research to support their work and now if they're buying in analysis on say three different items of taxation and you've got £62,000 for each item that's not a lot if you're relying upon volunteers to undertake the work I'm sure we've got very good people out there to take it on but the time is likely to be quite limited so and one would want them to take this very seriously because it's the starting point for actually doing this type of analysis and developing the role of a commission which is likely to expand so I just believe that this looks pretty limited even as a kickoff and I know funds are tight but I'd like to have seen maybe some payment at least for the chairman of this commission on a totally part-time and limited basis and some more funds for buying in good quality research preferably from Scottish Higher Education institutions to enable them to develop the ability to analyse the Scottish economy more and elements of it there's not enough work going on in Scotland in the Higher Education institutions on analysis of the Scottish economy setting on one side the work of David Bell Peter McGregor, Brian Ashcroft and other all of them tend to be of my generation rather than the next generation unfortunately thank you I guess both you and Professor Simpson will say that output is more important than input but I mean in terms of the input of the sum available do you have a personal view in what sort of sum you were expecting or should be there in order to kick it off properly or are you just saying that the sum that is there if you have a more exact I haven't got an exact figure I just know that 20,000 doesn't take you far these days especially when you're paying the full cost as you are now with HE institutions on just the marginal cost you're paying full cost I would have preferred that some analysis of the work that was required and then giving some indicative costing of that rather than coming up with a figure which looks to me somewhat arbitrary okay thank you moving away from that issue then the question for both of or for either of you if Scotland were to go independent in March of 2016 what is your view on the likely borrowing costs than an independent Scottish Government would face relative to the UK Government I can honestly say I haven't thought about the numbers and I don't know I don't know of any reliable estimates I'm quite sure that there would be an initial premium on the costs as I say however a big factor will be a market subjective assessment of what the capabilities of the Scottish Government to repay the loan and that will depend primarily I think on their judgment of the personnel and policies of that Government obviously I like David have not undertaken research on this I've seen the work of the National Institute of Economic Social Research of Angus Armstrong and Monique Abel which looks as good quality as one can at the moment but so much will depend on the form that independence takes so much will depend on the currency arrangements on the arrangements for management of the public finances et cetera et cetera so the markets will be looking at the extent to which rigorous and secure policies are in place and also at currency union or whatever the way forward is there will be a premium if it's all managed well it will be relatively small and could be short lived as the reputation is built and enhanced then that premium should reduce okay thank you you mentioned the currency union Professor Pete obviously you both answered a number of questions in relation to that so I want to ask a couple of different questions around it are there any good examples of countries that have separated and then successfully retained a formal currency union retained yes I'm not sure if there are unless no I can't think of any but then I can't think of any apart from Czechoslovakia which went the other way so I just don't have any evidence I mean such there have been a number of currency unions in history of which have been quite successful I think Belgium and Luxembourg is the one that springs to mind that lasted quite a long time but the important thing is that we're not we talk about having a currency union as I said before as if it were something new we're not creating something new we're simply having continuation of the status quo but adding on certain agreed constraints on each government both governments we mustn't forget concerning their behaviour that's all and so I can't see any once these constraints have been agreed I can't see any forces which would tend towards the breaking up of such a currency union I have to agree that the number of examples out there is limited as it is for standingization type operations and perhaps the classic positive example there is Hong Kong but the level of reserves that Hong Kong holds enables as such that are beyond the wildest dreams of avarice so far as an independent scotland is concerned and that enables them to manage having a financial sector of substance and having a very stable relationship with the dollar and that being secure and acknowledged by the market so I don't think there's a good example out there but I think that that it is achievable but the exact basis on which it's achieved remains to be determined okay let's assume there's a yes vote in September let's assume a currency union was agreed between the two governments I just want to explore this idea of permanence or the market seeing that it's not just a kind of short term arrangement there have been comments made in the press by quite senior people saying this would be for the first couple of years and then we'd do our own thing the white paper itself says quite openly it would be up to the people of Scotland thereafter to decide what arrangement it preferred most in terms of currency so there are certainly some indications out there that there are at least some people in Scotland who would prefer not to be in a currency union for terribly long if it were to work what do you think would need to be said by both the UK government and the Scottish government to give a clear indication to the markets that it was a permanent or semi-permanent agreement would there need to be a formal declaration would there need to