 Fy colleagues, fel angen i chi. Fy imeddiwll, yn 2022 mewn a bawb foursus cerddoriaeth i ychydig a'r cyflomwr Cymru. Mae'r eitem er mwynhau ymateserrymfaenid yw Ieithy ddillol a'r cyflomwr Cymru a'r cyflomwr Cymru a'r cyflomwr Cymru a'r cyflomwr Cymru a'r cyflomwr Cymru o'r euchydig a'r llaw ac oeddaeth mewn agweithig. Mae'r gyflomwr Cymru ddych chi'n rhaid i chi oeddaf yn gwneud ysgolfaenid ar y cyflomwr For a first evidence session, I welcome to the meeting. Dame Susan Rice, DBE, Chair of the Scottish Fiscal Commission, Professor Francis Breeden, Commissioner, Professor David Olff, Commissioner and John Island, chief executive of the commission. Before we ask questions, can I ask Dame Susan to make any opening remarks? Good morning, Susan. Good morning, convener, and all of you. Thank you for inviting us to discuss our Mae'r cyfnodr gyda'r cyfnodr ymlaen gyda'r cyfu yn ei wneud â'r gyfnodr gyda'r cyfnodr cyfnodr gyda'r cyfnodr cyfu i fewn i'r gwylwg fewn i'r gwylwg cyfnodr gywedd gan gyfnodr gyffredig, ond dyma'r cyfnodr cyfnodr gyffredig gan gyffredig i fewn i'r gyffredig gan gyffredig yn ymlŷd gyda'r cyfnodr gyffredig ag fod oes ymddangosol, ac weld y cwmeith dedigol yn yma. The outlook for the Scottish economy is much more uncertain than in our forecast last December. The Russian invasion of Ukraine rising energy prices, and further global supply chain disruptions on the back of China's response to Covid have led to a very challenging economic outlook. The main focus in our economy forecast has been on inflation and the cost of living crisis for many households. We are forecasting inflation to peak at nearly 9 per cent in the last quarter of this year as the October energy price cap increase comes in. We don't expect earnings to keep up with inflation, with a significant fall in real earnings of minus 2.7 per cent this financial year before it returns to slow growth in future years. Since December, the funding that the Government receives from income tax after taking account of the block grant adjustment worsens this year and next before getting better for the remainder of the spending review. These later improvements are due to the UK Government's promise to lower the income tax basic rate from 2024-25, which will not apply in Scotland, alongside our new baseline assumption of a frozen higher rate threshold in Scotland. I should add that although the Scottish Government understood this revised assumption, their income tax policies for next year will not be set until budget time. It is also worth knowing that the Scottish Government's funding comes under further strain in 2024-25 when it faces a negative income tax reconciliation of over £800 million. This reconciliation is a result of two factors in the budget set in January 2021, when income tax revenues were based on our forecasts and the block grant adjustment for income tax and the OBR's forecast from November 2020. If your cash reminds back to January 2021, there was a lot of uncertainty about the pandemic, but also about the state of the labour market with many people then on furlough. The forecast net position in January 2021 benefited this Government to the tune of £475 million, but we said then that we thought that this was an artificial effect of forecast timing and uncertainty, which would result in a negative reconciliation later. Since then, we have revised up our forecast of Scottish income tax, but the OBR has increased its forecast of UK Government revenues even more. The result is the forecast's large negative reconciliation. When the outturned data are available next summer in 2023, we will know the exact size of the reconciliation. However, we can be confident that it will be negative and is likely to be large. The tax position is part of the Scottish Government's funding position, and of course the size of the block grant from the UK Government is key. Overall, we are expecting total funding to drop slightly in real terms for the next three years before increasing slightly after that. Within this context, the Scottish Government has set its resource spending review. On the spending side, Social Security will account for an increasing share of the resource budget. This year, Social Security accounts for around 10 per cent. By 2026-27, we expect it to have increased to around 14 per cent. Since December, our forecasts of social security spending for 2026-27 have increased by nearly £1 billion. This is because of higher inflation and Scottish Government policy announcements, such as the increase in the Scottish child payment to £25 per week and the plans to replace the devolved payments, which are still administered by DWP. Spending in future years is determined by policies that the Scottish Government has already set in place and the commitments in the social security charter. When our forecasts for social security spending are added to the Government's own plans for health and social care spending, the funds left for other portfolios are very constrained. Once adjusted for inflation, funding for the other areas falls substantially for the first three years of the spending review. It is 8 per cent below this year's levels by 2526, and then in 2026-27, funding is expected to be 5 per cent below current levels in real terms. I would like to finish with a short personal comment. As you know, this is my last forecast, as I will be standing down from the Fiscal Commission at the end of this month. I just want to say that it has been my genuine privilege to lead the commission for these last eight years. I have to confess that I have both welcomed and actually enjoyed our regular engagement with this committee and your predecessors, so I just wanted to say thank you. Now we will take questions. Thank you very much for that, and I have to say that we will be sorry to see you go. I am sure that you just said that so will go easy on you for the next hour, but it is not going to happen, not at all. Obviously, you touched on the key issues that the committee will be asking about, and the first one really is inflation. I think that one of the concerns about inflation is that the GDP deflator of about 2.4 per cent is not realistic relative to the retail price index, and I can see Professor breeding and nodding at this time. Obviously, we are going to be faced, and we are being faced with a lot of public sector, understandable public sector pay demands. First of all, when you look at the real reduction in disposable incomes—Nominal earnings, we should say, I suppose, before we go on, even to think about taxation and disposable income—we look at the 2.7 per cent reduction. Is there a differential you see between the private and public sectors in that? That is the overall for the economy, but where would the private and public sectors sit within that? You were going to turn to the princess who was nodding before. I was nodding the first part. The second part is more difficult, because it says that we do not make that breakdown between public and private. However, I do agree with your first point, that Government expenditure—what is the real cost of Government services—is quite a difficult question to answer, and their convention has been to use this thing called the GDP deflator, which has had a number of issues recently, but at present time has a particular problem that it does not include import costs. Obviously, import costs is at the heart of the cost of living problem. For example, the heating and lighting of this building is really an import cost, but it is not measured—it is not covered in the GDP deflator because that is only domestic productions in there. I think that the takeaway from that is that there are real reductions in Government spending that Susan was alluding to. In some sense, in your mind, you might think that they are probably a little bit bigger because the import costs are going to eat a lot of that funding for Government already before we start thinking of things like wage bills and other elements of the services. I think that is a slightly tricky point at the moment with looking at real falls in Government expenditure. I think that if any employer was to say—for example, COSLA—to suggest that unions, for example, all its local authorities were happy to provide workers with a 2.4 per cent pay rise because that was a GDP deflator—in fact, they are not even off on that, I think. Then there are going to be very difficult discussions straight away. Is perhaps that measure still an appropriate one to use on temporary forecasts? It is difficult because measuring the price of Government services is very challenging. Even in the data, it is very challenging. Indeed, we have seen that in the pandemic. There is a thing called the price of Government expenditure deflator, which is specifically for Government services. We have seen that yoyoing around, because the pandemic has caused all sorts of—what is the value of education, how much real education services were supplied over the pandemic. We have seen that measurement is really difficult. The convention that has come from various fiscal bodies to use the GDP deflator is a compromise. It is the best worth—there is no good measure, but it is the best of the band measures. As I said, the key point to think about in the current situation is that one of its key weaknesses is that it does not include this import price inflation, which is obviously key in the current environment. That is why at the moment, in particular, it has a problem. I do not think necessarily that means that the consumer price deflator is a better one to use, because that has other problems—possibly too much import compared to what Government services are. It is a very hard judgment call, which is what is the right way to deflate Government expenditure. I just want to say that there is another dimension to this, which is what is the impact on public sector workers versus private sector workers of an average of 2.7 per cent in real incomes. That will differ across the income distribution. We know that, for example, the extent at which wages and earnings are going up is somewhat lower for people lower down the distribution and for people higher up the distribution. Also, people lower down the distribution tend to be more reliant on energy and food in their consumption, so there are going to be a hit harder in terms of the inflation that is hitting consumers. In principle, you would want to have a different deflator for people at different parts of the income distribution. The CPI measure of inflation is just an average measure for the average consumer in the economy. It does not tell you what is happening to all these different consumers in the economy in terms of their real incomes. You also have to take account of the fact that incomes might be growing at different rates across the sector. How that breaks down across the public sector versus the private sector is actually quite hard to work out. We have not gone into that issue in our forecasts. I think that we all realise how incredibly complex this is. It is a tribute that you are able to produce at forecasts as accurately as you do, given those issues. One of the things that I think is concerning many people is that, as inflation goes up even with increased pay rises, we could end up with significant fiscal drag. Certainly, in figure 4, you talk about the implied income tax net position. What do you believe that the impact will be in fiscal drag in terms of disposable income? Not much, I will be in more detail. The key here is obviously earnings, where the tax revenue comes from rather than inflation itself. One of the key things about the current scenario is the other feature of the current scenario. We have a lot of inflation, and we have not got that much earnings. Therefore, normally, when you have an old-fashioned inflation where earnings keeps up with inflation, you get a lot of fiscal drag, where you get people dragged into higher tax bans. You get a lot of government revenue coming through that way. We are going to see less of that in this case because although inflation is high, the earnings growth is not so high, so we are not going to see as much fiscal drag. However, there is clearly some as we see people move into higher tax bans as nominal earnings rise. The first point is to say that fiscal drag is not as big a factor as in a classic old-fashioned inflation where you are seeing inflation and nominal earnings rise. That regard, the Government has caught in a wee bit of a squeeze because fiscal drag is not bringing in as much money as one might anticipate because pay is not coming up, but at the same time, it is being faced with significant pay demands. Exactly. On the other side, things like benefits, etc., are being operated by inflation, so I am not saying that there is negative fiscal drag. It is just not the big bonus that it would be in a sort of old-fashioned inflationary scenario. Yes, Dean Susan, you thought you wanted to say. Just a sort of thought on the side, which is inflation is very steep. We are projecting it to be very steep by the end of this year. What really matters is less the actual number around inflation than whether it becomes entrenched or if it comes and then recedes. That really is an important point to keep in mind. Yes, absolutely. I fully appreciate that you know that in your report you talk about how you expect inflation to get back to around about 2 per cent. Obviously, once oil prices, for example, have jumped by a high level and if they do not increase any more than obviously the following year, there will be zero inflation in oil if the price stays the same clearly because you have already had that big increase, so there is a platforming there. I do appreciate that you expect long-run inflation tax to go back to not so much like in the 70-90-82 phrase when we had it for 20, 70, 30 per cent for two or three years. Going back to taxation, we have an understanding of that quite well, but for the record, I would be quite interested in the commission putting on the outlining of the statement that from 24.25 the UK Government intends to reduce the basic rate of income tax to 19 per cent, the income tax block grant adjustment will reduce a colony that is supporting next Scottish income tax funding. I am just wondering if you can perhaps touch on that for the record, please. The block grant adjustment is there to reflect what would have happened to taxation as Scotland being part of the UK tax system. If the UK Government cuts the basic rate of tax to 19 per cent, then had Scotland been part of the UK tax system, the tax rate would have come down in Scotland as well, and the last tax revenue would have been raised. What is happening because of that is that the block grant is not being reduced by as much as it would have been done had the UK Government kept the tax rate at 20 per cent. The block grant being cut by left means that the net tax position in Scotland is stronger because of that. That is why we are forecasting an improvement in the net tax position in Scotland because of the reduction in the basic rate in the UK. There is another side to that equation, which is our base assumption, which we have described, that in Scotland the higher tax rate—we have now made an assumption that it does not go up each year with inflation but that the threshold will stay the same. That means that over time, if that assumption bears out, more people will go into that threshold. That will also increase. That is a question that we probably want to ask the cabinet secretary, but I think that she will take the fifth priority budget deliberations on that one, to be honest. One more question for me, because colleagues want to come in, and that is the issue of the assumption of future Barnett consequentials below the core block grant based on analysis of historic data. That is page 18 of the medium-ten financial strategy, which assumes £250 million next year, assumed future consequentials, and £400 million after that. In paragraph 32 of your own document, you talk about £250 million rising to £591 million to 2026-27, which is £191 million more than is in the MTFS, so I am just wondering if you can talk about that. You can also just talk about how the Scottish Government ffared in terms of its assumption that £620 million, which the committee deliberated over quite considerably, but whether that did actually come forward or how much of it did. So there is a lot in that question. John, did you locate? We have been tracking this quite carefully. We know that roughly half of that has come in through block grant adjustments that have arisen from two physical events that have already taken place. We know that the Scotland, which had previously been ffared in to the £620 million, is no longer going to be used for that. That is going to be used for other physical issues, so that has come out of the equation. There is still the issue about reconciliations and that still remains open. We do not have a final determination on what is happening there. The position that we have taken is that we still think that our judgment is that it is broadly reasonable to assume that the remaining part of the £620 million will still come in. There do seem to be enough other sources of income out there that could potentially generate the money that has not already come in for that £620 million, but we are continuing to monitor it. So there is the spillover dispute, which is ongoing. Something is expected from that and UK may not dismiss their consequentials from that. So there are elements that are a little bit different from what made up the £620 number in December, but we still think that there is enough there potentially. Why is your £591 million different from the Scottish Government's £400 million in terms of that figure? I am not sure. I am just comparing the MTFS with your own forecasting document. The £250 million is exactly the same as what the Scottish Government has said, but you have put £591 million to £22,287 million. Is that just of £400 million, £24,25 million for that? For a longer time period. From my reading of the table, the Government has made different assumptions for each different financial year about the Barnett consequentials on top, but I have not got a comparison with the MTFS perhaps if we could just write to you with an explanation. I am just wondering why the Scottish Government has not included the figures that you have. That was all, because there is a £181 million. What we were trying to do in a sense was just unpack their assumptions. I think what they have done is they have compressed a fair amount of detail in this other category. What we have tried to do is just expand that and make it consistent with what we produced in the budget documentation. That probably explains why we have got a little bit more detail here, but I can certainly have a look at that and compare it with the MTFS and get back to you. On the point about future Barnett consequentials, are you confident that the Government's approach is sufficiently robust? It sounds almost like there being two granular, and there is a large contingency on those four class consequentials in future years. Is that the position that the commission has taken, or is that the fear that the commission has? I think that possibly the wording that we used is that we think that the approach that they have taken is reasonable. Obviously, we are talking about forecasts here, and we do not know what those will be, but it is probably a wise thing to have taken a look over the period of the resource spending review so that there is a kind of baseline based on our tax and our funding and our spending forecasts now. The Government has basically outlined how it would achieve its balanced budget that it is required to have in each of the years of the spending review. If funding changes—I mean, those numbers will always change, as you should know over time—they then can make decisions based on that rather known platform that they are starting out with now. Do we think that the number and the consequentials is exactly right really hard, and the further you go out, the harder it is to confirm that? We did have extensive discussions