 Fyelodau'r clywbeth amser i'r 40 ymhelys i ddesgrifennu 2016 y Ffrancfynodol a Gweithgafniad Cymru. A hyffydd i'r St Andrews Dyn ni. Mae'r erioedd yn gweithio'r agenda yng nghymru i gael i'r dweud ym mhelys i ffosieil i ddau ffosieil i ddau ffosieil i ddau ffosieil i ddau'r agenda. Fyelodau'r agenda yng Nghymru i ddau ymhelys i ddau i ddau i ddau i ddau i ddau i ddau of Fraser and Allander Institute in the UK, autumn statement and Scotland's budget. Members have received copies of Professor Roy's slides from the briefing that he conducted last week. I'm sorry, I couldn't be at your briefing. I know that some members were and I welcome you very much, warmly welcome you to the committee meeting this morning, Professor. I wonder if you wish to make an opening statement. Yes, please, yes. Thanks. Thanks, convener, and thanks for the invitation to come back and give our thoughts on the autumn statement and the potential implications for Scotland. I guess there's a number of things that were quite interesting from last week's statement, but firstly there was obviously the revisions to growth for the next couple of years by the office for budget responsibility, so they forecast that next year the economy would slow slightly to about 1.4 per cent and then back up to 1.7 per cent the year after. In relative terms, it's quite a significant slowing, but in comparison to other forecasters, it was slightly more on the optimistic side and crucially they expect that in the end of the years of the forecast period growth will return back to close to trend. There's obviously a lot of uncertainty about that, so as we've seen there's quite a lot of variation in different forecasts for the next couple of years and that obviously has implications for the public finances. The big thing then is what happened to the public finances and quite a significant increase in borrowing over the next few years relative to what George Osborne was protecting back in March, so I guess the big number there that is a big takeaway is the increase of borrowing of £120 billion. I guess there's a couple of things in there that are quite interesting to think about. About half of that is expected to come from the weakening of the economy in Brexit, but some of it also comes from some classification changes, but a slightly poorer tax receipts performance this year, even before Brexit was meant to happen, and that has had an impact on the overall public finances. Tracing that through, the chancellor faced the decision about what he would then do about public spending in the next few years. What we then saw was essentially, particularly on the revenue side of things, we decided to wait and see and continued largely with the departmental resource spending plans that George Osborne had. You look at the Scottish budget being projected to fall in real terms of around about 3 per cent, assuming that Scotland matches UK tax revenues over the next few years. I guess the big difference then was on capital, so there was quite a significant stimulus to capital investment, so that was £800 million coming to the Scottish budget until the next few years. In some ways, it depends on which way you look at it. The glass half full, glass half empty is on the one hand quite a significant increase in where we are just now, so £800 million additional. When you add in the new borrowing powers, that is a further additional real-terms increase in capital borrowing. If you look at the full amount of capital that the Scottish Government could do in 2020-21 relative to 1011, it is slightly higher in real terms once you add in the full amount of capital borrowing. That was quite interesting. Again, on the other side, it still is relatively low in comparison to 1011 just purely on the capital dell, so it is down in real terms. You can now look at that one way or the other. That then obviously has implications for what happens with the Scottish budget, and we will see the details of that in the next couple of weeks. Okay, Professor Roy. Murdo. Just before I come to my question, I just want to pick up on that last point that you mentioned about the overall envelope of capital spending, which I think is quite interesting. When the Scottish Government borrows for capital projects, what are the restrictions on how it can borrow for those projects? Under the new fiscal framework, it can essentially borrow from largely two sources. It could go to the private market if it wanted to, or it can borrow from public work loan support, so it can get the same rate as the UK. 450 million pounds additional capital borrowing at the end of the period is quite significant when you add in the additional money that is coming as well. Okay, thank you. What I was really going to ask you about was the overall size of the budget. With figures that we got from SPICE tell us that in real terms, the budget for 2017-18 will be up 130 million on 2016-17. That splits, as far as I can work out, 23 million up on resource dell and 106 million up on capital dell. Would those figures be in line with your own assessment? The two numbers that are quite interesting to take to you are what is happening between this year and next year, and then what is happening toward the end of the forecast period. You see pretty much the budget between 2016-17 and 2017-18 as flat, but in revenue terms, there is a small will-terms increase. One of the reasons for that is how the deflators have changed. Imputed rent—I do not mean to go into a big discussion about imputed rent—was a change in methodology about how you use imputed rent. The deflators have changed, so they have become slightly lower. Some adjustments in the year around budgets have actually lowered the cash terms number for 2016-17 and increased cash terms number for 2017-18 relative to where it was. Yes, she gets the modest real-terms increase between 2016-17 and 2018, and then the additional cuts coming on the back of that. That is slightly different from what was planned back earlier on this year. I am just wondering how this puts into context all the discussions that we had prior to the autumn statement. You might remember when you came in previously and we were talking about the potential for cuts in the resource budget and the impact that that would have on the Scottish Conference planning, which, of course, was the justification for the finance secretary delaying publication of his budget because of the expectation that there might be further reductions. Of course, that has not happened, so perhaps we could just have gone and seen the budget much earlier. Two things on that. Largely, the plans have remained unchanged from what George Osborne had. As I said, there has been a slight change with methodology around the deflator, which changes whether it is increasing or decreasing in one year to next, but it is relatively small numbers. The big question was what would actually happen. As we said in the September report, there was a lot of uncertainty about it and the scenarios that we had potentially had a stimulus this year, so genuine real-terms cash and real-terms increase from this year into next or additional consolidation. I guess that the chancellor faced that difficult balancing act between further consolidation or a stimulus, and in the end he has almost decided to wait and see. To be fair to the Scottish Government in that context, the fact that it has turned out this way, it was going to turn out one way or the other, but there was a lot of uncertainty about it. To be fair, it was a justifiable position to take. Where it gets slightly more interesting is what happens in the future, because this year, potentially with the budget being flat in real terms, in a sense, almost hides some of the challenges that are coming down the line, some of the difficult choices that will come in years 2, 3 and 4. That moves into the issues about whether a one-year budget is appropriate or whether you need to set out spending plans going towards the end of the Parliament. Professor Roy, just talk us through about that longer term, because it's interesting to see the front page of the Scotsman this morning and some of the projections being made. I don't know if you had a chance to see that, and obviously in your resource plans and the historical context slide that you have in your own material to provide this. I'm not sure that they reflect exactly the same numbers, but they seem to reflect the same direction. I think that if you could talk us through that, because if any cabinet secretary set in their budget for the next financial year, I need to obviously consider what the longer term issues are. Essentially, you've got the budget increasing very slightly in real terms this year into next, so about a £20 million real terms increase, depending on which adjustment you make for inflation. However, looking at our projections up to 2020-21, you're looking at about an £800 million real terms decrease between 2016-17 and the end of that period. That works out about just over a 3 per cent real terms cut. The number today, which is slightly higher than that, needs to be careful that there's a void double counting here, because essentially what that does is essentially add in the implications of some of the commitments that the Scottish Government has done in health and childcare, which then means that other non-protected areas face a cut of closer to £1.2 billion. However, that's a discretionary choice by the Scottish Government. That's not the budget being cut by £800 million, that's a decision to prioritise some areas of others, which then mean that the other areas have to take a larger real terms cut. That's in our presentation depending on which assumptions you use about growth. That works in around about anywhere between a 10 per cent, 13 per cent real terms cut in unprotected areas, but the crucial point about that is that that's part of a discretionary choice by the Scottish Government to make those commitments in those areas. You need to watch slightly double counting there. That neatly leads us to James Kelly. Thank you, convener. You've described the situation where the budget in terms of next year is almost going to be flat, a small real terms increase, and then cumulatively over a period of time there's an £800 million decrease. You also paint a picture where the UK economy is going to be smaller, unemployment rising, inflation rising, wages not rising at the same rate as inflation. Can you maybe just give a bit of description as to how the factors that result in a smaller sized UK economy like inflation, lower growth, rising unemployment, wages not going up as high as inflation? How do those factors impact on the Scottish