be a timescale put on it because I think there would certainly be some suspicion that at least on one side it wouldn't be permanent I would agree I think Jeremy earlier on in answer to another question suggested 10 years as a period of declaration and it would seem to me that seems perfectly sensible time period the problem is that even if a declaration of that type was made it's always up to the will of the people of Scotland to change it as stated in the white paper so in addition to any form of declaration there has to be a belief in the markets and elsewhere that this would be sustained and you mentioned that there are people in favour of independence who do not see this as the right way to go for an extended period so there would have to be a view that Scotland the parties to the Scottish government and potential other parties and those within Scotland did see this as the right path for an extended period and that there wasn't going to be a growth of pressure for moving very rapidly to an independent currency in order to achieve the flexibility that would to an extent be constrained by being part of a union so it would have to be seen as accepted by the great will of the Scottish people and the Scottish politicians and at the same time having a statement that this was for an extended period that then would provide the security that I think would permit not very significant premium on an interest rates and also a stability for the financial sector and others to work with I would just like to say that I think there's a risk that we can all get hung up on the kind of subjects that academics like to debate about what's the optimal type of currency arrangement should it be an independent currency should it be a common currency with the rest of the UK or should it be attached to the euro or even something else and the truth of the matter is that it doesn't make that much difference if we take three countries which for looking at them from here are broadly similar Denmark, Sweden and Finland Finland is a fully paid out member of the euro zone Sweden, I think I'm right in saying has a fully floating currency of its own and Denmark has its own currency that tries to keep it in relationship to the euro and so the prosperity of a country is very rarely down to its choice of currency and that shouldn't be surprising because we all know that prosperity of a country in the end is down to apart from luck down to the qualities of the people in it, the decisions they make and a question of what financial arrangements you have is really a second order matter entirely thank you if I can move on then the we touched on again very committee members have talked about the oil fund and their questions most analysts have projected for the first year of independence were it to happen between a 5% and a 6% deficit for Scotland how would you put money into an oil fund if you're running a deficit of 5% or 6% are you not then effectively borrowing money in order to put money into the oil fund can you feasibly do it at that stage or is it something that you would do once you'd got into a surplus of some sort first of all I don't accept the projection of numbers like that for the reasons I've given before when we were talking about forecasting because it's open to government to alter its budget in a number of ways that doesn't just involve projecting forward numbers in the same proportion that they are at the moment however I do agree with you that given that we all are as we both said we're entering a period of fiscal tightness there isn't going to be a huge amount of scope for putting a lot of money right away into an oil fund and I wouldn't pretend otherwise I do think however that it should be an early objective of a Scottish Government to start to put money into an oil fund but I wouldn't try to say what year that should be or how much I take your point you don't accept projections and so on but theoretically should they start putting money in before a surplus is reached so while in deficit or are you saying it should happen once we're in surplus whichever year that happens to be the second of the so only once you're in surplus you think it makes sense to I've got a slightly different take on that I mean the first point on what the deficit would be in the first year of an independent Scotland it does depend on policies but what I've seen thus far of the proposed policies is quite strong on additional expenditure items but not very strong on additional tax measures so I don't see anything as yet that persuades me that the deficit is likely to decline as compared to what it would have been under the status quo in constitutional terms and that's quite a tough take because if we're looking to Scandinavian models for example they may be more equitable societies in many instances but they also tend to be higher tax economies and so we have to face up to the issue as whether an independent Scotland wishes to have high spend in a number of areas and how it wishes to finance that because I don't think the answer is to run an even larger deficit than would be the case otherwise so far as your question on the oil fund is concerned I think what would be desirable would be to set out anticipated path for the fiscal deficit and to one that was seen as prudent and likely to continue to sustain sustainability of the public finances and the right path and then if one had this exceptional year in oil and gas revenue which took it well above the expected revenue stream then some or all of those funds could be stashed away in a fund and as I've said before if the level of revenue was below expectations then I think the government would have to take that on the chin within its budgetary arrangements so I would not necessarily wait till there was a surplus but I would only put funds into a fund if the level of restraints was greater than that was expected which was deemed to be consistent with appropriate management of the public finances if that's clear Thank you John I mean just to follow up on that point I mean presumably you could have a fund as different organisations do without actually having the cash in it but following up from what you said Professor Pete if you've