with economists on the Scottish Government about that, and we probe quite forensically what their assumptions were. We also did our own independent analysis of potential future consequentials. We may have presented some of their findings in a different way that we thought was a better way of presenting them, but the numbers were the same. We have just presented them in different ways. However, our independent analysis also suggested that the assumptions about future consequentials were broadly reasonable assumptions that could be backed up. I am just going to say that it is worth unpacking it a little bit. There are two sets of numbers floating around here. There is the base line, the Barnett base line, which is the substantive amount of money by the end of about £39 billion. In a sense, we are confident about that. The first couple of years were taken from the UK Government spending review, and the second part of that, the Government took from OBR projections of resource expenditure and implied the growth rates in the OBR to the Scottish baseline. We were reasonably confident about that, more than reasonably confident about that. A very large £39 billion component. The other part of this, which we were talking about before, is the Barnett consequential line underneath, which is about at the end of £0.6 billion. We have done our own analysis, and we are broadly comfortable with that. Having that distinction between those two different lines on the table is important. I understood that, but it is a useful clarification. The danger is that you fall into the traffic going more. We have always had these extra consequentials, and we expect them to happen again in the future. I take that point. On the difference between OBR growth and the forecast growth that we have in Scotland, I just really want to unpack what is contained within your forecast. In particular, when we look at where we have to change, I understand the points around holding the thresholds rather than inflating them. I understand the point around the 19-pence decision futures at UK level. However, if you strip those out, it would appear that, since December, the commission's forecast for earnings growth in Scotland has deteriorated. It is certainly very clear that the earnings growth is slower in Scotland than the rest of the UK. I am just wondering if you could provide any insight into what changes have occurred since December and what the consequences are. Maybe just on a broad level, and my colleagues would then come in. If you are looking at GDP since December, the slowing of the oil and gas sector impacts Scotland and Scotland's GDP. Particularly in the London area, the buoyancy in earnings, particularly in financial services this year, has been quite marked compared to the last few years. That creates a bit of a bifurcation in terms of GDP growth for the princess. I am sure that you have heard us talk about archi data. The almost real-time data is pointing exactly as you say that Scotland has not kept up with the rest of the UK over that period for reasons that are really making me nature what Susan has just said. The other thing to say is that looking forward is that a big part of the fall in total earnings is a relatively slow growth in employment in Scotland versus the rest of the UK. There is an element of slower growth in average earnings, but I am right to say that of the two, the growth in employment is the bigger element of what has slowed down in the first two years. Just to clarify, my assumption was drawn from figure 3.17, where we see that the teal line, which is your latest forecast, being significantly lower between 21, 22 and 23.24 than the yellow line, which is your December forecast. We are just coming back to the source. I think that we all understand the underlying issues with the north-east and the oil and gas, but in your previous forecast in December, you showed quite a detailed regional breakdown. It showed that trend was also apparent in the south-east of Scotland, which you might have expected not to be in the same dynamic. Indeed, you might have benefited from some of the same things that have benefited the south-east in terms of the financial services industry. Has that regional analysis been carried out by the Fiscal Commission? What does that show? Indeed, why are we seeing all the regions in Scotland suffer that lag? It seems to be more pervasive than just the north-east. I think that you are right. It is slightly more surprising, given that there is finance in both London and the nature of what we are still looking into. The nature of the finance industry is different. In particular, the larger bonuses related to portfolio management industries like hedge funds and others that really drove the London earnings. That is not such a big part of the Scottish financial services that does more in other areas. Although that is tentative, because when you get down to that level of granularity, you are stretching the data to its limits. I think that was our feeling as to what had happened here. There was a particular bonus to the financial services in which London focuses rather than other areas of the UK. Can I just add that box 3.2 in the main report repeats that analysis, and it takes a little bit further. It looks at growth in RTI pay since 2016, 17 by region as well, so there is a nice amount for which it summarises all of that. Following on from that, what underpins fundamentally earnings growth and employment growth is productivity growth. Again, looking at figure 3.13, you see a trend downwards since 2010 in terms of productivity growth. Indeed, you stated it quite starkly in paragraph 3.39 that productivity growth has stalled since 2015. First of all, I assume that that is largely, and it seems to be what you are saying in the report, tied to falling investment levels in oil and gas. More fundamentally, there seems to be an inflection point that you imply around this financial year, where we will start to see productivity growth growing again in Scotland. I am just wondering what lies behind that assumption, because it almost gives us a bit of a hockey stick, which I am slightly concerned about when I see, especially in forecasts, rather than retrospective. I think that some of the growth and productivity is simply people getting bashed into jobs and there being quite high levels of demand to sustain quite a lot of production there. What we are worried about over the medium term in the next couple of years is that we are seeing all those pressures in the labour market, where some sectors are really struggling to get a hold of workers. We have seen that with airlines and airports over the last few days. There is a sense out there that while the total amount of labour is probably okay, they are all in the wrong places, they are in the wrong industries in the wrong places. Until the economy sorts that problem out over the next couple of years, there will be issues there about the levels of output and the levels of productivity that can be sustained by the workforce. However, that is not a problem peculiar to Scotland. That is a problem across the rest of the UK but in other parts of the world as well. I just want to ask one final question. Just relating back to one of the questions that the convener asked in your answer about what is likely to happen with inflation in future years. The convener made a comparison with the late 70s and early 80s. Am I right to infer that the fundamental difference is that we have a much more globalised economy and therefore the things that are rising in costs that spend is not being cycled back round our economy is going to other parts of the world whereas back then in a much more isolated economy that would have fed back round and therefore given headroom for earnings to grow and simply because those revenues are going elsewhere in the world, particularly China, that is going to dampen inflation in past or am I doing too much amateur economic theory in that statement? Can I just maybe make one point about what we have said about inflation and it's already been repeated here that it will be very high and then starting next year we'll begin to come back to the Bank of England's target of 2%. We looked at that very carefully as we were closing out our forecasts and felt that that was still a proper assumption to be our central assumption in the forecast but we do and we've noted a downside risk increasingly so that inflation would last longer and I think that's what this question is about so that is certainly a risk. We're not saying that that could not happen but our forecast right now assumed that our central case will be the case but it doesn't answer your question directly but I just wanted to be clear that it's not that we've had blinders on and have not looked at the possibility of worsening inflation. Some of the inflation we're suffering from at the moment is imported inflation it's because of things like rising energy prices because the gas market that other consumers want to buy into is driving up the price there and also the shortages of component parts coming out from China because of the lockdown of Covid in China that's going to have not one effect on inflation as well so it's quite difficult to work out how far where some of our demand is driving up prices elsewhere and how much is domestic the demand is driving up domestic so I guess it's a question whether this is a correction or an on-going cycle fundamentally. Right this is a different character inflation this is because of the trade shock where we were seeing it in the price of imports relative to what we're exports which basically means sadly we need to end up this the situation as a poorer country that we entered into it because we have to pay more money to to overseas to for the stuff that we require. I think the point is that this is not the first time this has happened I mean in a sense you know the the 80s and 70s and 80s we went through exactly the same routine so what is somewhat different now and this is really I think what you driving at is partly due to globalisation partly due to very anchored inflation expectations it's not it doesn't feel like the beginning of an old fashioned wage price spiral which we would have which we saw in the previous oil price shocks part you know say because a because the labour force in a sense is global rather than just country level but also because I say we've had such a long period of no inflation it'll take us a while to get back into that habit of you know trying to claw back if surprise inflation each time so but clearly we and all other forecasters are at the moment making that as an assumption that there will be a one-off this won't lead to a to that sort of attempt to claw back the the higher inflation and higher wages and that's and I mean I think I could probably suggest I think before you write to say the fact that all forecasters have made roughly the same judgment as us doesn't necessarily mean it's the right judgment it just means that we've all made the same judgment. I was going to raise some similar questions to Daniel about your I suppose how confident you are accepting what you've said Professor Breedon about everyone else made the same prediction because you know you estimate it will peak at 8.7 in the last quarter this year but when you read more detail and some of the uncertainties that you point out in the supply side that we've got much less understanding about I suppose my question to you is realistically how confident I mean we know it probably be wrong because all these things are wrong and I fully accept that but it's more the kind of confidence level because it seems to me you know when you read what Andrew Bailey was saying recently in conceding that the the fiscal levers he has to exert control he concedes are fairly limited over cpi inflation and it just I just obviously it's always uncertain but how uncertain and if I asked you to place a wager of your own personal money say 500 pounds how much of that money would you risk perhaps that's a better way to put it we should just go right down David how much would you risk I think the issue is that there are two components we're talking about the system refer to earlier there's a question of what's the level to which inflation could get there's a question of how prolonged inflation we get one problem is that inflation is quite volatile it depends on whether you're looking at the monthly inflation rate quarterly inflation rates or annual inflation rates so we could be out a little bit on that just because there is a spike in one of the monthly levels of inflation it comes back to this question of how confident are we that inflation will drop significantly back down towards the 2% level that is where I think the greatest uncertainty lies is a question about how embedded inflation gets first of all whether there are other sources of shortages which might be fragile than it's near assault that we haven't been aware of because back to the point that Francis made us the moment it does seem to be the case that because we've had many many decades now of quite low inflation inflation expectations are anchored at quite a low level so there's not the same spirit back in the 70s and 80s that as soon as prices start going up you immediately need to get higher wages there's a recognition that wages might not always go up necessarily at the rate of which prices are going up so that anchoring of inflation expectations could still hold inflation down a little bit and then it goes back to our hypothetical point that our chair mentioned that inflation is about the weight of increased prices so even if oil prices stay high the inflation is still going to go down because they're not going to carry on rising and so that is one of the reasons why we think inflation will come down is that we don't see the obvious forces that are going to carry on driving them up it doesn't mean we think prices will go down it means we think prices will probably stay high and that will still have impacts on the cost of living but the force is driving them up we don't quite see where they are. The other element I think and the periphery is that the chancellor has put some money on the table over the spring and the most recent packet of money in late May particularly benefits lower income households and should for this year so this is a one-off for this year keep those households relatively okay in terms of the increase in cost of living and that is something we're very cognizant of is that we're talking at the end of the day about households and people and communities here but if those households in general are not suffering from that cost of living crisis because of this one-off grant and some will actually be better off that also creates less pressure to just pump wages up more and more and and you know you put all these factors together so that's also why we thought that it is at least still reasonable to think that inflation might not last all that long okay so I'll collect your 500 pounds from all four of you at the end of this session then thank you very much. My other question then and I'm just not quite clear where and how you baked the impact of Brexit into all your forecasts. Now I assume you've done a similar thing you've reflected all the way through the kind of hangover from the pandemic and some of the supply issues that we've talked about the reverberated around the world but I'm just not clear and I suppose to be honest I was sort of slightly surprised that there wasn't any mention of it given that we know now that the impacts are only starting to be felt even although I appreciate that it's complex to pin Brexit on one thing because it's a very it's a very fragmented picture but I just was surprised that there was no mention of it and so what and how have you baked it into all their numbers is my question? I think the answer is so yeah it is baked in it is now part of the baseline assumption in the economy so for quite a number of years we were talking explicitly about Brexit and how it was impacting our forecast but it's now it's now in there as baked into the forecast of what's going to be happening to the economy I said there might be some subtleties about how far is Brexit driving some of these inflation stories we're we're talking about and it's just too early to disentangle the effects of Brexit and all the other factors that we're driving in and is that similarly to what you've done with the pandemic then is that the same approach you've taken? The approach is in there already. We begin to observe the effects of Brexit being different from what we obviously baked into the forecast when we were making a judgment at that point at the moment. It really is too early for us to make a judgment that our original judgment was incorrect so we're still running with our original judgment of the impact of Brexit. Thank you John to be formed by Douglas. Thanks convener very much just a few things for myself can I first of all say how much I appreciated working with Dame Susan Rice over the years I think I was on this committee before the fiscal commission was set up and was involved in the process so it's been a long running relationship with the commission and yourself personally so I have very much appreciated that for one. We've spent quite a lot of time on inflation. On social security clearly the numbers are going up quite dramatically and it's often been said that if we give more money to people who are less well off that will boost the economy more as a secondary effect because they will spend it here in local shops on local goods and services whereas if people who are better off of more money they may spend it abroad or on other things. Does that secondary effect come into the forecasts or can we not really go that far? A lot of the growth in the social security benefits relates to how much more the Scottish Government needs to fund for those benefits beyond the amount that comes from Westminster for the original shape of benefits and that comes with opening the benefits up in various ways in terms of eligibility in terms of you know length of time on a benefit but one of the things that now kicks in in a significant way is that not all but I think a majority of the benefits move up with inflation so I think there are a suite of disability benefits the adult disability benefit is the big one in number terms but these will increase with inflation so some of that growth is for that reason. The Government's focus on child poverty has led to expanding the population of the age range of children whose families would earn that payment and the payment that was moving up earlier this year to £20 a week is now at £25 so the growth there is because the actual benefits are really significantly different as well as growing with inflation. Okay so as the next step I mean does it matter from the economy's point of view whether the Scottish Government which clearly is the focus is putting the money into social security and therefore is going to a certain groups pockets and on or you know say compared to scotch enterprise and then it might be going to international companies. Does that make any difference to the economy? Yes to a small degree you're exactly right that you know if you give money to people with high propensity to spend then clearly that money will quickly re-enter the economy more so than if you give it to somebody with a very high propensity to save so that effect is there. I think well we don't track it directly and I think overall it is relatively weak because it's very much the second round because we're not you know people who receive these benefits are not going to be paying more income tax themselves it's the people who you know the shops they go into and spend and the incomes of the people who work in those shops that might go up you know so it is a very second round effect and so I think we haven't explicitly modeled it but I would my guess is it is a relatively small effect. You're talking about the economy the economy is more than just the aggregate or the average economy the economy is also about the distribution of well-being across