budget? I have one point of clarification. The £800 million cut in real terms is not cumulative, it's just a difference between 16, 17 and 2020-21. The cumulative number will be bigger than that, so that's just one year to the next. You also have the cuts in 17, 18, 18 and 19. The cumulative number will actually be bigger than £800 million. I can add them up for you. I can add them up here, but I'll... I mean, I guess your wider point gets into what's the overall outlook for the UK economy. Obviously, the Office for Budget Responsibility revised down their forecasts for the UK economy over the next couple of years. What was really quite interesting, again, with their forecasts, without going too much into detail, was what they're assuming is happening to productivity. One of the key challenges that we've had since the financial crisis is really quite weak productivity growth, and that's projected to at least continue for the next couple of years. That is a thing that drives what's going to happen to earnings, for example, so we expect earnings to grow much more slowly than they had been predicting. With inflation to rise, that, in turn, leads through to lower real household incomes. I think that you've got this balance between an economy that is slightly slower and that is feeding through to real household incomes and higher inflation at the same time as continued consolidation on the public finances side. You've got that mix of pressure on households but also a continued consolidation on the Government side. That means that there will be less resources going around to pay for public expenditure in real terms but at the same time a squeeze on households. I guess that the key challenge is that, and the challenge that I was wrestling with was how do you actually grow your economy out of that? If productivity growth is weak, what can you do to boost productivity and restore the public finances to health? That's crucial to what actually grows revenues in the long run. That, in part, explains the new investment that he was doing around the productivity plan and the new support for R&D and things like that. I guess that the next couple of years, both on the household side and the public spending side, will be quite challenging and it will be interesting to see what happens in the next couple of years. Just in terms of going back to the overall size of the budget envelope and looking further down the line where there are cuts of £800 million for the year-specified and then further cuts, what are the options in terms of taxation to mitigate those cuts? We've seen one view in the IPPR report this morning of a three-pence tax rise being needed to mitigate the cuts, what are the potential options in terms of different scenarios with different taxation policies raised? You now get into what could the Scottish Government do with its new tax levers that are coming starting in April, and there they have in paper quite a bit of discretionary power to do things differently. One-pence and income tax approximate will raise £500 million, so if you're facing an £800 million cut, one 1.5 to 2 per cent increase in income tax would be, in real terms, sufficient to compensate that. That's ultimately a political choice about whether you want to do that. Obviously, that needs to be balanced with what's the outlook for the economy. If the economy is going to be slightly more fragile, you face the challenges of increasing income tax and what might be the economic impacts of that. There's a lot of uncertainty about that. We genuinely don't know what implications there will be from using those devolved powers on the economy. On the one hand, there will be concerns that it could lead to a slower economy relative to the rest of the UK, which will have implications. On the other hand, it might be a way of increasing revenue, which you can then use to spend on public services, which will have its own positive boost in the economy. It's a difficult choice, and that's ultimately a political choice about what you do. The choice is now there, which I guess is the key point. They now have an opportunity to take different tax decisions if they want to, to make up all of the drop. Professor Roy, the Chancellor mentioned that he wants the UK economy to be match fit and had a real focus on productivity growth in the autumn statement. Productivity is also a priority for the Scottish Government. As things stand, Scotland remains in the third quartile in terms of productivity, roughly 25 per cent behind Ireland and Denmark and other countries. With additional £800 million capital spent coming to Scotland, what would be your recommendations as to how that could be spent to boost productivity, and what other policy steps could the Government take in Scotland to boost productivity in the short and medium term? I guess that it would be far better for me to give a policy prescription about what the Scottish Government should do. There are a few points in there. Coming back to my point about the importance of productivity, productivity is absolutely crucial for what happens to future tax revenues, not only in the UK but also in Scotland. One of the reasons why the UK public finances have not actually been as healthy as they will be are predicted on a consistent basis over years is not because they have not made spending cuts. Some of the areas in welfare have not delivered and they have moved back on that, but they have actually delivered most of the spending cuts by department. The reason why the public finances have disappointed is because tax revenues have been a lot lower than would have been expected, and that comes through productivity. We have not had productivity growth at long-term average for over 10 years now, and that underpins the OBR's forecast going forward. They assume that we get back to that point, but we have not been there for 10 years. One of the key risks in the forecasts that the OBR acknowledges is that, if productivity does not get back to where it was, then the deficit will be a lot worse. In some ways, that is one of the reasons why we are motivating the chancellor to make those investments in those areas. We know that that has been a challenge in Scotland for a number of years as well about our productivity performance. We have caught up in part with the rest of the UK, but the UK lag behind everybody else, so we need to do more. The new capital investment provides an opportunity to do that. As I said, you have an £800 million cumulative increase in capital investment, plus the £450 million per year additional capital that you can now put into investment from the new borrowing powers. You have an opportunity, particularly on the infrastructure side, to look at how you can increase that expenditure and boost the economy. The UK said at the autumn statement that it wants to achieve a step change in productivity, but it matched that with an investment of 0.2 per cent of GDP. Is it possible to get a step change in productivity with such a small investment? We worked out about 0.25 per cent, which is the value of the national productivity investment fund divided by the share of the economy. That context is relatively small. If the UK productivity is around about 20 per cent lower than some of our key competitors, that puts that into context on that regard. It is a relatively small stimulus to tackling that. On the other hand, in terms of public sector investment, it is up to a relatively high level in historic terms. It is a bit of a mixed bag on that regard. A lot of it will come down to how it is delivered. We await to see some of the detail behind us. What we had last week was ambitions by the Government to spend an extra £2 billion on R&D by 2020-21. We do not know what that would look like. We do not know how much of that will be to replace potential European funding that is lost, such as net additional money. The ambition is there, and the rhetoric is there. The question then will be what we will see in terms of delivery and whether those measures will have an impact. I should caution that some of the numbers that have been included in the national productivity investment fund include things such as housing. Again, that number is potentially slightly inflated, because there is some evidence that housing and better access and better links to work except that it does improve productivity. However, it is a bit more of an indirect link than some of the other areas such as R&D and infrastructure, for example. You said in your earlier answer to Dean Lockhart that the UK is seriously lagging behind in this area. Would you say that that is because we are just spending less on it? Can you put it into a European context? What sort of percentage of GDP would an average European country be spending? It varies. You have to be slightly careful about trying to do direct comparisons because people measure things slightly differently. The UK has typically spent less on investment than most of our competitors, both in the public and in the private side. We have good quality infrastructure, but we tend not to have a lot of it. That is a particularly issue around transport elements, for example. I will avoid going into anything about trains, please. There is a general point about Brexit happening, and we think that the headwinds will be there. Whether the headwinds will be strong or slightly less, I think that most people would accept that Brexit, at least in the short one, will be a challenge. There is a valid debate about the scale of that. The solution to that is what you do about productivity. As I mentioned, the UK's productivity performance in the past few years has been quite dire. Long-term productivity through the second half of the 20th century is around about 2.5 per cent. Last year's productivity was about 0.8 per cent. The year before, it was about 0.7 per cent. It is really, really quite weak. The key thing will be how we can tackle that and boost that, and that will in turn feed through to growth. To follow up on the question about the national productivity investment fund, I would like to talk about the key areas such as housing, transport, telecoms and R&D, where the main focus of the UK Government's productivity investment fund. I will follow up on Dean Lockhart's question. Are there any areas that the Scottish Government should be focusing on in passing on any Barnett consequentials, capital spending consequentials, or should we be looking for a different balance in any of those expenditures, because we have always heard from Ayrton Muscatelli recently about the need to increase R&D expenditure. We have obviously heard from other people about the importance of all these areas. I think