had a good year you've got a bit of extra money from the oil and the gas but you're still running a deficit you could actually put the money into a fund on the government balance sheet have it kind of ring fenced but in a sense lend the money back to the general fund rather than borrow separately I'm not sure how that arrangement would work I can't think it through sitting here but I would only move resources into the fund if the the public finances were deemed to be as was required and the level of revenue from oil and gas was above the expectation consistent with that as appropriate state of the public finances and then they have to be ring fenced they have to be moved away and then one would earn a return on those funds in some way or another whether that was then returned to the fund or whether it was passed across to other parties sorry something is beeping here it's a long time ago it's a long time ago one would have to determine whether any returns on the assets in the fund were retained into the fund or transferred to the general budget my preference would be for them to be retained in the fund so that fund built over time but you'd also have to be absolutely clear on what that fund was to be used for thanks so much are you okay Professor Simpson? that's okay that's right I wanted to go on to some of the things you'd said in your paper about implicit debt and explicit debt and I was slightly intrigued by that because some of the figures seemed quite high could you explain to us what you meant by implicit debt implicit debt is really all the spending commitments that a government enters into for the future which are not covered by explicit tax that have taxes that have already been planned in other words for example the most obvious example is the pension promises for public sector workers and they also cover things like NHS funding for example not all NHS funding may be covered by the present tax revenues or tax revenues that are foreseeable on the basis of present tax arrangements and then there are whole sorts of other things like legacy, PPI, PFI liabilities and network rail expenditures and so on and these tend to accumulate almost unseen as it were and when we look at the debt position of a Government any Government at the moment we tend only to look backwards at the level of debt that's been accumulated in the past we tend not to look forward and anticipate what the liabilities in the future might be that are calculable and that are in excess of foreseeable revenues I mean I follow, I mean I certainly understand the PFI PPP point because these are a real debt they will have to be paid I suppose I'm struggling a bit with the NHS idea because does the NHS not just live within whatever money is given to it and I mean any country if you've got more money you can give a bit more to the NHS if you've got less money you give a bit less why is there liability there? Well because I think we all have expectations about the level of funding for the NHS and I don't think we're future commitments as to why I'm not sure that it's true to say that if it turned out in the future that or if the foreseeable tax revenues failed to cover that we could just cut back on these commitments at will even if we could I think it would be wise now to know about them so that when they come along there wouldn't be unpleasant surprises Okay so I mean you actually suggest in your paper that the implicit debt it could be over five times the explicit debt which that's what this American calculated that he calculated not just for the UK but a number of other countries and he didn't go into detail on his methods but he's a perfectly respectable academic researcher so I had no reason to dispute his numbers That sounds quite scary and I mean you go on to say Government debt explicit and implicit seldom appears to be the subject of serious debate at Westminster a run in sterling could be precipitated at any time I mean is that overstating it a bit or is it not? No it's not overstating it I think that we've been very lucky or maybe if you were a conservative you would say not lucky but a good policy that there hasn't been a run in sterling since the financial crisis broke but that doesn't mean to say it's going away and if for example the present many boom in house prices were to continue that could very well be eventually triggered a significant rise in interest rates which might in turn trigger a downturn and if we had another downturn in the economy within two or three years then I think that very well could trigger a run in sterling Yes, because going back earlier on in your level report you said when interest rates return to a more normal level so I mean is your feeling that they are artificially low at the moment? I don't think everybody recognises that thing these loose money policy quantitative easing has meant that interest rates are historically unprecedented in low levels and everyone also agrees that that can't go on forever because otherwise it would loose uncontrollable inflation I mean I personally think it's loosened quite a bit of inflation already I think the reason why the stock market has risen for example in the last few years is precisely because of the availability of this money but I don't think that it would be safe to continue to do that and indeed both the Fed and to a lesser extent the Bank of England have announced plans for tapering off this rate of increase of the money support and that will inevitably raise interest rates back to their more normal level Professor Pete, that's quite a bleak picture and suggests the UK is not doing very well Do you... It is, the requirements are fairly bleak people Do you share that view Professor Pete? I certainly share the view that interest rates will rise and are at an artificially low level whether they go back to 6, 7, 8% or whether they stabilise it to a 3% I have no idea I hope that we are in a relatively low inflation environment and therefore the level of interest rates that is required will not be excessive because certainly we have to remember that any increase in interest rates will be a burden on households as well as businesses and the risks of further debt problems emerging particularly