individuals and social security certainly plays a role in giving you a different distribution of well-being across individuals than you would have got had you not had those programmes in place. Yes no absolutely yes no let's keep on. The £817 million reconciliation sounds quite scary but we previously had quite a large reconciliation we thought was coming along and it turned out not to be quite as bad so should that make me hopeful that again things will improve or is it very different this time. I think the answer is we really don't know because the numbers that will actually define and make specific that reconciliation will be the out turn numbers that come out in the summer of 2023 16 months after a budget is when we see the income tax out turn numbers so we don't know. Because I think last time I was right in saying it was even at the end of the year in question where we're still forecasting a more pessimistic position than it actually turned out so it is quite hard to know it in advance. There are two components to this there's the pay-as-you-earn components and the £817 million reconciliation we're talking about taxes collected in 2021-22 so we actually have real-time data which comes in every quarter on the sort of the pay-as-you-earn elements so we can be reasonably sure about that component as we get towards the end of the year 2021-22 financial year as we pass that point. The difficulty is self-assessment and that we just don't know about so I think we do know some stuff but we know and pay-as-you-earn is bigger than self-assessment but we don't know the self-assessment stuff and that's and that could move quite a lot and yeah so it may be bad it may be worse it might be better. Would that be because I mean from year to year it can change quite a lot people who are self-employed as compared to people who are employed and that balance. I think that for sure but also 2021-22 is the tell-out of the pandemic and funny things are going on with self-employment because of the furlough as well so you know it genuinely is. Well that's fair enough. Question mark. Thanks. I think that the other self-employment is that for very very high earnings that's often driven by bonuses in the city and those are inherently hard to forecast. We have had high levels of bonuses this year but that can change from year to year so that's the bit that's quite hard to forecast. I think we're pretty confident that the reconciliation will be negative. It's not going to suddenly become positive again but whether it's 600 million or 900 million that's where it's harder to be confident. I think that's a key point going back to your original question is it could be worse. So don't say you know oh well you know because it's uncertain maybe it'll be good news. I mean sadly it could because it's uncertain it may be even worse news you know so that's why I think that you know there's a depressing message to keep in mind. Okay I thought I was pessimistic but that underlines it more and the final thing I just wanted to ask you I think there was suggestion that you were going to investigate further the kind of slower employment growth in Scotland compared to the UK is that correct? Can you can you just expand on what you're going to be doing? Well I mean we continued to look at it and there was a chart one of you referred to figure 3.13. This isn't something we did for that purpose but if you look at it's the demographic point we've made at this committee over the years that we have a population that is getting older and therefore coming out of employment but what we don't have is the replacement if you look at the kind of 16 to 25 years of people who might be going into employment that's a smaller group and it's that it's not just at the upper end of the age range it's actually filling in the workforce from down below but I'll turn to colleagues. The issue here is the participation rate amongst younger workers it just seems to be lower in Scotland and has been falling for a while and to be honest we don't quite know precisely what that is obviously one component of that is people going into education and delaying going into the labour market that's one reason why you might have low participation and it may be that if people are perceiving greater uncertainty in the future they feel they better get more and more qualifications so that could be part of the story. You wouldn't quite explain why that would be different between Scotland and the rest of the UK but that's something which we are going to look into in more detail it's quite hard to get all the data you need to do that. Sorry to say a key point is you know is this a one-off and you know I think we'll go back to normal I mean in future years always is a secular trend and obviously you know the difference between those two outcomes is hugely important for the Scottish economy and that's the question we really not sure what gets the answer to but that's the question we're trying to dig down to whether there's something going on that is of a long-term consequences which then has big implications for the sustainability of Scottish finances in the long term or is it just a one-off that we will look back on all and scratch our heads about in you know a few years time but it already has stopped. Because presumably the life expectancy would be part of that equation in that that affects the proportion of the population that's actually working and so on and that seems to be a UK wide issue is life expectancy. Exactly I think the demographic so you know we can obviously you could predict those forward very relatively high level confidence as as David was saying this issue of participation amongst younger people is the one where we are sort of really straffing our heads about and that but it is a very important question to get to the bottom of. Okay that's great thanks. Okay thank you John Douglas who followed by Liz. Okay thanks community. Just wanted to ask about the 620 million pot again I'm sort of quite new to this I'm still trying to get my head round it but do we know how much Scotland was going to be contributing to that 620 million at the start of the the year? And you should ask and come at secretary. I just you know I struggled to see where the transparency is around that 620 million when you know I don't know how you can you know almost approve it or say it's it's okay if you don't know what's going to be in it yourselves. We had some conversations with government officials but they were in confidence so okay I think the best thing is to ask the cabinet secretary about the components. Right. I asked from my point of view I'm trying to think that well could have up been hired at the start of the year you know as well as MSPs if I was to say I want I think we should spend another 50 million on child poverty for example you know I would have to say where that money's going to come from so I guess you know can I just say at any time well just make that 620 670 you know how is it a flexibility that that can go up to as well just like the other forecast? I think the what's important to think about here is that I think from you know very early days of the Scottish budget there's always a degree to which there's an additional lump of money and there've been various conversations about it in this committee and people referring to it as you know in the high servers and things like that but what's happened over the past couple of years three years or so is that the government has been much more transparent about the the size of that and what goes into it and we've certainly been pressing the government on that quite a lot and you can see that in the you know in the current report again there's more transparency than previously so for example we now know that um there's about 660 million pounds worth of scotwin money which is going to be drawn down in the first two years of the resource yeah the spending review period so if you think about that you know you've got that commitment about 670 if you dig around on the Crown Estate website you can find the sort of a rough indication of how much money they were thinking would come from scotwin so you know it's reasonable to assume that most of that sort of scotwin money is actually in this in this resource spending review in the future so yeah from that you can infer something about what happened in the past but i think my going much beyond that is probably not not confidence i think that is something for the government but i'm right in thinking that it's not easy to to work out then what what constituted that 620 million at the i think we were we were given a reasonable story about that which you know after some program we we judge to be as reasonable but i think the you know i think the thing that we're trying to work for is is much more transparency and i think you know i think you do have to credit the government with sort of moving a massive distance from the position they were you know five years ago to where they are now where you know it actually goes into documentation there's a degree of narrative and they tell us stuff as well and i think this year you know that that that transparency has increased as well so i think you know the government's moving in very much the right direction to improve transparency yeah i guess i guess they are but it still worries me that you know there's money comes out of that 620 million for scotland for example and then magically there's just other things appear that make that figure still achievable so i think we've already had it once already i think it was to do with them cover recovery money and now we've got it with with scotland so yeah it will be something i ask the cabinet other question i had was around non-domestic rates now in the in the table you know we're seeing going up from 2.7 billion to 3.3 billion next year now some of that will be because there was covid relief funding coming through for retail hospitality and leisure but it's still a 20 percent increase was there any any narrative around you know why it would be increasing by by so much and then it also increases by 9.8 between 25 and 26 any detail around that well one thing we have done is to revise down some of our four classes for NDR because of appeals losses we had assumed a certain level of appeals losses that would materialise over a period of time but we were getting to a position where that limit was already being hit and so we thought reasonably in the future we're going to have even more appeals losses and so we've revised down the month of NDR that's going to be collected over the next few years because of those appeals losses yeah but it's going up it's going up by 20 percent yeah so if you look at i think figure 4.17 in the report it sort of breaks down the change in the forecast between december and may as you go out more of that increase is basically due to inflation so and there's a total increase total change of 26.7 of about 132 million since december forecast and 136 of that has been because of inflation so inflation is the main driver towards the end of the forecast increases okay so it's not really growth because we can see the growth is quite quite flat it is going to be the businesses we have paid more because of inflation coming through in effect and that and underline that of course is an assumption about the poundage so we're assuming that the poundage basically goes up with inflation but if you look at how the poundage is actually moved it tends to be just a little under inflation so there might be a little bit of difference because of that and then i guess for you know three years time when it goes up by another 10 percent i guess that will be around revaluation time i guess or is there something else maybe? Revaluation is the sort of factor there but i think what we've done on revaluation because there are lots of rumors at the moment but i think on balance we just don't think there's enough information to sort of say where revaluation is going to go so we made a pretty neutral assumption around revaluation but it's still going up by 9.8 on my again you know i'm just looking at the table the table we've got we've got changes since the december forecast in a couple of years time that is against on principle due to inflation and i'm just trying to do that thing that you've been doing in your head as well but my hunch is there that the principal driver as you hear the second half of the forecast is around inflation right okay thank you thank you uh list before by ross thank you um could i ask very specific questions about where as forecasters you think there is the best potential for improvement in productivity and economic growth because obviously that's the bottom line in terms of trying to improve the Scottish economy for the future and i know you can't set policies at all and won't comment on that but how easy is it for you as statisticians and people who are analysing the various trends within the economy to spot where you feel there is the best potential for improving productivity and economic growth within the current setup? As forecasters that does go quite beyond our remit that the general drivers of productivity first of all you have to realise that there's different definitions of productivity there's productivity in terms of output per head but there are much wider definitions of productivity as well so partly it depends on which measure of productivity you're talking about a general driver of productivity is when things are becoming very expensive then people find ways of doing them in alternative ways so if for example you find that the shortage of people to pick fruit is causing a real problem to the fruit industry well there was an article last week about some really sophisticated automatic fruit precursors that people have developed now if those were developed in scotland and if scotland could then sell the intellectual property rights around the world and capitalise on that discovery that would bring a lot of income to Scotland and it would increase productivity because with the existing workforce you could pick far more fruit than you would do otherwise so those are the normal sources of productivity growth it comes from technological improvement technological innovation driven by the need to overcome problems and shortages you find in the economy some of your recent analysis has highlighted the fact that there are issues regarding the tax revenues from the northeast and the fact that some of the labour market there may well change as a result of just transition and changes within the structure of the economy is it within your ability to set out where you think the greatest impact of these changes to tax revenues could be in the future or is that something that you would not do let the government do that I just see tax revenues as absolutely critical and you've said this yourself in several consecutive reports that tax revenue is absolutely critical in terms of how well the Scottish economy can perform and I'm just interested to know how easy it is for a government to set policy on the basis of your interpretation of that what I was going to ask about slightly feel comment which is so I in some of my research I look at small economies which scotland isn't but it's close to that particularly I've done a lot of work in Iceland and one of the things that is noticeable in small economies is the importance of actually sort of softer areas of where productivity growth comes in particular areas like social capital social cohesion you know that I if you look at the economics of a country like Iceland they look awful you know it's a it's a tiny cold island in the middle of nowhere you know it was about three trees you know it really doesn't have much going for it but it has been a very successful economy and one of the key reasons a very productive economy one of the key reasons is that there's a very strong you know identity amongst the people there's a very strong social cohesion in that country so I think it's not all I mean clearly you know in in our roles here at the physical mission we have a very fiscal and very money focus but I would just say that you know productivity growth is not all about about without money it is also about the softer areas of how how countries develop as well so I I just tip that one in as a slightly left field way of thinking about productivity. I think our what we could do is four classes and analysts is a more negative thing unfortunately we can identify what are the reasons why it's not going as well elsewhere by able to say how it compares to what's going on in other places that might paint the messages if we only could we could do what they were doing that would be a way forward whether that is feasible and viable as a policy for Scotland I think is a somewhat different issue but we don't see it primarily as our role to work out what policies the Scottish Government should do to drive up tax revenue. Absolutely understand that it's just to set effective policies it is helpful to know where not only where the negative concerns are but the potential for growth and as I say I come back to your reports over several years now where you are highlighting the tax revenue situation is being absolutely critical could I just ask one further question about the current inflation situation because you've highlighted this morning as well as within your report that there are different factors there's the cost push angle where quite clearly global prices particularly in energy market and supply chains are causing very significant cost push and there is the demand pool side whereby obviously hoping that demand within the economy and increasing earnings eventually will drive that up are there different timescales do you think where that inflation effect will start to diminish is it different for the cost push in comparison with the demand pool what do you think the likely scenario is when we do start to see inflation healing off will that largely be because of the cost push situation or the demand pool well I think it was a cost push element that we were thinking about as being the reason why we thought inflation would come down quite rapidly over the next few years it was just we didn't see what the sources of cost push were that were sustained that was worth of growth of price increase there's still quite high demand out there because people coming out of the pandemic have accumulated lots of savings not everybody but some parts of their population have that's still there to be spent in some ways they haven't blown all of that so there is still potentially quite high levels of demand out there to be met so I think it's more of the cost push side where if you wanted to see inflation falling away that would be the element where you look from so would you no I think that's right I think that you know in a sense if you wanted to go back to the discussion we had before as to what the fears are about this big prolonged inflation is from the demand side that's where it's wherever it's this is coming up along the cost push we clearly it's still anything that could happen but the feeling is as we've discussed it's a one-off and that that is the most likely scenario from the cost push side so it's really whether that then gets translated into a you know that in combination with the tight-neighbour market you know it's it's really into a longer term inflation problem I think that's where that risk comes from thank you that's very helpful thank you very much I think Iceland's always been very social cohesive but it was always historically one of the poorest countries in Europe I think independence in 1944 harmasing geothermal power and victory in the cod war in the 70s is probably also at a very significant and positive effect Ross thanks give me a head of all that I've only got two questions this morning the first is just going back to Daniel's theme around productivity and specifically the assumptions that you've made around this inflection point this year that's in figure three point thirteen and that growth in productivity David you mentioned that that's essentially the assumption there is based on getting more people in not more