that the Government will be looking at over the next few years, particularly around innovation and what more can be done there to stimulate R&D in a Scottish context, particularly the links with universities and how it can increase the interaction between the university sector and business. There will be some areas that the Government will be looking at. Transport infrastructure, as we know, has strong links to productivity. With its additional money, it will be looking, I am sure, quite hard at what particularly unique issues in Scotland need to be addressed and where the potential real benefits could come from. That is the benefit of devolution in that context. With its additional money, you now have the opportunity to identify the priorities within Scotland and see where the key elements come from that. I think that some of the interesting things will be around—we have been before—what happens to digital. We know that that is going to be crucial in the long run, so thinking about how the Government will deliver its digital plans and whether it needs to tweak that or additional money can go into that will be quite crucial. I guess that what the rule will be quite interesting will be to see, given the priorities that the UK Government has set out around productivity and making productivity their flagship element, with additional money coming on capital, what does the Scottish Government do with that, to either follow suit or take a different path? Professor, a very quick supplementary on this may be an unfair question, but what do you mean by infrastructure? In answer a few minutes ago, you seemed to imply that housing was different from infrastructure, yet housing is often rolled up into infrastructure. Do you mean roads, or do you mean digital connectivity, or do you mean something else? I think that what I was really meaning there was that infrastructure classifies a broad area from housing through to transport, etc. I guess that my point is really around some infrastructure that we know has direct causal relationships to the economy, much more directly than particularly in some other areas. They also have a much shorter impact. The impact between investment and the boosting economy happens over a much shorter time period than in other areas. For example, housing has more of an indirect but very much a long-term impact on the economy, particularly around inclusive growth and boosting productivity of households, etc. However, it is more of an indirect and it is a longer term thing. The Government will face that choice. Do they go to invest in infrastructure that has a more immediate direct link with the economy or something that has a longer term more indirect? Ultimately, again, that is the choice that they face. I am really making the point that, within that encapsulation of national productivity, there are a lot of things in there that capture both direct effects but also indirect effects as well. Very interesting area. What about energy efficiency measures in that regard, in terms of their ability to help those in the lower end of the social spectrum, together with the impact on growth? Yes, very much so. You get on that. There is the stuff about what can you actually do to those elements. We will have a capital element, a boosting growth element, a direct effect, but they will also have long-term effects from great efficiency there. What would be really useful to see is when the Government published the budget, when they make those choices, is to set out exactly how they believe that they are impacting both in the economy or in the inclusive growth, so that you get the full justification about why they are doing it. What we had last week from the UK Government was quite a lot of ambition and some numbers attached to it but less yet on the specifics, understandably, about how they would actually implement that. I think that that is where it will be interesting to see what the Scottish Government does as well. It could be on energy efficiency, it could be on housing, it could be on transport, but setting out where the choices are will be crucial. There are a couple of things that I wanted to explore a bit further. I will take a step back and look at what we are talking about and the numbers and based on the OBR. Clearly, the OBR is based on some assumptions, and it is just to first of all explore some stuff around that. We are talking about an extra £120 billion borrowing, but you are saying that that is potentially optimistic compared to some of the other forecasts, and the OBR has clearly made some assumptions around what type of Brexit etc. However, I suppose that I want to understand, or what is your understanding of the information that the OBR had to make those decisions and what kind of range is there, if it is a different type of Brexit, and how much worse potentially could it be. There are probably two points to make. One is the OBR's forecast in the short run, but then also what might happen in the slightly longer term. What the OBR has done is to assume pretty much the same as most other forecasters that next year the economy will slow down in relative terms because business investment is likely to be lower because of potential uncertainty around Brexit, but consumption will fall because of higher inflation feeding through to real incomes, and that will lead to a slower growth over the next couple of years relative to others. The OBR is forecasting growth of about 1.4 per cent next year, then 1.7 per cent, and then back up to 2.1 per cent the year after. Just to put that in context, the Bank of England is forecasting 1.4 per cent next year, but only 1.5 per cent the year after, and then only 1.6 per cent the year after that. So there is a bit of a difference between the OBR and the Bank of England, which is quite significant. Ultimately, there is a lot of uncertainty about those forecasts, but if the Bank of England forecast were to turn out to be correct, that would obviously lead to weaker growth, higher unemployment and a weaker public finances, and therefore the OBR will have to address that. That is essentially really in the short term, but there is a really interesting part in the OBR right buried away in one of the annexes, where what they do is they model what might happen if you have different scenarios for productivity performance. As I mentioned, the OBR essentially assumed that productivity returns to trend by the end of the decade and into the 2020s, so they assumed that productivity grows around about 2 per cent. That is the number that drives the reduction in net borrowing over the next few years, taking public sector net borrowing to about £20 billion. What is quite interesting is that they also run two scenarios about what happens if productivity does not rise. If productivity stays the same as it was last year, and even under that scenario you are looking at, instead of borrowing about £20 billion, you are borrowing £50 billion. So, crucial there is how the economy does. If the economy does not perform as well as they hope, they have a scenario in there that borrowing rises to £50 billion. However, productivity could return, it could actually be slightly higher, we could get the bounce back and the economy could grow more significantly over the next few years. Under that scenario, they believe that the deficit will be eliminated and you will actually be running a surplus. I think that there are two crucial points to that. One is what is the outlook in the short term for the economy, and there is a lot of uncertainty about that. Who is right, OBR, independent forecasts, or the Bank of England? Even setting that aside, what is the long term trajectory for the UK economy? That is a key thing that will drive the public finances in the medium to long term, and that is probably arguably the most important thing to focus on. In the short term, it looks like that could be an optimistic forecast, based on some of the other ones that are out there. The OBR has been quite clear that it is more optimistic than the Bank of England, slightly more optimistic than the average of independent forecasts. To be fair, most forecasts have been revising up their forecasts, particularly for 2016, so there is a lot of uncertainty behind it. It is based on assumptions and a judgment call on the assumptions that you put into the forecast. The OBR is quite clear about what they do model and what they do not model around Brexit. They are essentially taking the public statements of the UK Government, so they model that up. They assume that the UK leaves in 2019 and that that has an impact in the period up to then, but they do not assume anything beyond that about future trading relationships. Clearly, that will have an impact on future growth and future public finances. Okay. Another thing that I wanted to explore, which I am a wee bit confused about, is around population assumptions. If I look at what we have got—the UK population has been growing at migration—that migration is about 350,000 a year or so, which is about half a percent of the population, which is a fairly chunky number. Brexit is a big part of the vote for Brexit, which is on the assumption that population growth and migration would be to put their words under control and reduce into the low of tens of thousands. If that is true, you are also going to assume that you return to a 2 per cent plus GDP growth rate, and you are assuming productivity stays at the current low levels. Those cannot all be true. Either population is going to seek current levels, in which case what was the point of voting for Brexit, or that GDP growth numbers are way over optimistic by at least half a percent, or that something magic is going to happen in productivity over the next few years that magic is going to nowhere. What is your comment on that? What the OBR does is essentially in productivity, they assume that I hit productivity the next couple of years, but it returns to long-term trend toward the end of the forecast period. What they assume about migration is that they had been planning to increase their forecast for migration towards the end of the forecast period relative to what they had forecasted in March, because migration had been much higher than it had been. What they do now is to assume that, essentially, that increase does not happen because of Brexit. There is still migration into the UK and built into their scenario planning, but they have reduced the level of migration compared to their forecast. They are still assuming that there is positive net migration into the UK. Is that similar, Lynne? Yes, but not increasing that it might have done otherwise. Migration had been higher, so therefore