in the household sector of substance if rates were to rise rapidly so it's got to be managed very carefully which is why I'm sure the Government of the Bank of England is looking to easing the pressure on the housing market as one way of avoiding unnecessary increases in interest rates he wants to achieve that by changing the policy on stimulating demand rather than changing interest rates directly on this question of implicit may I just come back on the implicit debt I mean I totally take David's point so far as PPI, PFI is concerned those are debts that are committed they are not contingent liabilities they are liabilities that are there and should be included but I think it's a somewhat different story with how one manages the position on the health sector for example I think it is absolutely right to look at what the implications should be over an extended period for the public finances if the health sector was given the funds required to maintain certain standards to take account of health inflation and we know that health costs rise more rapidly than those in other sectors and we also know that with an ageing population demographic change leads to high health costs so it's absolutely right to look at what the impact of that on the public finances is concerned but I don't think you then automatically assume that that leads to an increase in debt because what that then gives the opportunity for the government of the day to do is to determine whether it wished to stick to that commitment for health or pensions or whatever it is whether it wishes to do so and at the same time to reduce expenditure in other areas to compensate or to raise taxation to compensate so the deficits can be adjusted to take account of the higher expenditure on health or pensions without necessarily leaving to the rampant increase in debt so there are ways of managing policy so it's right to be aware of the risks but one shouldn't assume that every extra pound spent on health leads to an increase in debt that doesn't follow as night follows day That's helpful I mean one of the suggestions we had previously was that when countries are heavily indebted they quite like inflation because that erodes the value of the debt So I mean going forward for the UK is that going to be a temptation for the UK to allow inflation? I very much hope not I mean I think that if you have a significant increase in inflation you will lead to a deterioration in the value of sterling interest rates under the existing regime and that will lead to higher costs for business it will also lead to a further rebound on inflation as an imported inflation rises sterling falls so it may be a lovely way of in principle getting rid of the lowering the real value of the debt by higher inflation but I don't think it's a stable approach to solving the issue I think some policies are much more appropriate Professor Simpson Because you're saying Yes Because you're saying that if interest rates rise I mean for the UK that is going to put serious pressure on UK's finances On UK On UK debt if the debt stays the same or increases and the interest rates increases I think you're both suggesting they will be I mean that is going to put huge pressure on the UK and will the UK not be tempted to lower inflationary route Absolutely I don't believe it will be tempted down that route because that would be such a change of the policy that was deemed successful in that glorious period in days gone by and is what all all serious parties are committed to a lower inflation and stable environment going forward it would be very difficult to move away from that and I think wrong That's great I mean sticking in interest rates we've talked already a little about for Scotland if independent would be different from the interest rate for the UK and if I'm right in saying I mean we've got a number of issues in there we've got the personnel actually running the respective economies we've got the actual policies that would be involved it's been suggested that on the whole smaller countries pay a premium although I think we've also had evidence that some smaller countries are so well run that they actually end up with a lower net interest rate and presumably to a debt level would be a factor in there because if you've got huge debt, presumably a higher risk and anyone lends you anymore it is going to be a higher interest rate I mean are these the main factors that are considered? Again I come back to my point that I think it's not very helpful to try to put numbers in these things for example at the height of the Irish debt crisis they were having to lower it's something like 15% in the commercial market 10 years now the Irish government's borrowing rate 10 years is actually lower than the UK lower than the UK now I don't think for a moment that will last permanently but it does indicate that one ought to be very careful about trying to put put numbers in these things and I don't therefore if we come to the original part of your question what will be the difference between interest rates in Scotland and in the rest of the UK the answer really is what interest rates relating to what particular type of debt if we talk about government debt then any difference between the two will be due to the difference in the market's perception of the ability of each government to repay its borrowing and it's not at all clear to me that that would necessarily favour the UK as I just said a week or two ago the Irish borrowing government borrowing rate was lower than the UK now on the other hand if we talk about the more important kinds of borrowing which is commercial borrowing for long-term investment then I think the markets will judge on the characteristics of the borrowing company and the prospects of the project and I don't think that they will be inclined to add on any other factors to that I can follow up a couple of points there can you explain why the Irish borrowing rate is lower or has been recently lower than the UK no I can't but it's just an indication of the way in which markets especially international markets can move in quite irrational ways or at least that are not immediately apparent to observers and on the second point