people into jobs because unemployment's low but getting more people into the the right jobs but float back in the kind of highest profile examples of labour shortages over the last year or so they've not been in particularly high wage sectors your retail and hospitality has been one of the the biggest examples so could you maybe expand a little bit on the assumptions you're making around this rearrangement within the labour market because what I took from what you were saying before is there will be sectoral winners and losers from this because it's not about reducing unemployment it's already quite low some sectors are going to end up probably with labour shortages as a result of workers moving into the sectors that will result in the kind of productivity growth that you're assuming could you expand a little bit on the underlying assumptions there okay well in the longer term labour market should work in the way that you've got adjustments in wages you've got adjustments in people's expectations about where they're likely to get good employment and those end up shifting labour around between sectors so you get the right amount in the right sectors so in the longer run we expect markets to work and broadly sort out that problem it's quite hard to say exactly that's going to break down sector by sector because it will depend on what responses there are in wages in different sectors what type of sector it is what type of wage negotiation goes on in that sector so there are lots of detailed factors that make it quite hard to predict in detail how that's going to go but broadly speaking economists take the view that these things do get sorted out there will be some levels of wages across different sectors that will get the right people into the right jobs having said all of that we still think that the Covid pandemic will have long run scarring effects on the young people that is still the widespread prediction of the effects of the pandemic because people who had come out of school thinking they might go into the say the hospital hospitality sector develop some scales there move on and start at some point running their own pub whether the one restaurant all of those all of those early stages in their career were taken away by the hospital sector being closed they're now facing new job new school efforts competing for the same jobs as the hospital sector opens up again so their expectation their job market profile is very different from what it was had the pandemic not taken place and that could have long-term effects on what their long-term salary levels will be what their long-term levels promotion will be so we certainly expect the pandemic to have long-term effects on workers albeit there'll be workers in various sectors various jobs they will be not be the same jobs and the same salaries they would have expected to get had the pandemic not taken place thanks for taking on board what you've just said around it being really difficult to predict the impact the predicting detail the impact on various sectors if i could try and press you for one element of that not on a specific sector but are these assumptions based more on an assumed growth in existing high wage sectors or in the average wage in what are currently low wage sectors like in retail and hospitality rising what's the balance of the two are you assuming that these low wage sectors there will be an improvement in paying those areas or just that people will continue moving out of them into existing high wage areas to be honest we just haven't broken the analysis down at that level to say where some of this matching is worse where we're going in the future or where wages we've got a lot of our forecasting is still a pretty high good level so i've thought that we can break it down at quite a level i don't want to say no i think exactly right when we haven't gone down to the you know who's got to move where but i think your point is right that there is a degree of labour market mismatch at the moment you know basically people in the wrong job student and then you know jobs breakers is waiting in some sectors people still employed in sectors that possibly should need to shrink or do things differently um we we're not you know we haven't done the detail of what those flows are but we do know in the background that makes another it's another reason why analyzing the economy right now is quite hard because we don't know what the economy looks like when everyone is you know shifted place and everything is back to normal we're we're still in the transition where the mismatch is still being worked out and so the economy feels tight but that may be just because that mismatch is still being resolved and sticking with it that's part of high level assumptions just one final high level question is probably just asking to to pull together various points that have already been made but you've seen in the the IFS precursor to the the spending review they essentially said that the cabinet secretary had the option of axing taxing or hoping i kicking the can down the road and hoping that more money would appear somehow later and you know that boils down to either difficult decisions could be made now or we could just hope things will get easier in the future on balance do you think the spending review was a successful exercise if the measure was making difficult decisions now or is there still a high level of can kicking going on here if you could i just make a point about the IFS view and report and article which is that they published that i think the friday before the tuesday when the uh spending review and our forecast were placed in front of parliament so they didn't because of timing didn't have the advantage of um either our up-to-date numbers or in particular the government's um view on how we'd have balanced budgets going forward based on those up-to-date numbers so i think you just need to put it in that um in that context um it but the you know in principle the the the right sort of challenges were being raised what happens here you asked whether and you know this was a sensible thing to to do the resource spending review and i think i referred to that previously i think my colleagues would agree that overall um it some might say it was a brave thing to do but it it seems to me that it was right to do it because um it gives um it gives currencies the wrong word it gives the the the concepts that the government can then use as the actual numbers come in and they see what funding really is over the next year and the year and the year after and what the actual costs are it's spending really is and they will have to make adjustments um but they they have a better it's it's more um anchored more rooted because of the um spending reviews so i think it was a good thing to do but colleagues you share that view i think in the very nature the the budget budgets had to be you know this document to be published with balanced budgets projected into the future meant that that question you asked at the beginning had to be answered there was no way to dodge it because it there wasn't a you know an alternative there wasn't anywhere else to put the the mismatch it the you know the the funding gaps whatever that you call them so i think in that sense it it has given a fair amount of clarity as to how this situation will will develop to say that within the figures we published to support the spending review there are elements of both taxes and cuts in spending there so because of our assumption the baseline assumption that the higher rate threshold will be frozen that will generate more tax revenue that's reflected in the assumptions in the forecast and the spending review but also as susan said in the work review remarks you have seen significant cuts in real spending in it in the non health non social security area so there has been a combination of both tax and acts in there thanks so much i can see the cabinet secretary at the door so i will wind up my questions there convener thank you very much for that i appreciate that we have actually a lot of more questions i'm sure we could ask but time is against us and as ross has pointed out the cabinet secretary is waiting to come in and we have another section about to start so i want to just as i wind up this session i get again formally thank you dame susan rise for all her phenomenal work over the years the leadership and our wisdom and indeed insight which has proven invaluable to this committee like john i was here at the very birth of the sfc and it's great to see how it's developed and flourished over the years and i'm sure it will continue to do so and of course i will see you tomorrow dame susan at the spice briefing which starts at 8am with bacon rolls just for those who have not already sold on the idea of attending so thank you very much and i'll call a break until 11 25 thank you we will now continue our evidence taking on scotland's economic and fiscal forecast may 22 and the scottish government's resource spend review and medium-term financial strategy i welcome to the meeting cabinet secretary for finance in the economy kate fobs msp miss fobs is accompanied by scottish government officials andrew watson director for budget and public spending gary gillespie chief economist and andrew scott director of tax and revenues at the scottish government i welcome you all to the meeting and invite miss fobs to make a short opening statement thanks very much and thanks to the the committee for its input to the resource spending review and the medium-term financial strategy it's obviously a hugely challenging time to be delivering a spending review where recovering from a pandemic as well as experiencing the unprecedented cost of living crisis and there's quite clearly significant volatility in the funding outlook despite that though i think our partners appreciate as much certainty and transparency as possible when it comes to setting out the spending parameters over the next few years and that's what lies behind the the spending review which commits 180 billion pounds over the next few years now we started off this process by focusing on a number of key objectives a number of key priorities obviously by extension where you have priorities then you focus in your attention and the funding on those priorities and that includes tackling child poverty transitioning to net zero economic recovery as well strengthening the public sector in scotland obviously in addition to that we added responding to the cost of living crisis we've also set out commitments to drive reform and greater efficiency across the public sector that's because notwithstanding the current uncertainties the funding position is constrained in terms of that funding position obviously the assumptions in the mtfs and the spending review are based principally on the existing block grant settlements that was implied by the 2021 UK spending review the OBR forecasts of future public spending and then updated tax and social security forecasts from the Scottish fiscal commission and when the UK spending review of course was set last autumn inflation was about 3.1 percent despite inflation now hitting about 9 percent a 40 year high the UK government hasn't updated its spending plans so we have far less funding in real terms than have had to use the best assumptions that we have available in addition to that we've obviously seen a real terms reduction of 5.2 percent between last year and this year and our real terms funding grows about only about 2 percent across the whole four-year period once you account for the devaluation of social security benefits so as the committee knows i've highlighted some of these challenges when it comes to that trying to deliver our priorities and there are other there are issues that emerge as a result of that I think too it goes to the heart of a point that the committee has flagged in the past which is the limitations of the current fiscal framework and the lack of economic and fiscal levers available to the Scottish government to manage that volatility and that risk which are inherent in any forward-looking spending review my last point convener is that we've also undertaken a targeted capital review to address a lower than expected capital grant allocation provided by the UK government because you'll recall that we had set out our capital spending review in advance of the UK government spending review to try and provide as much certainty to partners as we emerge from the pandemic but that capital spending review will arrest around £18 billion between April 2023 and the 31st of March 2026 with over half a billion of additional funding directed at net zero programmes compared to previously published plans so as I conclude briefly the aim of these plans is to provide as much long-term certainty as possible in an extremely volatile economic situation thanks thank you very much for that opening statement I think what's significant is the fact that you have very little room to manoeuvre and I think that's appreciated by the committee but clearly we'll be asking questions about the choices that the Scottish government has made and why those choices obviously have been made first thing I would ask though is I mean that in terms of the detail I think there has been an element of frustration I think from some of the outside organisations that you know and I would say because I know that you would want to to make that clear up front is that this is not a budget you know that this is a resource spending review but the one of the concerns has been that we've only so far received level one and level two funding in that and a lot of organisations are obviously wondering where they would fit in with some of the decision making that's taken place yeah it's a fair question and it was captured in some of the the pre-RSR publication analysis by the Fraser Valander I think Fraser Valander had asked the question around the granularity that could be published and I had indeed suggested that we might just publish a high level narrative with priorities I thought it was important that we provided as much granularity as possible which is why it goes to level two the risk that we face is that due to the level of volatility in the funding and I can unpack a lot of the assumptions underneath the funding available due to that level of volatility is extremely difficult to be any more granular than level two and even providing level two detail was challenging part of that is driven by inflation I've already said that much of our spending review is based on the UK government's spending review which you would accept you would expect and inflation was 3.1% we're at 9% it's going to rise and I think we have to make a judgment on on on that risk and actually being too granular carries with it its own risk in terms of planning and forward planning which may then not come to pass so it is it is it's not easy and it's not a budget at the end of the day this is not a budget and we will set out for example our tax rates and our public sector pay policy in advance of each budget so you're right in commenting on it being a judgment call and I think we have pushed as hard as possible to be as granular as possible in an extremely volatile situation yes I think I mean for my reading of the situation it appears that you've been very cautious in terms of your spending proposals I would imagine that you would be hoping to be able to add some resources to the figures that are actually outlined here but if we actually look at the to start off with the level one figures when you made your statement in parliament last Tuesday said and I quote we've prioritised spending on health and social security education and tackling climate change but if we look at educational skills resource you know the first four years of the of the spending envelope from this year onwards there appears to be virtually no increase a 1% increase in cash terms over the next this four-year period the next three years and then interestingly in 26 27 there's a huge jump of about 17 percent there's actually a number of other areas where we see also significant changes almost in that last year so I'm just wondering why that is the case and why the decision is that if education is to be prioritised why the funding has been kept very tight over the next few years and then suddenly there's a significant jump in that 26 27 year well much of this comes back to the core objectives that I set out so for example tackling child poverty and much of the spend for tackling child poverty is of course in the social security line which you'll see but much of it is also in the education line so rolling out in preschool meals for example as well as early learning and childcare expansion and so when it comes to the the trajectory of spend we have tried to ensure that the trajectory of spend in each portfolio matches the plans for rollout or expansion of particular initiatives I'll see if anybody else wants to come in in terms of the breakdown by year but that's been our starting position where we have tried to match the funding to the commitments that have been made that are specifically tied in with core objectives there is another element to this though as well which is that the trajectory is quite bumpy over the next few years because of either the impact of reconciliations that need to be accommodated so for example larger reconciliations in certain years than in other years because that eats into spending power because there's a limit of only using 300 million pounds of borrowing to manage some of those reconciliations you then have to use your core spending power to make up the difference as it were so we've also tried to smooth the trajectory so that you don't have a portfolio for example that's dealing with a rapid and sudden drop in one year only then to climb up in the following year because that's employees that's workers you can't expect a portfolio to take education to see a drop so we've tried to smooth the trajectory over that period across portfolios I don't have anything else to add from anyone else but I hope that answers sort of the macro question as well as the particular question it's just almost like in real terms you're going to have decline in education over the next three financials then suddenly you've got quite a dramatic increase and I mean that's repeated a number of portfolio areas I mean time is against me to ask all the questions on that so I'm going to try and touch a number of areas so that colleagues can follow up some of them if they so wish another area obviously is local government I mean obviously local government is a land that although you said it's a fair settlement that local government will have over the years ahead I don't believe that they will agree with that I'm just wondering how the kind of static or declining budget when inflation is sitting on account how that really allows flexibility for local government because clearly much of what local government spend its funding on is statutory services so they have to provide them they don't have a choice and obviously statutory services already have a high proportion of spend and perhaps they did five or 10 years ago because of the relative reduction local government resource on that so that's one thing on local government also on local government if there's greater flexibility as has been talked about and I know you're looking for public workers sector workers for example to be more productive but perhaps for a four-day flexible working week how does that impact on other areas of the economy like for example transport where there's a significant reduction in the number of people who are using public transport not only because of the lack of reliability you know for example my area is a lack of bus drivers we've also we've seen real disputes this is there's issues across the UK in that regard and the retail sector how would that be impacted you know as I knock on from the fact that a lot you know lots of public workers might be staying at home and another area you've talked about in this is a multi-year estates programme and I think obviously from reading the document there