they are planning to increase, but they are just not doing that increase now, they are just keeping it what their previous forecast had been. They still have positive net migration, but it is not as high as it would have been under the remaining in the European Union, which they had been planning to change. As I said, they then increased productivity back up to 2 per cent at the end of the period, and that is the key drivers that influence their GDP forecast. If migration was to drop to the numbers that Brexiteers have assumed in the low tens of thousands, those numbers would not hold up. If you change your migration assumptions, if you lower them, that will naturally reduce your GDP forecast. However, as I said, to be fair to the OBR, what they have done is tried to be as neutral and as balanced as possible around what are the things that are driving the forecast. They have not assumed changes in that migration thing. They have also not assumed changes in potential trade relationships. They have not assumed changes in how the trade relationship might feed through to productivity. I think that what you will see is that as the Brexit deal is finalised, the OBR will have to naturally come back to their forecast and change it, and that will ultimately be the thing that will drive it. One of the key things with the forecasts for the economy and the public finances is that the level of uncertainty in all of that is highly significant. In terms of the most pessimistic forecast, we are talking about potentially £220 billion of additional debt by 2020 if it was a hard Brexit. I think that that was the number that I saw from the OBR. I think that within that there are a couple of numbers flying around that are slightly confusing around that. What OBR is forecasting on its current assumptions is that it will have £120 billion additional borrowing over the next few years because of that. The increase in debt, the £200 billion, is coming through reclassification changes. Some of the money that the Bank of England is doing is now being classified as public sector, and that adds about £100 billion on to the debt. One of the reasons why net debt increases significantly between this forecast and the last forecast is reclassification change. The key number to focus on is the £120 billion, which is the additional borrowing relative to what had been planned, which will happen over the next few years. However, that will all have to be revisited because what the OBR has done is essentially not really make a long-term forecast on what Brexit might look like. If you have a hard Brexit, a soft Brexit or a middle Brexit, you will have to have a look at the forecasts again. Oh, boy. Willie, did you say that you wanted a supplementary on this? I just want general borrowing and forecasting and stuff, if I could boost. Thank you very much, Professor Roy. One of your slides that you gave has some key messages on it. One of them says that there is £120 billion of additional borrowing, forecast of which only £23 billion is due to policy announcements. My arithmetic tells me that that is £97 billion of additional borrowing and a substantial portion of that is attributable to Brexit. Can you just give us a wee flavour of what that is actually for? Why are we borrowing that amount of money and what kind of impact does that have on the overall national debt? The number is the £120 billion additional borrowing, so that is the cumulative borrowing between now and 2021, relative to what the chance I had been forecasting back in March in his budget. Within that, you are right, £60 billion of that is attributed to Brexit effects and £25 billion of that is some policy. Interestingly, around about £25 billion of that is just a general weakness in the economy beforehand. Tax revenues have actually been disappointing in 2016-17, and they expect that that will continue going forward. Even before Brexit, borrowing was going to rise relative to what had been planned. There is a small difference between classifications about borrowing and where that comes from. The OBR is essentially set out where it thinks that how that additional £60 billion will come from and where the different sources of that kick through. The two key ones to look at are what it thinks is going to happen to tax revenues because of business investment, which is leading to lower growth in the economy, which in turn leads to lower long-term growth in corporation tax, national insurance, income tax, etc. However, crucially, the forecast will be lower consumption going forward, which in turn feeds through to lower tax revenues. Accumulatively, they are revised down their income tax revenue forecasts of around about £66 billion, so that is a significant downward revision to tax revenues. The key driver of that £60 billion increase in borrowing is essentially a slower economy, which is leading to slower growth in tax revenues, which in turn leads to higher levels of borrowing. The slide talks about a substantial deterioration in public finances. It will imply lower wages, higher employment, lower living standards, a significant downward revision to forecast of growth. It talks about 12 fiscal rules since 1997, 10 of which are broken, are abandoned. That is hardly an encouraging picture in St Andrew's Day for Scotland. Is it right to say that the overall national debt is heading towards the heady total of £2 trillion? Thankfully, those numbers are not my numbers today, so I am not the one giving you the gloomy news. We are just talking about that. Essentially, what you have got is a situation where the previous chancellor had a plan to restore the public finances back to balance, and there was obviously a debate about whether that was the right or wrong thing to do. Essentially, that was going to be tougher because tax revenues were not performing as well as had been planned even before Brexit. Now, you add in the downward revisions that have been made to the economy, to living standards and to earnings as a result of the referendum outcome. That means that the ability to meet those public finance targets becomes much more challenging. You have an increase in borrowing. Instead of running a surplus of £10 billion, you are now running a deficit of £20 billion. Debt is now higher, so it is rising towards 90 per cent of GDP. In turn, that just means that the fiscal rules have been broken. Again, quite a number of fiscal rules have been broken. Now, he has a new set of fiscal rules that are more about rather constraining public spending, and it is more about giving him some headroom to do it. He has left about £26 billion worth of additional stimulus that he could do if the economy slows worse than he expects. Ultimately, that has led to a set of weaker public finances going forward. You are looking at the budget continuing to be cut up to 2021, but even then, that a payer job is probably not likely to have been completed. You will look at potentially some further cuts or consolidations into the 2020s as they try to restore the public finances back to balance, because that is what they said that the overall objective will be, is that they will run the balance budget at some point in the next Parliament. There is also a debate about whether that is a good thing to do or not, but that is what they plan to do, so that would imply further real-terms cuts to public spending going forward. Is there any good news anywhere on that horizon? I think that the big thing, which is to be fair, is that the economy has held up much better than expected in 2016 than most forecasters had planned. There are three key things about how Brexit will have an impact on the economy. One was the potential real, short, sharp impact on uncertainty that could come from the short result. If you think about the immediate couple of months after Brexit, that was a significant risk that was there that the economy could slow down quickly in 2016. There is, then, the adjustment phase as you travel to the new world. Even the people who supported Brexit said that, as you go through that adjustment phase, there will be some challenges within it. There are longer-term impacts from something like Brexit, and that is where there is much more debate about potentially impacts on trade, but there are also people who supported Brexit saying that that is an opportunity. The positive bit comes in the first part, which is that that level of uncertainty feeding through to the economy, at least in the immediate term, has not actually been as significant as the potential would be, which showed that the economy had a slightly more momentum through the start of 2016 than had been thought, and the economy was slightly more resilient than had been thought in there. The sharp drop in depreciation in sterling has also fed through to some positive impacts on exporters. I think that that is the key positive thing that I would focus on. Now that we have got through that, I am jolly experience. Patrick, not that you are going to be any worse. To be honest, I think that Willie Coffey's voice sums up the way a lot of people feel about everything that 2016 has thrown at us already. Good morning, Professor Wright. A few of us wanted to come on and talk about distributional impacts and the social justice impacts. I would like to try to link to that from the discussion that we have been having about debt and productivity. Assuming that at some point the UK Government does get to the point of a surplus and starts reducing public debt, and you have acknowledged that there is a debate about whether that is advisable or not in principle, is it fair to say that if there has not also been a significant increase in productivity, that reduction in public debt can only lead to increased levels of private debt in the economy? Unless they continue to cut through public expenditure or increase in tax revenues. The way in which you reduce the debt is either through growing more quickly on the productivity side or continuing to cut there. Where does that growth come to reduce overall debt? It either comes from becoming richer and able to pay off more or it comes from either further cuts or increases in debt in somewhere else. That could come through higher levels of private sector debt. The story that we have seen since the financial crash is a significant increase in household consumer debt. By one estimate, it has gone up by 65 per cent since the pre-crash levels. A lot of that will be about the people who have been hit by the austerity decisions that have been made, whether that is in terms of pay levels, whether it is in terms of having the basic needs met, whether it is in terms of austerity cuts on the welfare side, and