you suggested that government borrowing is distinct from either individual or business borrowing the two rates are not not related at all or not related completely well I can't see why business borrowing should have any particular premium attached to it simply because the business is located in Scotland or negative premium if that's what you're hinting at did you want to comment on that Professor Peter my expectation would be that the factors that you referred to are the main ones determining the differential on interest rates and yes some small economies have lower rates but that's because they have achieved great credibility and have very conservative policies so other things being equal small countries tend to have a small margin and I think Scotland would have to gain credibility over time I think there's also an issue of the stability of the currency if Scotland were borrowing and sterling for example as part of a currency union the markets would have to be satisfied that was likely to be sustained for an extended period before they placed the premium so far as corporate borrowing is concerned I thought that there tended to be a margin over libel or whatever the base rate is within an economy that led to the cost of borrowing and if the the rate of government borrowing was slightly higher here than elsewhere I would have thought that might feed through to an equal small margin for those borrowing in the corporate sector but the main issue will be the security of the company and the markets OK, that's great, thanks so much OK, well thank you very much now the session has been a long one and we could discuss many things I was keen to go into such as economic growth and productivity et cetera but we don't have time for that so I'm just going to finish with one question which is really on the the whole point of this is about Scotland's public finances post 2014 and we've talked a lot about we've already mentioned the fact that there doesn't seem to be any low-com denominator in terms of the union's party policies going forward if there's a no vote in the next two or three years it's likely that UK parties will be involved very much so if there's a no vote and focusing on the UK general election and possibly depending on the outcome of that election a European referendum is it your view therefore that there is likely to be any real focus on Scotland for example, we've heard about potentially the Barnett forum being reviewed or do you think it will be Scotland will effectively be lost in all of this and if Scotland is not to be lost and we have further devolution do you think of one fiscal power which would be your priority to devolve to this Parliament well I think there are a number of questions there to answer your last question I would say that is I think the most important single tax that should be devolved second of all I don't believe that the unionist parties would have the slightest interest in bringing forward any additional substantial devolution legislation for two reasons one is if you look at the period after the 1979 devolution referendum which was lost nothing was done for another 20 years and looking at it if you put yourself in the position of the party managers of the Conservative Labour Party in London why on earth should they what is there to be gained bringing forward some legislation concerning Scottish devolution when as you say much more important issues are at stake so I can't see any movement at all and I think that's reflected in the carefully judged vagueness of such commitments as has been made already they are notable for their lack of clarity so I think the answer is nothing will happen I hope David's wrong in the event of a no vote I hope that there will be, particularly if it's very close no vote I hope that attention will be focused on the next round of devolution particularly fiscal devolution I think that may be associated with a call for following up on the needs assessment front you've talked about revising the Barnett formula which will come from Wales and elsewhere for reconsideration of the way that formula works in the context of a needs assessment study and Gavin McRown has talked to you about that needs assessment is very complicated I got involved in a bit of a mock one when at the Scottish office and I think I learnt from that that I could probably have come out with whatever conclusion people wanted from the analysis but I think it would be because there is a view that Scotland has done relatively well and Wales has done relatively badly in the context of a no vote and the thought of further devolution I think that might come to the fore in terms of what I would seek to devolve I actually believe that transferring responsibility for significant further parts of welfare would give real opportunities to make decisions within Scotland I don't think devolving further income tax would lead to major changes I do believe that if there was more ability for the Scottish Government to make its own decision across a wide range of welfare policies and again Gavin touched upon this in his evidence and gave fairly clear indications of where that could go that might give an opportunity for Scotland to develop its own priorities and to implement policies within that context I think the resources were devolved with them because when county tax benefit was devolved it would have produced by 10% 40 million a year you are entirely right it would have to be the full resource a full appropriate resource would have to be transferred and that would have to be very carefully scrutinised to make sure that some was forthcoming I am going to finish the session by just asking either of our two guests who have been tremendous in answering all our questions this morning if they have any further points they wish to make or they are happy punched up perhaps I am done sir ok, well thank you very much for that just before I end the session it's just to say that for three long years my loyal, need devoted deputy convener has been championing at the bit to chair the finance committee and next week he will have that opportunity so on that very positive note I would like to wind up the session thank you very much everyone