seems to be a kind of enthusiasm for selling off surplus public buildings if for example there are going to be fewer people in the public sector and more people may be working hybrid or from home but the difficulty for as I see that for local government will be that in some areas of Scotland there might not be much demand for their surplus public buildings whereas in other areas for Edinburgh for example there might be a significant demand and that would mean that some local authorities would be unbalanced in terms of their resource availability so I know that's a fairly convoluted question but it's about how local government is going to be able to innovate and reform and at the same time cope with these huge changes over a relatively short period of time. So I think I've heard three questions in that so I'll take those in turn. It's because I'm trying not to I'm trying to allow other people a chance to come in so I don't know why I have to do it. So firstly on local government I think this is going to be a recurring theme of the various questions that are asked this morning it's a very similar question to what you just asked me around education and I am not in any way denying the extremely challenging outlook that we face right now within the the funding available to us and the job we've had in trying to be as fair as possible right across the public sector. Now one brief tangent if you recall in our budget we set out three objectives which are tackling child poverty and transitioning to net zero and improve economic recovery. Now we've intentionally added resilient public services to that because if you were to just base all your decisions on those first three then your core public services are going to find it very challenging so we have tried to protect those core public services but that is not in any way to say that it isn't an extremely difficult outlook you know that there's no two ways about it and that's where the other two parts of your question around public sector reform including for example the estates is so important because if we can become as efficient as possible then it allows us to focus our funding on front line services and ultimately focus on on achieving those objectives. So two quick points on local government under certainly the most challenging of circumstances we have protected the revenue budget in cash terms so it says £100 million in the final year and we've also protected the baseline of £120 million from this year and so that means that local government will receive about £42.6 billion over the resource spending review period but the second point here is that because it is level two what those figures don't include is the funding that is normally allocated to local government from other parts of portfolios so for example that the transfers from education the transfers from social care so there will be a significant uplift that you'll see in future budgets because the resource spending review does not provide the granular detail on the funding that is made available through those transfers. There's a point there on flexibility and it has to go hand in hand with the fiscal framework and now that we've we're through the local government elections that work is being dusted off again and it hasn't stopped but obviously it had to be suspended briefly during the local government elections and that fiscal framework has got to look at maximising the flexibility and maximising empowerment of local authorities. On your other points perhaps I'll just more briefly say that on the estates this is not about focusing all of Scottish Government workforce for example in Edinburgh this is about the fact that across Scotland we have hybrid working now and therefore for me to continue to renew leases and it is largely leases rather than necessarily outward ownership to continue to renew leases when buildings are only half or a quarter occupied doesn't make financial sense so it's about how to ensure we maximise the use of that estate and if we can save money on for example estates then I can maximise more money for social security to feed hungry kids or to help with frontline workers. I completely agree with that but it's not about obviously as you said focusing public sector workers in Edinburgh it's about the distribution of capital receipts so my concern obviously there is that if you're unable to sell buildings in some parts of the country whereas in other areas you might have a high demand and indeed a higher price per square foot received for that how would the Scottish Government look to balance that because it's quite rigid the funding formulas we have at the moment and I just feel that some of the poorer local authorities might be left behind because they won't be able to generate those capital receipts unless the Scottish Government looks at a way of perhaps redistributing and of course when you do that then you get the other problem in that some councils say well there's no incentive for us to sell buildings if the money is going to go to another council so there's going to have to be a way in which the circle is actually squared so that's the thing I just want to leave hanging there but again I need to move on because there's a lot to cover. The government obviously has very significant climate change ambitions but I think and we've requested further detailed information from the cabinet secretary in recent weeks but I still think there's a frustration that we haven't got all the information we require. I mean one of the issues that we have is that even if the money is made available for example in this equation I've asked to the First Minister directly as well is decarbonisation over a million homes in 50,000 non-domestic buildings by 2030 on page 22 of the report supporting our commitment to carcolombs by 20 per cent by 2030 and loads of other commitments there where is the workforce going to come from this because if we actually look at the level 2 detail in terms of training and skills there seems to be a significant reduction in terms of that area well sorry employability and training is actually going to be stagnating for a year or two and then you've got an 80 increase up to 2027 but enterprise tourism and trade which one would have thought would be tie in hand with that actually will have a 9% reduction over the four years and that's before you even look at inflation so it seems to me that you're trying to encourage enterprise and innovation but the budget's been slashed significantly and training isn't really kicking in at this stage despite these huge ambitions with a skills and labour shortage. So on that in particular obviously employability is going up so it's a choice employability and I'm sure we're going to come back to this employability and skills are the two areas that people probably most frequently raise with me in terms of the pressures right now particularly with unemployment at 3.2 per cent and the need to invest and therefore within that finance and economy portfolio you see an intentional choice of investing more in employability and skills and the skills line does go up and as a result we therefore cannot mirror that significant increase across the board because you just by nature in a budget cannot prioritise everything and when it comes to enterprise and skills that links back to the national strategy for economic transformation and the constant refrain from the economy committee and others about decluttering landscape so we need to be as efficient as possible that does not compromise our objectives but we need to ensure that we're reducing duplication across various public bodies that operate in the enterprise and skills space so to my mind the balance that we've sought to strike in the finance and economy portfolio is the right one it reflects the constant refrain I'm hearing right now about the need to invest in skills as well as to ensure that we're as efficient as possible in supporting businesses so when you say where's work workforce can come from and the need to invest in training and skills that's why I've prioritised it like that now that means that the focus will nearly always be on the areas which are not seeing the the more generous uplift but the focus is very seldom on the areas that are seeing an uplift in challenging areas on climate change specifically I think it's important to say at the outset that from a capital perspective certainly we cannot reach net zero without leveraging in private funding I don't think there's any question about that and I don't think there's any dispute on that you know it's where the Scottish National Investment Bank has a role to play in terms of leveraging in private investment so we're going to need private investment we can allocate public funding out of our capital available bearing in mind that that's approximately about five billion pounds a year four hundred and fifty million pounds approximately per annum in terms of borrowing capacity and capital but it's going to take more than public funding for us to reach net zero and I don't think we should we should hide that so hopefully that answers both the skills question as well as the the funding question yes I would say though that in terms of private funding are you talking you're not talking necessarily about businesses you're talking about for example homeowners have to invest significantly and transform with their own houses I'm actually talking a lot about private investment in terms of you know we'll come through cop 26 where you know gfans tells us that there's 130 trillion dollars of assets under management right now that are looking for a home in significant infrastructure projects and other things to help with that transition so I'm talking about the substantial sums of private sector funding that is available right but you can only actually deliver a if you've got the money but b if you've got the personnel but the other thing which I had a meeting yesterday with the stack is forestry llp as they funder a bridge I was opening yesterday my constituency and they said one of the real drawbacks one of the things that tears their hair out is the sclerotic way in which in which the the public sector deals with for example developments planning applications etc etc I'll just give you one example from my constituency you know a road junction which was agreed way back in 2020 for 18 months I've been chasing transport Scotland for a start date on site or even when it's going out to tender and all I get back is you know government processes and procedures are taking place you know 18 months I mean I don't even tell me what they are even though I've asked them I've raised it in the chamber it's still no start date and people if people are going to invest in Scotland they need to actually have a structure in place that not only welcomes that investment in the process years ago I read an article by the former chief executive of West Lothian council who went from coffee boy up to chief executive and he basically was asked how he turned it round and obviously proximity Edinburgh helped but he said well we turned all planning applications around within a month we either said yes or no you know indicatively and then we would go into further detail necessary and so people knew West Lothian was a place in which you could invest now clearly there's an issue about shortage of planners you know so that has to be addressed but surely in this day and age we must be able to have a position whereby we can approve projects much more expeditiously or quite frankly go again at another project involving 900 jobs you know in terms of the of the zero carbon area and basically they said that they actually were going to consider moving to T side because a planning the planning committee put back there the deliberations for 11 weeks now and a contact the chief executive to the council they brought it back forward so that that won't happen but you know that this happens all the time and in terms of reform what are we going to that's a long-winded question but it's because I feel quite passionate about it and I do many what we're going to do about that yeah I feel equally passionately about it and I appreciate that on this resource spending review there's there's much that is challenging there's much that's difficult but I don't think it's unreasonable to set out a programme of improving our outcomes and that goes hand in hand with efficiency so for example I don't know in your examples that you've identified what the cost was of that inefficiency you know how many people had to how many teams had to manage that application how many what the cost is of that additional time and that additional inefficiency and that's the kind of thing where if we are serious about achieving our objectives we have to make sure that the processes are there processes are efficient and we have the right people and the right teams to deliver that and that's where I think the resource spending review does two things one it sets out the challenges of the the financial position and you know I can't I can't change that because I can only spend what the sfc forecast but equally it sets out the fact that if we want to get better and if we want to improve our ability to meet our objectives we're going to have to take a long hard look at how we achieve that and I've used the example in the enterprise and skills space where you know if we have if you take a business organization I'm sure we all have businesses in our our area our constituencies who go to five six seven different public bodies because five six seven different public bodies provide grants that's in that is inefficient we want to make it easier for businesses to access the help that they need in a one-stop shop yeah and it'd be told and not just be told manjana when they're when they put an application and when it's going to be dealt with actually it would help if there was a detailed timescale but on on on procurement Scotland and indeed the whole UK pay significantly higher in terms of procuring things such as you know road upgrades for example simple straightforward things in continental Europe is that an issue that's going to be addressed and we're going to look at the procurement costs here compared to elsewhere because I mean that would release if we had if procurement costs were reduced to continental levels that would release significant funding to enable us to have more projects how often have people walked or driven along the road and seen a seen a you know you're stuck at the some road works for half an hour and you get past it there's no you're empty working there you know it doesn't matter what time of day or night you actually go past it never seems never seems to be empty there that else is one guy in a digger and 10 folk looking at the holiest dug I remember raising this you know I mean triple vol experience I had raised this with Stuart Seames in 15 years ago and he said that that would be looked at and I'm still waiting if you know I mean so I think these are real issues that we have to address in terms of I mean you know the crisis is a mother of advent adversity is a mother of invention so surely this is a time to really address these issues and well procurement what kind of what focus will it be on procurement I want to be in a city where three four years from now we're still asking the same questions we're not seeing any real significant improvement other than less money getting spent on the ground so and I think that's the necessity of the art of resource spending review so again we cannot afford not to make these reforms and the four sort of pillars of the reform agenda within the resource spending review includes procurement so it's encouraging public bodies to look at four areas where we might drive efficiencies one is on estates you've already touched on that one is on shared services and one is on procurement and then the other is on grant management so you know what the rsr doesn't do is give all the answers in one go as to how we're going to achieve that but it does set out a plan over the next few years for for driving that reform and the reason why we need a resource spending review to do that is because it's very difficult to drive reform within one year very difficult to do it within annual budgets so you need to have that longer term perspective of a three four year spending review in order to say right changes you make in year one might be expensive but you will see the benefits in year four okay one final question from me because colleagues are clearly keen to come in and that's regarding social justice housing and local government portfolio i noticed that in that area 96 of the increase in spend over the next four years will be on social security but half of that's further welfare benefits will be devolved but half of it is a choice being made by the Scottish Government now given the kind of positive resources and the fact that for example the police are going to be faced with a zero budget at a time of rising cyber crime etc etc in various other areas are going to have to deal with fixed budgets is it is it the best use of public money to look to spend an extra 1.2 billion in benefits and what will be the result in terms of the wider economy of that spend and indeed removing people from poverty which is clearly what this spend is about yeah and i would argue that it is important spend i would argue that 1.8 billion pounds for the scottish child payment is an important choice that we have made but you're right it is a choice and where you choose to prioritise one area of spend then when i necessity you are prioritising other areas and we have chosen to make tackling child poverty a core objective we have backed that up with increased spend on social security we have reformed social security powers that we have control over and i think tackling child poverty has got to be one of this government's missions interestingly it's pretty much supported i think unless i'm told otherwise in the next few minutes supported by all parties in the parliament as well so it is a choice ultimately though if we achieve our objective those figures should decrease you know you shouldn't set out to invest in social security over the extreme long term because if you manage to tackle child poverty if you meet your child poverty targets you should see that spending figure come down because there are fewer families who are in need of that additional support i asked that very question of the scottish fiscal commission not today but the last time they were here and they said that their view was it would have no impact on spending in actual fact i would say though that the child poverty line as distinct from social security assistance is projected to increase from 34 to 97 million so there's a significant increase in that but that's only a fraction of the of the 2.4 billion increase in social security spend yeah i mean it is it has been a choice that we have made the other difficulty with social security of course is that it's demand led so the forecast will inevitably change because no forecast is 100 percent aligned with outturn so we have got to make sure within our own budget that we have the capacity to meet that demand irrespective of where the demand falls so it does create risk and volatility but it is a choice of this government i think it's the right choice and in terms of the scottish child payment i don't think it's unreasonable to suggest that if you meet your child poverty targets and the scottish child payment is one of the levers for doing that then you see that figure fall but a time of chronic labour shortage and skills shortage surely trying to get more people into work is the ultimate cure for poverty people having a good wage etc and there's an issue about people who are on the cusp of these benefits i, the people who are working and just over the benefits who don't receive so many benefits there's a real issue about the the the relative burden they face in terms of taxation because what we're looking at in this 1.2 billion is an extra 500 pounds a year for every taxpayer in Scotland if you even it out i mean clearly obviously people in higher taxes