that private debt is more expensive than public debt as well. Is there anything that the Fraser of Allander Institute can do to give a clearer picture about the impact that that is going to have on any further increases in private debt on not just social justice arguments but also on the condition of the economy? We often think about that distributional impact purely in terms of the direct changes in tax and welfare rates, but when we push people further into desperation, we also push them further into private debt and that will be more expensive for them in the long run. It is a very good point, and it is definitely something that we would be keen to look at. It is probably an argue or a weakness, and a lot of the discussion that you have around outlook for the public finances focuses on the public finances, and it does not think about what the wider implications are from the economy. You see some of the unintended consequences of that, so debt being pushed off balance sheet and then coming back on balance sheet, so things like the Bank of England's Asset Purchase Facility and now coming on to the public sector balance sheet. That adds about 10 per cent to GDP. There is a whole debate in there about genuinely what is the ultimate debt of the economy. At the moment, we always tend to focus on the public finances, so I think that the point is really well made that it is not just about looking at the debt on the public sector side of things but also the private sector side of things. The point that you then get into is really crucial in that one of the implications that you saw coming from the autumn statement was that the slower growth is coming through lower productivity, which in turn leads to lower earnings. With higher inflation, that creates a really quite dangerous cocktail of relatively slow growth in real earnings, which in turn feeds through to relatively low levels of household income, which in turn puts pressure on households, so in turn your right potential leads to higher levels of private sector debt, which are essentially all ignored from the analysis that we currently do and that we do elsewhere. Linking that, how that all feeds through to what is happening on the private sector side of things, both in terms of the distributional impact but also the debt impact, will be something that is a really good suggestion that we will look at. Thank you. Moving on to the impact of the direct changes in the autumn budget statement in terms of how those are distributed throughout society, I have got a couple of charts in front of me. One is from the women's budget group, demonstrating that not only the impact is more severe on the poorest third, least severe on the richest third, but that at every level throughout the income distribution the impact is more severe on women than it is on men. I have got another chart here from the resolution foundation looking at the distributional impact prior to the autumn statement, so the 2016 budget, and then comparing that with the changes in the autumn statement. Those changes in the autumn statement are really marginal compared with the hit that people were already taking, either in terms of tax and benefit policies through the 2016 budget, with admittedly people in the top desail a little bit worse off, but only by a tiny proportion of their actual income. The rest of the top half of the population significantly better off, and the deepest cuts coming to the poorest third of society. Is that an assessment that you would recognise and endorse that coming from the resolution foundation? I guess that the ultimate question is what can we do about it with the choices that are available to us in the Scottish budget? Is it possible for Scotland to change that line at all and make a more significant impact in terms of protecting those who have been hit so hard by UK Government decisions? I do not have the specific charts in front of me, but I recognise the various bits of analysis that people have done. Obviously, it depends upon what your starting point is about when, who wins and who loses, etc., and where do you start from the start of the consolidation period or do you start from this autumn statement and things, but what we do know that over the next few years you are right in that the autumn statement did not contain too much new measures around changes in welfare or changes in taxation that would have an impact on the people in the lowest part of the income distribution, the households in the lowest parts of the income distribution. What we did know was going to be crucial going forward was the phrase to working-age benefits as being the key driver of what would be the challenge for that part of income distribution over the course of the next few years. With higher inflation, that makes that challenge even harder. If you then are on top of that, earnings are now predicted to be slightly slower than they would have been, and then inflation eroding that as well, you then have quite a pinch point over the next few years in that kind of group within society facing the full impacts of higher inflation on their earnings, but also the full impacts of inflation on a freeze in working-age benefits coming through. What the chancellor did do was a lot of speculation that he might do something to address that. What he did do was make a minor change to the taper rate at universal credit. It is a relatively minor change in comparison to all the other changes that had been planned to save some money, and it also does not really kick in until quite a bit further down the line. We know that the roll-out of universal credit keeps on being delayed, so any changes to universal credit are not likely to have immediate impact on the vast majority of people receiving working-age benefits until toward the end of the forecast period. I do not have those charts in front of me, but that analysis is consistent with what we would conclude as well. You then get into what policies can the Scottish Government do to mitigate that. There is obviously a lot of debate about what you can do around personal allowance and can you set a 0 per cent rate on top of that to increase the personal allowance? To be honest, that is not really a tax policy that impacts on the people in the lowest part of income distribution. Most people are not paying income tax at that point because of the various deductions that come off, so it has much of a less blunt part of it. We know that people in different parts of income distribution use certain types of public services more often than others. That is potentially the way to look at what mitigating action can you take around the use of public services to support different parts of people in income distribution. Local government is crucial to that. We know that, ultimately, local government in the end picks up quite a lot of the anti-poverty measures, quite a lot of the implications in terms of education and so on. There are potential ways there that the Government might want to look at how it could potentially utilise off-setting some of the impacts by directing resources to the public services that the Scottish Parliament controls and combating it that way. It is interesting that you mentioned that the personal allowance is one option. The very next graph on the Resolution Foundation report demonstrates that the change to the personal allowance in itself, 85 per cent of the benefit of that goes to the richest half of the population. The notion that increasing the personal allowance is a socially progressive measure does not stand up to a lot of scrutiny. I wonder whether we would be able to have a more positive impact on the curve about who is benefiting and who is carrying the greater burden. If we were willing to look at the tax rates rather than the allowances and thresholds and reduce it for those on a below-average income and be willing to increase it for those who can afford to pay more. The personal allowance benefits individuals, so it does not in any way impact on a household basis. In turn, the vast majority of the impact hits through to the higher parts. What you are talking about is potentially what you might do with the rates to raise income and feed through to the use of public services. That is one way to do it. Whether you could cut rates, for example, to boost incomes of marginal households, again, it comes back to the point about personal allowance. If your focus is on the households most impacted by the welfare cuts and the first few deciles of the income distribution, then, again, cutting tax rates is not likely to impact on that group. In fact, if you cut the basic rate, that will benefit everybody. You have to be careful about how you use the rates as well. If you only have one basic rate as it stands at the moment, which is required under the new powers? It is not. My point is that if you are really focused on the households and the first few parts of the income distribution, cutting the rates or changing the allowances is not likely to have too much of a direct impact on them. It is what you do with the resources on the public spending side to target towards them that could be most crucial. Marie, I am sorry, but I was taking me over to get to you a bit. I think that you have covered most of what I was going to ask very well. Our job here in the finance committee is to scrutinise the Scottish Government. We try to match up policy aims with spending and see how that works. It is not particularly our job to scrutinise the UK Government, but I am absolutely struck by what you have just said there about how the hardest-hit people will be the poorest in society and the working-class families and those in low income. How does that match up with a promise to be a Government that delivers for working-class families? I do not really want to comment too much on UK Government policy and things, and I think that the UK Government will probably have quite a strong answer and be able to articulate an answer back to you on that. The Chancellor does face a difficult balancing act between growing the economy, and his view will be that a faster-growing economy and economy that has stable public finances in the long run will be the most important thing for boosting growth across the economy. That is really a political argument, and whether he agrees or disagrees with that is ultimately a choice that he would make. I think that our focus will be on the analysis around that, so who is impacted most by the autumn statement is the focus that we would do. Whether that is the right or wrong decision, the right way to do it or the wrong way to do it, that is ultimately a political choice. It is fairly going to be some people