are there a relative share of that but that's an issue that people face some folk will will will who are on fairly low pay and haven't worked long hours will wonder whether or not that's the right priority going forward and obviously a lot of families that will receive the child payment or will receive additional support are already in work 2 so you know that is where you cannot look at let's say that 1.8 billion pounds for the Scottish child payment in isolation from the employability and training line which is going up by 100 million pounds over the next few years because they are two sides of the same coin you know i think that from a child poverty perspective governments have an obligation a moral obligation to care for children in poverty that is not their choice they are in poverty and those figures it need to be grappled with but simultaneously it's about helping parents not just to get into work because many of them are already in work but ensuring that they are paid sufficiently which is where the real living wage comes in and to make sure it's secure employment so you know the Scottish the child poverty plan obviously captures all of this the resource spending review comes in behind and funds it but i think we cannot ignore this issue and we've got to tackle it and we've made a choice to tackle it in terms of the priorities that we've set out for the resource spending review okay thank you very much for that first person to ask questions would be John to be followed by Liz thank you very much convener we spent quite a lot of time looking at inflation with the Scottish fiscal commission earlier on this morning and looking at it from kind of different angles and specifically i mean professor breeding talked about the previous kind of old fashioned spiral we had in the 70s and 80s with wages and costs kind of chasing each other up and and they seem to think that is not going to happen this time so they're looking at their predicting a real earnings decrease of 2.7 percent can ask for your angle on that i mean do you see a do you think there has to be a reduction in real earnings and you know wage increases cannot match inflation for the next period and certainly from a obviously we'll set out public sector pay policy in advance of every budget but i've been clear in this year's budget that i cannot inflation proof public sector pay policy because of the high level of inflation and the fact that it is due to rise i know conscious of the sfc's forecast and where they see inflation going averaging 8 across 22 23 before falling back in line with the bank of england's 2 forecast from 2024 to 2025 and that is very much in stark contrast with the inflation assumptions that were used by the UK government to underpin their spending review in october 2021 and so you know the difficulty of me answering that question beyond just this year and perhaps next year is to say that i have a funding pot available which is based on assumptions last autumn which have been completely overridden as it were by that by the inflation we outlook that's inherent in the sfc's forecast i mean i'm happy to bring in anyone else if anybody else wants to come in on that but i don't know if that was sufficient the answer i mean i suspect there's no end to this we could discuss this subject because i mean one of the other points this sfc made and i suppose i was surprised they weren't a bit more certain but as to how long inflation might last so it may come back down again if presumably say all prices come back down but if they don't come back down it could carry on is that is that you would agree with that i don't know gary wants to comment yeah i'll have a bit coming in that so i think i'm nice to catch some of the conversation in the last session so i won't go over that between cost push inflation and demand pool and essentially where we are at the minute it's a combination of both the supply side cost pressures are really driving it so in the context of where we think this is going to go the fiscal commission bank of england others believe the mechanical nature of inflation is calculated means it will come back down so it's unlikely to have oil prices would need to keep rising at the same rate this time next year for that calculation to continue so that's why you see the forecast coming back down but i suppose your more general question is what about the impact i think referring back to the seventies of pay growth through labour pressure wage pressure and that question i suppose in a sense is partly answered by the fiscal commission today as well because in their assessment they say real wages fallen by 2.7 percent on average this year the bank of england are forecasting average pay across the economy of around five percent so you've got that squeeze so if that's the squeeze for this year an inflation comes back down to circa three percent as forecast then wage pressure should mitigate as well the challenge though i suppose gets back to the convener on the earlier questions is we have an incredibly tight labour market and the extent to which bargaining businesses competing for staff the extent to which we can ease that pressure so i think again relates back to the cabinet secretary's previous comments about employability support as well about getting more people into jobs the change in nature of jobs as well i think this thing gets into a broader productivity discussion about how businesses use labour and the extent to which they replace labour through investment and capital so i think in the short answer to your question is perfectly feasible for inflation to be backed down next year and for this to be a a year to 18 month type shock the risks in the longer term are of the scotland's demographics and the extent to which we can address those so even in a so so that could continue to give pressure on the on the labour market okay well i'll never come in on that point but i'll not i'll not pursue it any further aim i was also asking the fiscal commission about the emphasis on social security and you've already been asked about that and the fact that that will be protected and in fact more invested in that area and will that have a knock on effect so i'd be interested to know if you think because the concept has been that if we give people who are less well off more a bit more money they will spend it locally that will come quickly back into the economy and will boost jobs and eventually tax they said they haven't really made that kind of assumption and i just wondered if you were expecting as say compared to if we gave more money to scotch enterprise some of that might kind of leak out to the very higher paid people well i think i think from my perspective and others may want to come in on this as well but there's two impacts from getting social security right one of them i've already touched on so particularly with a view to Scottish child payment where we managed to meet an objective like tackling child poverty that will in a very obvious way deliver not just benefits for those families but for for the wider economy and for ultimately for public finances because if people are taken out of poverty and they're in well-paid secure employment and you don't need me to spell out the benefits of that to the the taxpayer in terms of pressure on public services and so on but the other part to this is the tight labour market so again if we are able to support people into work if we're able to provide support for them we know that when unemployment is 3.2 percent the area that we need to do most work on is on the economic connectivity figures in order to expand the labour market so to my mind you have a there's a moral obligation to ensure that those who are entitled to social security support get access to social security support in a dignified way that is an ideological choice which i think is the right one to make but equally if you get this right and you support more families out of poverty then it inevitably delivers benefits elsewhere reduces other pressures on public services and my hope would be does boost certainly that the labour market okay thank you and to move to another area the suggestions have been that a head count within the public sector would reduce to the same levels as pre-covid which i believe is 30 000 people less and i think within that daniel johnson was giving us figures earlier you know there's been an increase of 14 000 in the nhs so can we expect that there would be a reduction of 14 000 in the nhs or how does that work out so i think it's unlikely that you would see that in the nhs and that's why i've intentionally set out quite a flexible approach where we know that there are some parts of the public sector that have grown and probably will need to grow to an extent further so for example the national care service if you you know that they will need to be able to flexibly employ and expand in some areas there will be other parts of the public sector which no longer need to maintain the sort of coven expansion of workforce so rather than taking a UK government approach which is to put arbitrary figures on i think their figure was 91 000 fte which was to bring their staff numbers down to 2016 levels we have set out that we will freeze payable which does not equate to a freezing of pay levels but we want to work with employers and trade unions over the next few months certainly advance of the budget to understand how we can we can manage those workforce numbers in a flexible way which allows some parts of the public sector like the health service to continue to grow where it needs to grow and other areas to decrease where they don't need that sort of post-Brexit post pandemic levels of staffing okay thank you okay thank you list to be followed by Michelle thank you cabinet secretary can i just begin with one bit of clarification if i may last week when we were in the chamber both at the time of your statement and then later at First Minister's questions we raised the issue about the information that was in the Scottish Fiscal Commission data which is in tables and graphs 4.3 and 4.7 which made a projected estimate for 2026-27 of a £3.5 billion hole in the public finances now you seem to be implying that that was not a correct estimate from the Scottish Fiscal Commission data and could i just ask you why? No, that's not my position. Those are forecasts from the SFC and the £3.5 billion i believe was was actually our figure published as well in December and it was based on a number of assumptions. The point that I was making in my answer to you and the First Minister's answer was we are now working with a resource spending review that is completely balanced so it is factually inaccurate to suggest that the resource spending review is not balanced because I must balance by law that the the the sort of gap between spending and funding based on the RSR framework which was published in December has come to the fore again in recent days that projection was based on for example inflation at 3.7% and 2% thereafter it was based on social care growth in line with the 2018 medium-term financial strategy it was based on a whole number of assumptions and the resource spending review in a sense is the answer to a lot of these assumptions based on more accurate information so I think what I'm very clear on is to suggest that there is a deficit in the resource spending review is inaccurate these are based on forecasts in advance of the publication of the resource spending review right so can I just be quite clear then that did you use that 3.5 billion in your estimates before the financial statement that you made or were you using a different figure that those we don't we don't use figures like that we come at it from the position of the sfc updating their forecasts in the weeks in advance of the resource spending review publication and we then have to balance our spending commitments between December and the sfc finalising their forecasts a few weeks ago there has been so much change to suggest that we go back to December figures is just inaccurate sorry can I just press you on this cabinet secretary because it's absolutely vital to the policies and they you know I think it's very helpful may I say that we've got a statement that looks over a longer period of time which is the first we've had since 2011 I was extremely helpful but obviously you are making your choices and setting your policy commitments based I would hope on what you see as the accurate statistics and what I want to know from you given what you said last week is what do you think we need to take into consideration that changes that statistic that the Scottish Fiscal Commission produced relatively recently I mean this this question is hugely important because it goes right to the heart of why how we how we build a budget or resource spending review the notion that I would base a May publication on December figures considering all that's changed since then is is is flawed so if you look at the assumptions that underpinned our budget in December the resource spending review framework in December I can go through it I can go through it was sfc forecast for social security in December 2021 it was assumptions around pay growth it was assumptions around health growth it was assumptions around social care growth it was assumptions around inflation all of these forecasts have been updated not by me because it's not my job to forecast it's the sfc's job to forecast and the way that you build a budget or resource spending review is that you use the latest figures that the sfc provides me with which they've now published and I must balance my budget on the basis of that so forecasts change constantly I understand that cabinet secretary what I'm asking for you to tell us because I think it is very important just as you've acknowledged yourself is it if these changes have all taken place as you rightly point out what is the figure that you are using for the black hole in the public finances there is no black hole in public finances really there is no black I mean this is this is the most basics of a budget in this that the scottish government sets or is not a budget cabinet secretary you said that originally this is not a budget indeed or resource spending review I don't know how else to explain the absolute basics of scottish government budgets which are or resource spending reviews which are that I must balance I can only spend to the penny what I am predicted or forecast to either raise or receive you cannot have a position in a resource spending review or in a budget where I'm overspending that's why querying the Scottish fiscal commission's assumptions is so important because they start with assumptions they provide us with forecasts and I only can spend what they enable me to spend well put it let's put it round another way on what have you made your projections for the policy choices that you have set out to the committee this morning what what statistics are you using okay the sfc forecasts which are largely based on either the UK government spending review and on tax and social security forecasts okay right can I come to this same point on a slightly different angle you said when you set out the national economic transformation strategy that our universities which as you quoted are integral to the realization of the national economic transformation strategy in place such a vital role when it comes to developing research and development and innovation why cabinet secretary are you cutting their budget in real terms given that they have very considerable influence on economic growth and ensuring that we are developing research and development three reasons why the outlook right now is challenging across the board the first is that our budget has been cut by 5.2 percent from last year to this year and is forecast to grow by 2 percent in real terms once you exclude social security devaluation the challenge for every part of the public sector is captured in the fact that there is less money available on top of that we have inflation at 9 percent forecast to go to 11 percent reducing our spending power on top of that for every part or every line where you want to see an increase there must be an equal and opposite decrease and my job has been to try and treat all parts of the public sector as fairly as possible including universities knowing how important that they are but that demonstrates again the point we were just discussing which is that I cannot spend a penny more than what the SFC forecast I will either receive or raise but cabinet secretary you have got to make choices about where where you believe the Scottish economy can improve both in terms of the receipts that you will get in from tax revenues and from other areas of expenditure and where you see that cutbacks have to be made and you've spelled out some of the cutbacks this morning what information can you give to the university sector that proves that they are deserving of probably an eight percent real terms cut over the period of this financial strategy we'll bear in mind in terms of that eight percent what we're trying to protect as much of the public sector as possible including universities is in cash terms now you're quoting a real terms figure based on the fact that inflation is at a 40 year high and is eating into our spending power so my commitment to universities in the same way that I've committed already on the employability and training lines is that we will protect them as far as possible but by as far as possible I mean the overall block grant I receive is not increasing significantly over the next few years and inflation is currently at nine percent so by necessity if you have got if you're not saying real terms growth in the funding you have available then you can only go so far when it comes to allocating funding so universities like many other lines are hugely important we will protect them as far as possible if you want to see any part of the public sector increase when it comes to funding either you need to take it from elsewhere or you need to increase the pot so if any extra money did become available to you that you're not currently expecting would the universities benefit from that I would hope so yes okay we might told you to that my final point can you just confirm or perhaps one of your officials confirm that the Covid spend which you mentioned earlier when answering Mr Mason the Covid spend for 2020-21 was 8.6 billion from the UK government and 7.1 billion for 2021-22 would you be able to confirm that I don't know if we have those figures immediately to hand because I'm giving evidence obviously on the future budget but we can probably write to you unless you've got it that be very helpful if we could thank you okay thank you Michelle to fall by Douglas good morning I mean I'm sure for people watching this committee I always say that and everyone laughs he says no one ever watches this committee but the discussion about black hole or not black hole I think is an important pivotal point because it's actually predicated on debt and you make the important point about if there is a black hole or not is on actuals not on forecasts and I think perhaps the media have tended to use that in a very florid way and there is actually Dr Vern Atrell discovered that there's a private person I'm quoting here precise point a mathematical singularity which we can measure as a racial GDP divided by total debt which an economy stops expanding and begins to contract instead and that point I'd simply know that the the UK government is hugely in debt that leads me on to the fiscal framework though and I wanted to just get some reflections from you and so we know that any government and also the UK government will have frequent errors across a wide range of forecasts the UK government unlike the Scottish government doesn't suffer any penalty as such for example having or being forecast it will have to repay 817 million in 24 to 25 and of course the UK government then doesn't have to repay that in a single year cycle it can pay over several years and my point in the beginning it can borrow so perhaps this discussion really is about how the situation we've got at the moment and I too applaud doing the the resource spending review I think it's a very worthwhile exercise but it does really sharpen the issues with the fiscal framework utterly fundamentally in what you're being expected to do within the limitations of what any other normal government can do so I'd like some further reflections from you if you could around that issue before I move on yeah so it's a very good point and as we've just been discussing forecasts are by their very nature uncertain so we're sitting well the sfc is doing it I'm not doing it they're sitting there trying to predict what our budget position will be in three years time based on tax and on on receipts from the UK government inevitably I'm still to see a forecast that's 100% aligned with outturn because they are forecast you know they're based on assumptions we have seen in the last three four months how those assumptions can wildly fluctuate you know who predicted it wore in Eastern Europe back in December so inevitably forecasts will change what other governments can do around the world is accept that those forecasts should be managed nearly always through resource borrowing so that you smooth the trajectory and don't require that any chess or education to give up funding in order to manage forecast error and that is what we're expected to do if the forecast error is greater than 300 million pounds and that's where it hits next year and in subsequent years where you see the impact of the pandemic you see the impact of through no fault of their own two different forecasters working on different assumptions and also forecasts that that didn't come to fruition now the reconciliation that's required in that year significantly exceeds the borrowing capability to meet that so that means about 500 million pounds having to be found from frontline services whereas all it would take for the UK government is to adapt the fiscal framework in that one area to ensure that there's 500 million pounds more for frontline services the other part to this goes back to my answer to the convener which is around smoothing the trajectories you can't expect the public sector to suddenly in one year absorb 500 million pounds when it's we're talking about a workforce and then see that climb again in the next year which is why most governments borrow for that so the fiscal framework review is obviously on going this for me is one of the most obvious areas where I would like to see progress one of the arguments we've made in the past for example is using one of the the the the borrowing powers for cash management which we haven't used and we haven't needed to use and redeploying that for example in terms of managing forecast error but I think it's one of the the biggest areas even if the the resource borrowing for forecast error was indexed or was aligned to even inflation these things would make a big difference well thank you for giving such a clear illustrator that I think you're making the point that if you were going to start from well nobody would choose to start from here it's an inefficient way to manage the finances but it does lead me on to something else when I when I read the document that I found interesting because again what we're talking about here is people's understanding of what's actually going on and I was very attracted in the economies of scale that you're looking at in terms of shared services for example which to me is an absolutely obvious benefit of where you could derive value and I mean obviously you've mentioned other areas grant management and procurement and so on and also in terms of the public the various public bodies 129 of them are so on but I suppose this also brings me to the point about the public understanding of this and I can appreciate you know the useful conversation with councils about might we be able to do this but I can foresee difficulties in terms of people won't won't necessarily a shared service because they'll see that as a loss of control so I agree with your approach about having a conversation but I just wondered what further challenges you foresee about that in principle I think it's useful and it's good but given the discussion we've just had I can see then it'll majorly throw up oh you want to get rid of this you want to get rid of that even though we're all aware of the huge fiscal constraints so any more thoughts about how you're going to approach that and also the timescales because my experience is that even if you get agreement it always takes longer than you think and it's always more expensive than you think and the return investment is never quite what you think either yeah so we'll certainly be engaging with um obviously public bodies on on taking that reform forward I think the important thing though is that the public sector obviously exists for the benefit of citizens and we need to start with citizens citizens are not necessarily going to be um aware of or even interested in the the back room shared services and particularly in an age of digitalisation and obviously digital is one of the the key focuses as well things like shared cloud services things like shared investment in in digital capability and we've already talked on things around estates and sharing estate is going to lead to the need to to share services as well and there's a lot of bodies that are doing very similar things around their finance or their HR capabilities and again I'm not sure that the citizen is as interested in the the back room capabilities as they are in getting the service that they want and I think all of us need to be aligned on the need to improve outcomes for citizens whether that's an individual business a household or or anybody else so we will certainly work with with public bodies to look up the art of the possible but I want to ensure that we protect and preserve public bodies autonomy to deliver the services to the citizens as they wish but work with them where they need for example investment in their IT or the digital well there might be scoop to do that more effectively and certainly the Scottish Government's been working on on our own shared services even within the Scottish Government you know making sure that you have one system for for all for all parts of the Scottish Government so I think there's a lot of scope but we will need to do it carefully and obviously we'll we'll report the initial conclusions in the upcoming budget okay thank you very much okay thank you very much Douglas to be followed by Daniel thank you hi cabinet secretary um first question I had was around local government finance and it probably comes as no surprise um so it seems to be a real term cut of like seven percent over the next four years so is that not really passing the buck on to the local government to really give huge increases to to council tax going forward no it's not but as I've said already across the public sector I think it's a very difficult outlook and from a local government perspective we obviously need to do this hand in hand with the work on the on the fiscal framework and also recognising that this is not a budget so I would well imagine that in future budgets they will see for example a significant uplift through the education and social security lines as a bare minimum but you also spoke about things like digitisation and reducing the state do you not accept that many local authorities have already been doing that over the last four years so for that to be given as a way that they can save money is actually quite insulting to those bodies because they've been doing that already yeah and I'm not sure unless you're quoting something I've said earlier um that I'm advising that or advocating that what we are saying from a local government perspective is here's the spending parameters over the next few years and that allows you to plan but it won't replace annual budgets so it gives them the as I said the parameters but it doesn't give all the details and I think you know future budgets will need to update on those details incidentally I think there's a lot that we can learn from local government too the way that local government works together the way that COSLA facilitates a lot of that sharing of best practice so I think you're right in saying that there's much for us to learn but certainly local government is to all extents and purposes fairly autonomous we spend the scent we set the spending parameters but ultimately it's for them to determine how they spend that money but you're also given targets about public sector headcount for example you know reducing by 30 000 we think over the next few years so that's going to feed back to local government as well isn't it well they have choices to make on within the spending parameters that they have so I certainly don't dictate to local government as to how they use their funding that's for local government to determine and all I can do through the resource spending review is set out the spending parameters it's for them to decide what what they do with that that core budget obviously there is additional funding on top of that for education and social security which we do have more of an influence over but in terms of the the core spending parameters it's for local government to determine how they spend that but if we think back to the reduction in headcount you know 30 000 has been mentioned 15 000 of the additional 30 000 pre-covid level was NHS and I think you've already said that probably won't be affected much so then the figures the reduction has to come from other places and one of those places could well be local government and all decisions around how local government spends its money is for local government to make it's I do not as you will well know I do not tell local government how to spend their core budget it's entirely up to them but you've been suggested in the headcount reduction of 30 000 across the public sector so that is really and I've got a figure on it that figures your figure or other people's figure but what I've suggested is that we need to get back to pre-covid levels but if you take local government one area let's say ELC expansion that's in a workforce expansion within local government I'm not suggesting that that is that it's something that needs to to continue but inevitably there will be other areas I'm assuming of the public sector and it's for local government to answer this question not for me to answer this question where there might have seen us an increase as a result of Covid that they may no longer need but there might be other parts of local government the same way that there are other parts of the public sector that need to see see see increases as we come out of the pandemic which is why we're being very flexible but I think local government's quite unique in all of this discussion around public sector efficiency because ultimately it's local government that makes the decisions not me I set the spending parameters I don't dictate to local government how they spend that money but I'm struggling to see where this headcount okay we don't call it reduction efficiencies are gonna gonna come from if it's not going to come from NHS it's we've already said that ELC has expanded so there's new nursery teachers there that will you know we can't get rid of them suddenly so where you know where is the axe going to fall I'm struggling to to see it cabinet secretary yeah and we'll work with public sector employers what I've been at pains not to do is to a set an arbitrary target on figures although it's dominated the the press and secondly dictate to specific public bodies what they need to do we will engage with them and most importantly with trade unions over the next few months in advance of the sub coming budget in terms of where the workforce needs to reset and it's you know it's based on a freezing of pay bill that doesn't equate a freezing of pay levels so that's why that's what's driving the need for reform but I hope you'd accept that there's a fundamental difference in my relationship with for example a public body like transport Scotland and my relationship with local government yeah but I'm struggling to unders yes you're you're not dictating the the figures in terms of headcount but you are holding the purse strings in terms of the amount to spend on pay so you are really dictating the headcount that's that's going to be in all areas well I've been I've been quite open and honest about the need to freeze pay bill but not pay levels I don't think there's anyone that doesn't accept that over the last two very difficult years there's been a lot of change in the public sector and inevitably some areas have had to see significant and rapid increases that are no longer required because of Covid and indeed because of brexit you know initial teething challenges around around brexit saw spikes and so it's about a general reset rather than setting arbitrary targets which is what the UK government has done but your questions really are stemming from local government perspective and what I'm saying very loudly very clearly here is that I don't tell local government what to do nor should I in the way that I can more effectively work with other public sector employers so so in the figures that's shown a seven percent reduction real terms is that are you saying then that it's not going to be as bad as that for local local government I'm saying that this is not a budget and we have used probably you know we've used what the sfc I think called reasonable assumptions to set our budget but if you think about it we're setting our budget on predominantly a UK government spending review of autumn last year which is completely out date hasn't been updated to accept inflation so do I think the numbers are going to fluctuate further yes I do think the numbers are going to fluctuate further so it might not be as bad as they expect them well I would sincerely hope that our budget is not as as bad as I fear but ultimately the only way for that to change is for the UK government to increase the the funding pot and to take into account the huge increases in inflation okay moving on to something you said earlier about enterprise that you weren't cutting the budget there it was your cutting duplication instead so can you give us some examples of where there is duplication within the enterprise budget yeah and just to clarify what I was saying is that within that finance and economy portfolio you will see some areas going up but not all areas can go up so for example training and employability are going up so I think one of the the two examples I would give is the national strategy for economic transformation calls on all parts of the enterprise and skills landscape to focus on fewer objectives and to do those really well so for example on productivity to really focus on productivity to focus on some of the new markets to focus on entrepreneurship and I would like to think that in focusing on those key objectives they align all their spend and they align their workforce to achieving those objectives that ultimately will mean that looking across the board there will be areas that some public bodies are better at than others so for example I think that Scottish National Investment Bank has a really important role to play in scalups now Scottish Enterprise have a great track record when it comes to startups so actually between the two of them Scottish Enterprise focusing on startups Scottish National Investment Bank focusing on scalups and both of them trying to ensure that they're not just duplicating each other's efforts would be an example I think where aligned to inset and also aligned to where they have a track record of success is you know and Scottish Enterprise has generated significant revenues for the public purse as a result of very effective investments so that would be one example the second example I would make is the one I've already talked about which is a recurring theme when it comes to business grants if you're a business where do you go first for grant support do you go to business gateway do you go to se do you go to high do you go to visit Scotland perhaps if you're in the tourism community do you go to the Scottish government so I think right now it's quite a confusing for businesses but in each of those organisations there will be teams doing very similar things so actually through you know collaboration discussion how do we make that more effective a more effective relationship for business and I think there's good there's good practice already and the enterprise agencies are completely on board and I've already started some of that work so do you see some of those agencies potentially going then no no I don't no I think they all have just people within them going I guess no I think they have all have an important role to play but I think they need to make sure that they are as efficient as possible and focused on the core objectives that we've set and they're you know certainly based on my extensive conversations with the enterprise agencies of Visit Scotland they are on board with that and they get that they're on board with a reduction in their budget that would be unusual for our organisation this is the fundamental challenge I think with some of this discussion is if we are more effective at serving the citizen by extension you will have a more efficient public body and what's not to appreciate about improving outcomes for citizens improving outcomes for businesses making sure that every penny of resource that we spend is actually delivering our objectives well I guess that ties me back to the other thing because you know from the the medium-term financial strategy there's little mention of the national performance framework really is that really truly embedded right through this document would you say I would say that yep it certainly it's embedded through the resource spending review the medium-term financial strategy focuses a lot more on the funding we have available and the resource spending review focuses a lot on the how we're going to actually spend it so I would make that distinction between the two documents but yeah I'll go back to identifying what the four objectives are tackling child poverty it's completely in line with national performance framework transitioning to net zero completely in line with national performance framework economic recovery completely in line and resilient public services I would say that this resource spending review is far more focused on outcomes than perhaps many things are so okay you mentioned tackling child poverty but what about preventing child poverty I think that's difficult when you have cuts to the local government budget you have cuts to the university budget you have cuts to the enterprise budget sure that that's the areas where we should be investing so to you know to prevent child poverty as opposed to trying to tackle child poverty I think that the greatest contributor to child poverty over the last 10 years has been UK Government austerity as backed up by the University of Glasgow's report most recently and we will do all that we can to mitigate but we are limited in what we can do when it comes to mitigation we will continue to invest our money through a different approach to social security but ultimately much of what we spend is mitigation and if you fix that at source we could probably redeploy that funding elsewhere but this government always talks about you know early intervention prevention and a lot of these areas that you're cutting would be tackling early intervention things like local government you know they can tackle this the source before it's a problem and that's why I'm sort of slightly confused with some of the things you've said today and some of the things I see in this in this report we're spending £1.8 billion in Scottish child payment which will go up to £25 per week which will just about mitigate the cut to universal credit of £20 per week but you're making cuts in areas that could prevent child poverty so that's my point I'm making last thing I wanted to talk about is tax so you mentioned you know you go on the the sfc forecast so the sfc