who are impacted very severely next year when inflation peaks. In terms of that, we know that the big thing that is pretty much guaranteed. Obviously, there are lots of things about the forecasts that are quite uncertain, but when you have a 15 per cent depreciation in your currency, you know that that will feed through to higher import prices, which in turn will feed through to higher inflation, which in turn will have an impact on households. When you choose to freeze working-age benefits, then that has an impact on people more than it would otherwise be the case because inflation is higher. Pensioners, on the other hand, are more protected because they are linked to overall inflation, so you get some differences in distributional impacts and ultimately it comes down to the choices and what you want to do with it. Dean Yew, you are a supplementary winner. It is related to slightly different points. The Chancellor said that one of the measures that he will look at going forward is budget deficit as a percentage of GDP. I believe that at the UK level it is currently 4 per cent, with the target of reducing that below 1 per cent by the end of the Parliament. In the Scottish context, the latest GERS numbers show a notional budget deficit in Scotland of around 9 per cent, I believe. What impact will the budget deficit and additional borrowing powers come to Scotland? What impact would that have on the notional level of budget deficit in Scotland? Would you expect that 9 per cent number to increase or decrease over time? I always love a question on GERS. As you know, the way GERS works is that it essentially assigns expenditure in Scotland an estimate of revenues in Scotland and then share of equivalent UK expenditures. Any movement in the UK deficit, either up or down, will feed through to the Scottish budget up or down. If the UK Government continues to cut the fiscal deficit, you would expect the Scottish fiscal deficit to decline as well. Within that, you get all the debate about relative shares of oil and all that stuff, what might happen there. However, purely on the onshore economy, if the UK deficit is falling, then the Scottish deficit would fall as well. That would be subject to additional borrowing by the Scottish Government if it used its new powers to borrow. The number that you are talking about in terms of GERS and the 9 per cent, etc., is essentially the notional Scottish position within the UK context. It does not really have too much to do with the Scottish position under the fiscal framework. If the Scottish Government were to increase borrowing and capital borrowing, then that would add to the overall public expenditure in Scotland. In the context of GERS, it is slightly irrelevant in that context, because, ultimately, the Scottish Government does not run a deficit, it essentially has a balanced budget. The GERS is a slightly different concept of what a fiscal position might be for Scotland overall. I can just change the focus just a little bit, Professor, from being about the budget from the chancellor and how we might deal with it in the Scottish context to much more an issue about this committee and Parliament in dealing with budgets, because I think that there is a crucial issue given that the autumn statement included an announcement that the UK budget will now move to the autumn as the main fiscal event. In terms of the timescale that was involved in that, it obviously put significant pressure on not just the Scottish Government but the Scottish Parliament and how we might deal with it and the ramifications of that change. Do you have any views about how the operation and framework of the budget scrutiny of the Parliament might be there for—it is going to need a— frankly, we were talking about a big change before under the budget review group, I think that we are now talking about a radical change that is going to have to be to deal with this. On the one hand, the fact that the main budget statement will be in the autumn, in some ways, is helpful in that regard. You will not have a situation where the Scottish budget is set. It goes through the process in January, February and then potentially you could have major fiscal changes by the UK Government in March, less than a month ahead away from when the Scottish budget would kick in. On that part of it, I think that it is a positive in that regard. I think that when the challenge comes in is when will the autumn statement be in the autumn. The definition of autumn in the civil service seems to range between July to December, and I think that that will be the crucial point. My assumption would be that I would not expect it to be that early in the autumn, if you think about when the UK Parliament returns and is later in the Scottish Parliament, you then have the UK party conference season, which will be in October. The starting point would be as you might not think it might not happen until sometime, potentially in November. I think that there is a challenge in there, because that immediately means that there is going to be some quite challenges about when the Scottish budget would be in the ability of the Parliament to scrutinise it. I think that if the autumn statement is going to be in the autumn and is a major budget event, then it probably makes sense for the Scottish budget to come after that, given that that is when the block grant adjustment will be. I would then caveat that with a number of points. One is that a lot of the information can be provided in advance of the finalisation of the budget, so there is a lot of detail that can be provided in the run-up to whenever the Scottish budget is done. Secondly, there is something about the importance of the timing that goes to scrutiny, but the key thing for me is the quality of the scrutiny. I know that that is the sort of stuff that the budget review group is looking at. I think that I am coming to speak to them in the next couple of weeks around that. However, what is the level of information that underpins the Scottish budget? How transparent are the assumptions that go into it? How transparent are the various elements of portfolio spending so that, if the budget scrutiny period is slightly shorter than it has been in the past, how can you improve the level of scrutiny that goes into it without having to try to find lots of different material from different places? With that, it throws into some quite significant issues about not just the timing but the quality of the scrutiny, because if it is going to be constrained in timing, we need to improve the quality. Although the auditor general suggested to us the need for a medium-term financial strategy from the Scottish Government, if that was to become a feature of the process in Scotland, in your view, what level of information do you think would need to be in that financial strategy to allow that scrutiny to be undertaken at an appropriate level? I would say that there are two things around that. One is that you have to move beyond one-year budgets. The point of order was making around the fact that the budget next year is going to rise in real terms. I think that there is a danger that that, in a sense, pushes back some of the difficult decisions that have to be made, because if you only publish a one-year budget, then that essentially is hidden to an extent. At the very least, you need to be setting out budgets up to the end of the Parliament. What the OBR does is that they essentially have a rolling forecast period, so every time they come to an update, they add an extra year on, and that is ultimately crucial. You should be looking at five years out for your forecasts, not just on your spending elements but also on your revenue elements. There will also be uncertainties about that, but there is an advantage in just being upfront about the uncertainties, as the OBR has done this time, being clear about where the various expenditure pressures are going to be. That part of it is where we need to move to in the budget process, just an acceptance that you need to have multi-year budgets to help planning, etc. The second part is about what you do about the medium-to-long-term challenges around the budget. I think that the Auditor General is quite right in that we know that particularly things like demographics will start to have quite a significant impact on pressures on certain elements of public spending over the next few years. There is a number again in the OBR where they are talking about that the deficit would be about 0.8 percentage points higher in the mid-2020s because of demographic pressures. That is quite a significant increase in spending that we needed to go to that. Again, it would be really helpful, particularly on where you are making commitments to, for example, protect the health budget in real terms. What does that mean in the context in which you have an ageing population? How can you forecast that ahead? What might be the pressures that come further down the line from medium-to-long-term implications? I'm going to get new supplementaries in that area. In that case, Professor Roy, thank you for coming along and giving us a very interesting session this morning. I now suspend this meeting to allow a change over our witnesses. Thank you very much. The third item on our agenda today is to take evidence of part of our taxation inquiry from Yvonne Evans from the Tax Law Subcommittee of the Law Society of Scotland, Alan Barr, who is a partner at Brody's and an honorary fellow at Edinburgh University, but you are speaking mainly to the Alan in a personal capacity, and Professor David Bell, who is a fellow at the Royal Society of Edinburgh. I very much warmly welcome our witnesses this morning. We have received papers from each of you, which we are grateful that you have sent to us. I know that committee members have had these. If there is any particular question directed at one particular witness, don't feel restricted by that. If you want to contribute, let us know. We'll try to make this as free-flowing as we possibly can. I don't know if anybody wanted to make an opening statement of... Okay. We'll get straight into questions at Adam Tomkins. Thank you, convener. I should say that I am also a fellow of the Royal Society of Edinburgh, but I'm not part of the working group that David Bell has been part of. I wanted to start with the suggestion that is very strong in Alan Barr's evidence, but I think that it is also in the RSE and other evidence that the use so far of devolved fiscal powers has been a bit disappointing and a bit lacking in imagination, and I wondered, first of all, if you all agreed with that. If you do, whether you think that it is more a reflection of