forecast in that in terms of the higher rate threshold would remain frozen as part of the forecast baseline so will that is that something you do see frozen which means you know it says here higher rate taxpayers pay an extra 653 income tax in 23 24 and that would rise to 1317 in 26 27 so do you think that's something that you will so we will update all tax policy in advance of every budget and i'm not won't be drawn today on setting tax plans for subsequent budgets but we will set out those tax plans in advance of every budget obviously the sfc have to go in the basis of assumptions and the intention here was certainly not to determine tax policy for future years okay thanks okay thank you Daniel to be followed by Ross thank you convener um I just want to go back to the points around public sector head count so the the aim is to return to pre-covid levels and I accept that you're saying that that will be done essentially through capping the total payroll at value but not in terms of levels and I understand that but there is a certain arithmetical kind of outcome from from that and first of all if you're going to do that as John Mason was pointing at half of that 30 000 isn't the NHS that's not going to be reduced so in essence in the remaining remaining areas they've got two options either reducing people's pay levels or reducing those head counts and if you're going to maintain NHS headcount at what it is currently and it's half that means those other areas will need to reduce their head counts by double the amount that they've increased by just to highlight that in the civil service that's 4 000 is the increase local government 7 000 the increase and I'm going quote 4 2019 to quote 4 2021 here and finally public corporations 5 000 now you've refused to be drawn on local government but you do have control over civil service headcount so are we going to see a reduction of 8 000 civil servants in the Scottish government what we're going to see over the next four years and it's important that it's understood that this is over the longer term because it's not it's not over a one year period is yes a reduction in workforce and in headcount to pre-pandemic levels and there's a number of different ways that you can do that so you can do that through effective vacancy and recruitment management you can do that through redeploying staff all of it has to be done in collaboration with trade unions and through discussion with trade unions to do this importantly we have a policy of no compulsory redundancies we'll update public sector pay policy in advance of every budget but I think the key here is that with a resource spending review you're not trying to drive reform over the space of 12 months you're trying to drive reform over the space of four years and so by 2026 2027 we want to see the total size of the devolved public sector workforce at at pre-covid levels you know what even within the health force we know that for a national care service which was an example I used earlier there's a lot of people already working in care so you know you have to take that into account it's about effective management across the board rather than setting arbitrary targets over a very short period of time I don't think I was either suggesting arbitrary targets or that the time frame was 12 months I appreciate that the time frame is you know four to five years but nonetheless you might not want to put a number on it but if we are going to essentially maintain health service headcount in broad terms albeit with some change if you have that macro figure and you're going to protect half of the increase the other areas are going to have to increase by more than the figure that they have gone up by that's just an arithmetic necessity is it not so therefore now you don't necessarily need to put a figure on it the headcount reduction of civil service will need to be more than the 3800 it went up by in the Covid period is that not just an arithmetical necessity I mean some of that will be in the health service so in terms of civil service but I think I mean I'm not disputing the sentiment behind your question which is that I have gone out and said we need to reset the size of the workforce we will freeze pay bill and ultimately we want to see a return to pre-covid levels now the public sector is as large I think it's a approximately about 470 k in terms of FTE and we will need to see that return to pre-pandemic levels that will need to be managed across the board and I think that's where my concern with your arbitrary figures even the 15k in the health service is putting arbitrary figures on the other side of that okay well let me avoid the figures all together if if the aggregate point is going to come out at at 29 500 and some areas are not going to have to to return to pre-covid levels then other areas are going to have to go further is that not just a statement of fact I think that is a statement of fact yet thank you one of the areas that I think you you disputed at the statement last week was around the overall position in terms of productivity growth and wage growth in Scotland now the the Scottish fiscal commission is pretty clear in paragraph 3.39 it states productivity growth has stalled in Scotland since 2015 I mean likewise if we look at income tax receipts and their projections again that the the the Scottish fiscal commission are clear that that wage growth in Scotland is slower than the UK average and that is a trend which if you look at when s figures actually goes back to 2016 where not a single Scottish region has outperformed the UK average in that period and prior to 2016 Scotland had typically outperformed the UK average and I'm not talking about the higher performing areas of the UK the UK average I mean you do accept that that's a fact and do you think there's sufficient focus on driving up jobs and wages and because ultimately that's what we need to do to increase the amount of money that we have to spend on the public service as well as being good in and of itself yeah no and I think you know there's a more balanced answer to that and hopefully a more balanced question too behind it than necessarily in the chamber because we accepted I accepted in the national strategy for economic transformation that increasing productivity is one of the most important objectives that we can have as a government as a society as an economy so if we take that as red that increasing productivity matters and we need to up our game when it comes to increasing productivity I think that you still have to accept that between 2007 and 2019 we did see significant growth in productivity now why is that important it's not to with with productivity in Scotland growing by 10.7 compared with 5.2 percent for the rest of the UK why is that important I think it goes back to the question of you know what do you need to stop doing which is perhaps dragging productivity what do you need to keep doing that might be boosting productivity and that's what the national strategy tries to get underneath so you know our economy is recovering right now we have the unique circumstance of record low unemployment of 3.2 percent there's not much more we can do around labour force if unemployment is at 3.2 percent with the exception of the point I mentioned earlier around trying to work with those that are classified as economically inactive to get them into into the labour market there's obviously work that you can do on on migration but I think I didn't catch all that the sfc said but they were also quite clear that Scotland is exposed to an aging demographic and it's also exposed on the basis that when it comes to earnings to the oil and gas industry so where financial services down south has seen a significant increase I think about 16 percent if I remember correctly I need to double check my my figure is about 16 percent there's obviously been a challenging time for for the oil and gas industry in Scotland which has had an impact on earnings so where you see so I don't think you can I think you have to distinguish a little bit between wage and productivity they're linked but I think there's two different answers to two different questions I mean they are inextricably linked and at ultimately if you want to drive one you have to deliver on the other I mean the one thing I would just sort of take I mean the demographics is definitely an issue for Scotland but in terms of the fiscal framework obviously that is to to a degree index so I mean I think that that looking at average earnings growth is is the fundamental but just coming back to the point around productivity and I don't disagree and I and I and I think that the end set does a good job of narrating the issue I would still take issues to whether or not it has sufficient focus on solutions and if we listen to what Professor Oaf was just saying earlier on in our session there is a particular issue that Scotland has around labour market participation and by his own remission you're not going to clear what that is but the way he put it was that the overall labour force is probably of the correct size but it's not necessarily in the right places now that's just me that we need interventions to redeploy people reskill people and ensure that people are maximising wages now that's not just about people who are out of the the labour market altogether although it is in part but it does strikes me that if that is the case I wonder about the priorities in the spending review because while you've highlighted employability fund that is not the entirety of skills spent there's a significant proportion within the Scottish fiscal commission a sort of Scottish funding again my sfc's mixed up apologies Scottish funding councils budget which is goes to colleges but that's flat cash throughout the spending review period 8 cut likewise universities have a significant contribution to play to skills and indeed the sds's budget is within those budget lines as well and it is flat cash 8 so there are at least four budget lines four areas of spend which contribute to that skills making sure that people are as professor will put it in the right places in the labour market only one of them is going up all the other three are being cut is that the right priority cabinet secretary well I do think that prioritising employability and training within finance and economy portfolio is the right call now that means if you have one area going up obviously you have you can't maintain that increase across the board but you know and that requirement just now needs to be a very flexible training offer so universities and colleges have an important role to play and they do need to adapt and you know be cognisant of what the future skills demand are going to be but in terms of employability training which as I said is one of the the very few lines that is going up significantly that is endeavouring to try and provide a more flexible retraining reskilling offer to individuals that need to retrain and reskill having said all that I go back to the light that my starting position here which is a very difficult outlook based on the funding we have available and I imagine that around this room and across the chamber there will be different asks for where I should be spending more I've already heard some of them today around local government universities employability and if I could spend significantly more on every line then you know of course every finance secretary would want to do that I can't I am constrained by a funding envelope and what I have sought to do is to be fair across the board now why it's even more challenging is because our spending power is decreased in terms of inflation you can't get away from that so what you are counting as real terms cuts is is higher because I have less spending power because of inflation so we have tried to protect but if you want to see any line go up I'm afraid on this resource spending view which is different from a budget I don't really have anywhere to go but but even employability is really only in the last year that it goes up by any significant amount at all so then you therefore have four budget lines which are certainly in the early years are all probably experiencing significant real terms cuts is that not so is that almost certainly on aggregate across the five years skill spending has an aggregate cut and if you're wanting to drive up average earnings is that not inconsistent and Gary might want to come in a little bit more widely on earnings but I go back to my fundamental point here which is I cannot overspend by a penny I can only spend what the SFC think is reasonable for me to receive and therefore if you want any part of that resource spending review to increase it has to come from elsewhere in the pot because my spending assumptions and my funding assumptions have got to be based on as much fact as possible which is what they are but if you drive up earnings faster than the UK now you can't do that in the short term but in the medium term it's not an unreasonable ambition you can improve the amount of money you have to spend certainly within a five year time period is that unreasonable to expect you that but you certainly can't do that if you cut skills funding it's a very very reasonable assumption to make my question to you would be that if I had done that in terms of significant increases on the four lines you're asking me for you'd be here asking me a question about four other lines that had been severely cut I'm really trying to clarify the choices you've made and this is clearly one of them and the choice I've made here is to see employability and skills increase and other budget lines protected I'll leave it there okay thank you Ross convener just to return to downsline a question around productivity and wage growth and this is something that I asked the sfc but by that point you were outside the door so you probably will will have missed that and their assumptions around increase in productivity are based on more people getting into the right jobs i more productive higher paid jobs given what's just been discussed about the fact that you know the workforce is not going to increase that means either low wage sectors becoming higher wage so wages in areas like retail hospitality tourism et cetera going up or a continued exodus from those sectors into to higher wage sectors in terms of the government's overall strategic priorities for the economy what is the what balance of those two trends would you like to see given that we've we do already have acute labour shortages in these sectors usually tied to issues of wages in those sectors is it the government strategic is it a more of a priority to grow high wage sectors or to try and raise wages in these existing sectors where we're seeing shortages because of those issues i would say that our immediate priority is to embed fair work so it goes back to all the questions we've talked about around poverty it's gone back to questions around productivity if you have fairer work conditions if people are in secure well paid employment and get paid a reasonable wage then that delivers multiple benefits both for our economy but also for the overall cost of the of the public sector and i would say that our primary focus right now is on embedding fair work principles it's certainly where we've seen employers also wanting to focus because at a time of high high demand and lower supply they've got to distinguish themselves having said that we are particularly exposed when it by the fact that a lot of the highest earners are in very few industries so that means when there is a downturn in oil and gas that has a disproportionately large impact on both our tax revenues and on our economic outlook so i think there's an argument there too to try and make sure that we are where we diversify but also taking into account the impact that has so if that's the case then would it be fair to say that the priority say for Scottish Enterprise fixed budget the grants that they're issuing the strategic priority for them is far more aligned with targeting low wage sectors for offers of grants but with attached fair work conditions rather than issuing grants to businesses that are already a high wage sector well the way that we're doing the former is through embedding conditionality so you shouldn't be able to access grant support for example without signing up to fair work principles so in a sense it shouldn't even necessarily be a particular focus it should be the status quo it should be the norm that you can only access government support if you add to your to fair work principles and i don't think it's an easy either or because we also know that from the the inset work that was done that where scotland has some of the greatest potential is in some of the high growth sectors so for example in technology for example in renewables in these areas so i don't think you can neglect for example some of your core industries who should expect only to receive support if they meet those conditions but in terms of future growth ambitions which i know is where we maybe have a slight difference of opinion just on how to define growth not on the principle of growth at all in terms of those growth ambitions we we do want to see far greater rates of successful scale-ups knowing that that's where a lot of jobs are created and just one final question given you know as you've pointed at the single biggest factor affecting so many discussions we've had this morning is the current rate of inflation what discussions have you had with the treasury about the impact of inflation on the budget and the potential of inflation proofing the Scottish budget yeah we have had discussions and i'm actually seeing the chief secretary's treasury next week and we'll continue these discussions i'm sure on on the fact that our current assumptions around block grant is based largely on an out-of-date spending review that doesn't take into account inflation and i will continue to make those points to them i certainly would like to see at the very least some of the review of the fiscal framework taking into account what role what impact inflation has on our spending power but also on the way that certain elements keep track with inflation so those conversations will continue their conversations and i'm generally an optimistic person but i've been having those conversations for a very long time thanks very much thank you thank you very much and just one final question for me and it is i hope on an optimistic note i mean in section 2.4 of the document stronger fairer green economies a lot of really positives in there you talk about again the national strategy for economic transformation stimulating entrepreneurship building new markets increasing productivity developing skills embedding entrepreneurship you talk about an investor panel inward investment plan export growth plan and i think these are all very positive what kind of impact do you believe that'll have by the end of the of the period actually that we've been discussing up to 26 27 in terms of increasing investment jobs job retention in fact because many businesses sometimes we get to a certain level move outside scotland so what impact do you think that new kind of cultural change will actually have on scotland and under revenue base if we get it right it will have a huge impact it will have a hugely positive impact the reserve spending review covers the period that's just short of halfway to the national strategy for economic transformation outcomes which are over 10 years but if we get this right if we invest our funding in achieving outcomes and objectives not in maintaining the status quo then we can shift the dial on these things if we just defend the status quo then we'll get the same outcomes and i think all of us have an aspiration and an ambition to actually deliver what the resource spending review sets out in terms of economic growth in terms of tackling child poverty and resilient public services okay well thank you very much cabinet secretary for spending so much time of your morning in responding to our questions that ends today's deliberations so call us meeting to an end