a sort of failure of political imagination on ministers' part, or is it perhaps more disturbingly a reflection of a lack of capacity on the Scottish Government's part? It's a combination of the two. I think that in the end it's a matter of practicality, is that in relation to the devolved taxis, there was a necessity to get legislation onto the statute book and to start collecting the tax, and that is a long and difficult process. Therefore, the understandable main route was to work on the model of the UK taxation that was there. In other words, to take the prime tax-raising tax that is directly, that is wholly devolved at the moment, land and buildings transaction tax, it was based entirely on an SDL team model, and it was therefore understandable that it should be taken pretty well from the UK model. Therefore, it was the kind of act. I wouldn't necessarily start from here, but they did start from there, and I can understand the necessity of doing so. In order to do it differently, it would have required a much, much greater preparatory effort in terms of economics of what it would raise, in terms of would it be attached to transactions at all, for example, or should it approach this from an entirely different angle? That is harder and takes more time, so I can understand why it was done. Was it possible to do it differently? Yes, of course, but I can fully understand why it was not. I just make one point really in addition to that, is that I think one of the principles around a well-functioning tax system should be that of transparency, and really we shouldn't expect things to change very rapidly. If we move away from the current Westminster model of changing taxation at relatively short notice without wide and informed consultation before that happens, then you do run the risk that the tax system loses some credibility. I haven't been particularly concerned. A small change has been made in the structure of LBTT, but we certainly are of the view that a transparent structure, as far as the approach to taxation is concerned, would involve a wide consultation, and you cannot expect that to result in very rapid changes in tax structure. I agree with that. We do not want change just for change's sake, but if there is going to be change, we want to be considered carefully thought out. Perhaps slow change is easier to manage, because we are certainly looking at certainty as a very important principle in tax, so it is perhaps more manageable to start small with tax. There is a power on the statute book, section 80B, of the Scotland Act 1998, which is not a Smith commission power, but a Kalman commission power. It was enacted in a 2012 Scotland Act. It has been enforced since 1 July 2012. It is a power to create new taxes, a power in this Parliament to create new taxes. It has never been used. Nobody ever talks about it. Should it be used? Should we talk about it? Would that be a way of having a more imaginative discussion about fiscal devolution? The easiest thing in terms of more imaginative solutions would be to start from a new taxation base and then you would not be tramled by the Westminster model, either in the form of legislation or for what it was attempting to tax. It is a slight danger of that taxation for taxation's sake. We have a new toy in the box, so we are going to use it. That, to me, seems equally dangerous, but that would be possible if there was a policy or economic desire to tax a particular thing. The policy of simply raising money may not be enough. Tax is much used as an economic lever, so it could be done for both of those reasons. Again, I can understand why it is not because it is hard. Those things are difficult. I agree that we should be opening up the debate. We have had that opportunity for some time to discuss the structure of taxation in Scotland. We cannot do that without recognising that we are part of an existing structure as far as the UK is concerned. That is incredibly complex. Finding a way through that to determine a different path for Scotland is not something that can be done quickly or lightly. One thing that I would add to that is that we do not discuss charges very much, either. Taxation and charging for services should not be seen as completely distinct entities. For example, local authorities charge a lot for long-term care. There are taxation alternatives to that particular charging route, but those issues seem to not really be all that high-profile in the public discourse in Scotland over the past few years. I think that we support all of those comments on new taxes or amendment of existing taxes. We can point to plenty of problems with existing taxes and individual taxes that, if the Scottish Parliament did get hold of, there is an absolute opportunity to reform for the better. In terms of the whole tax system, it does absolutely add complexity if we have extra or different taxes in Scotland for taxpayers. I think that there is a policy thing to start with. You have to decide whether taxes are to be used as a means of discouraging or preventing people from doing things by making them more expensive, or alternatively, there is an opportunity. Governments need money and, therefore, there is a source of money that can be raised. That will be a reason for a new tax, but those are separate considerations. Sometimes they happily coincide, but they are separate considerations. One more question from me. Do you feel free to disagree with each other where you want to? Thinking about general principles, as far as I can see, nobody has mentioned the great constitutional principle that there should be no taxation without representation. Is that not a principle of Scottish taxation that we should adhere to? If it is, then what is the justification for business tax when businesses do not vote? Are we confident that we have the right relationship between the tax base and the definition of Scottish taxpayer and effective representation in Scotland? I do not think that I agree with you on the businesses that do not vote, because the owners of businesses do vote, the shareholders, the employees, all of the people who economically derive benefit from businesses do have votes. It is hard to see how you would give entities a kind of super vote perhaps for their representation in any working form of democracy. On that constitutional question, we are as good as we can get. Entities do not have separate votes, so they do not have direct representation. In terms of the Scottish taxpayer base, that is difficult. In a mobile without hard borders, it is extremely hard to tie this down. The one thing that comes as a surprise to me, and it is not possible within the current devolution settlement, is that rental of land in Scotland will be taxed according to the location of the taxpayer, not the land. That strikes me, given particularly other policy initiatives in relation to land in Scotland, that is somewhat anomalous in those circumstances. However, otherwise, the tax is tied to the person rather than the place, the person then has to be tied to the place in some method or another. My difficulty with how it has been done would be, for a pretty small number of people, it is uncertain. For most people, it is very certain that they have one home location, that will define them as Scottish taxpayers or otherwise. However, a very small number of people, but probably ironically, the people who have the most to gain or lose by flexibility, then there is uncertainty attached to it. The definition adopted is the slightly woolly definition that is home for a Scottish taxpayer. It is carried over into an element of the LBTT legislation, which I find somewhat strange, because it is a rather vague definition, basically surrounding where your home might be. That taxpayer base may change in due course. I agree with that. The definition of home is inconsistent across different capital taxes, LBTT and many different taxes and charges. It would be helpful to think carefully about what you are trying to achieve with that and whether the tax is achieving that. Thank you. Do you have a supplementary on this, Patrick? I do not have a supplementary on Adam Tompkins' question yet. I am glad that Adam has given us all permission to disagree with him. I will bank that for the long term, if that is all right. He has actually confirmed that he is supporting votes at 16, if there is effectively any statement on this one. I was surprised at the idea of giving votes to businesses that sounded more like a 2am Donald Trump tweet than something from the usually calm and intelligent professor. He was very much right to say that there are pre-existing tax powers that have never been used. It goes back to 1999, because the Scottish Parliament has always had the ability to levy a very wide range of taxes on any tax base at once, so long as that tax is being raised for local services. There has been a reluctance to get beyond the general acceptance that council tax is a bit rubbish and a bit of a broken system, a reluctance to go beyond that consensus and actually take action. Is it worth suggesting that, underlying all of what we say publicly, there is an unspoken principle, an unspoken principle, which is that we take the path of least resistance and do what is politically easiest. I know that we are going to get on and discuss what the actual principles ought to be, but is there an unspoken one that is actually preventing political action from being taken even when everybody agrees privately that it is necessary? I am inclined to agree with you. I have the Birch review, which I did the analytical work for and the conclusions of were dismissed before. They more or less hit the press. I do think that subsequent events in relation to the council tax have suggested a very, very small sea conservative approach to its reform. This is a political problem, it is not an economic problem, but it seems to me that Scotland has not been all that radical in terms of its approach, particularly to the taxation of property. I think also that there is a danger with any taxis that they are simply new taxis grafted on to the existing system. To be truly radical and to get acceptance, that would really require a starting point of what we are going to get rid of before we come up with something new, before we insert something new. To do that is really difficult, because you have to calculate exactly what you have got in terms of what that raises. See whether you need more or less from what is going to replace it. In political terms, see which particular geese are going to score up loudest, because there may be more feathers taken from them than was the case under the previous system. All of that is really difficult stuff. The temptation if you have taxing powers, including to introduce new taxis, is simply to put a new tax on eating peanuts or fizzy drinks or something else that does of its political reasons. That creates a layer of additional complexity in what is the most ridiculously stupid complex tax system in the world. At the moment, the Scottish element of that is just another layer of complexity for people who are in Scotland, and you could add local authority, residents of particular local authorities, if that was to be used radically. That may be yet another layer of complexity in a fundamentally stupid tax system. A Scottish addition to the stupidity just because we can does not seem a very good way forward. The suggestion was that Scotland has not been tempted to make changes. You say that it is a temptation to add more complexity. Given the scope of devolution from 99 onwards, it seems to me that there has been very little giving into that temptation. In fact, we have retained outdated and dysfunctional systems instead. Although they are outdated and dysfunctional, I think that they have been retained because you mentioned the path of least resistance. That is understandable because to make different decisions is hard and requires a lot of preliminary work. This is not that old Parliament to have done that necessary preliminary work. I will come to Marie Todd in just a minute. Something that strikes me is a real tension here in terms of the ability to us to make these radical reforms. Obviously, the biggest area of tax take that we have for the foreseeable future will be an income tax. Everybody in their papers are talking about low compliance costs, procedural fairness, transparency, keeping compliance costs low and so on. However, to create radical reform on income tax, how feasible is that when the HMRC will continue to be the administrators of that process? In any radical reform, the Scottish Government would require putting significant money up front to pay for that change from HMRC. In the income tax area, how radical can we be in terms of the issues in reality? I think that there are administrative costs that you rightly raised there. There is the intermingling with the existing tax in the rest of the UK. There may be behavioural response if we go for radical change in the bans and the rates. There is also the issue of the interaction with national insurance, which is, in all but name, another form of income tax. There is the fact that possibly a lot of radical reform might be around the tax base and changing the tax base, which Scotland does not have control of. It seems to me that radical change, in respect of our largest source of revenue, should be thought of as a long-term venture rather than one that we embark on relatively quickly without going through the necessary analysis, consultation and so on. I also must be recognised that, at the moment—I do not think that it would be that expensive to be radical within the current confines—there is complete control of rates and thresholds, but only complete control of rates and thresholds. Some of the other things that are talked about in relation to the tax base and aspects of defining a Scottish taxpayer, for example, are not devolved matters. It would be relatively cheap, whether it be desirable, in entirely different matter, to be radical in diverging from the rest of the UK policy on income taxation. We are told that it costs a lot more, the greater the divergence. In terms of rates and thresholds, that is probably not true. Much more importantly, it will be just as expensive to make small changes to that than to make large changes in terms of administration. Indeed, in many ways, it is perhaps worse to make small changes because it loses transparency. It is possible to be radical on those things within the devolved powers, so to say that whether that is desirable, given the mobility of the population, is a very different matter. I think that it is possible. I agree with that. You have very wide powers with the rates. You can do what you like with the rates, but that, as has been said, is only part of the story. It is not having control of the rest of the tax expenses relief. It will hold you back in terms of how you can shape and reform the tax more radically. There was comment from some of the people about the people creating corporations to avoid income tax. Can you just talk us through about what the dangers are there for us if that was to become a reality? Yes, it could be done, but this is a constantly moving battlefield. As a good example of the interaction, the way that it would work at the moment is that people could take income from their own company in the form of dividends, which is not liable and not capable of being liable at the moment under the current rules to the Scottish rate of income tax however different that was. Whether that was worth people doing that, particularly that there tend to be significant upfront costs in converting businesses to corporations from a sole trader or partnership status, whether it is worth doing that depends on the amounts involved, but it does illustrate the tension between the two systems. The taxation of dividends is an RUK matter, the taxation of earned income from the same company, from the same business, from the same underlying economic activity is within the confines of the Scottish Parliament. Who is sensible to all that? It is not particularly sensible, I would say, to have that amount of separation. It is understandable perhaps with fluid borders. If I can just add other tipping points that are of interest in relation to the yield of income tax in particular, so you have got this incorporation issue, you have also got the self-employment border, where people may be encouraged to become self-employed, even though in reality their behaviour is very much similar to that of an employee. I think that is one of the reasons why, in the autumn statement, the chancellor was acknowledging that income tax revenues have fallen way below expectations for this fiscal year. The other borders that are important are the hours border, so people work less if, as a response to higher income tax rates, the early retirel or withdrawal from the labour market border, if people respond adversely to higher income tax rate. As has already been mentioned, if you can move to a lower tax jurisdiction, some people may find it advantageous to take that route to avoid higher rates of tax. The tax system at the moment creates a lot of situations where taxpayers who seem very similar can be taxed quite differently based on things like employment status, as has been said, so that offends the principle of horizontal equity, as it is known. There is no clear policy reason for that, no justification that I have seen that really explains why that should be the case. It encourages taxpayers to choose the tracks motives for doing things in particular ways. Again, I think that most of what I was going to ask has already been elucidated, so thank you very much. What I would particularly ask about is the question of people being mobile and able to change their residency. How confident would you be that the current arrangements with the HMRC would be able to be tight on that in terms of identifying Scottish taxpayers? Any tax system has to be used to identifying the tax connections with the people that wish to tax. There are levels of that already, for example, at UK Residency. Are you a UK resident to start with, which is a preliminary to whether you are a Scottish taxpayer? I think that they are reasonable in placing that in their ability to place that. In terms of identifying Scottish taxpayers or not, I think that I would stress the relatively small number of people who have a real choice in this. I think that it is a relatively small number. Relatively, thank God, computers. Yes indeed, they would be. I think that because, other than in a few cases, there is a move away from a very objective count the days, for example, test, that is going to weigh down the list of qualifying or disqualifying yourself as a Scottish taxpayer. I think that those vague notions may cause some difficulties for people who are effectively based in Scotland but who are able to create a base elsewhere. The extent to which it is placed depends on the resources that are put into it. How soon people are prepared to challenge that position and get tax cases on the board so that people will know that, if you do that, you will not be a Scottish taxpayer, and if you do not do that, you will. It would be quite short-term gain anyway if you caught someone with a Scottish, and if they knew that they were Scottish, they could just counteract that by changing their practice so that they spend much more time in London or whatever it is that they have fallen down upon on the test. Murdo, do you think that you are a supplementary in this area? Yes. The discussion that you were having is very interesting about tax distortions and also tax competition. There is quite a lot in the Ross site of Edinburgh paper about the interrelationship between taxes in Scotland and taxes in the UK, given that we are in a single market and given the issues of fluidity that we have been talking about. How much evidence is there about the impact of differential tax rates in a jurisdiction like the one that we are moving into? How much do we know about likely changes in behaviour? A little bit. We know more at the international level than at the subnational level, and some countries seem to manage quite successfully with quite different rates of income tax in localities right beside each other. I guess that Denmark might be an example of that. You get differences in countries such as Switzerland, but I would need to go back and check that the evidence is less clear as to the potentially negative effects that people are taking actions for tax motives in that jurisdiction. There is a mixture of evidence. My feeling about this is that one has to be pretty wary of applying international lessons from other jurisdictions to the UK and Scotland, partly because the UK has one of the most fluid labour markets in the world, evidenced to some extent by the huge increase in employment over the past few years. A lot of the other countries from which one might be drawing evidence do not have that level of fluidity, and that is very important in relation to income taxation. I can only offer anecdotal professional evidence of what people do in response to tax rates. I think that it is surprisingly limited at the edges, but if what is regarded as a penal tax rate, it will take action if it is possible to avoid it. A differential of a pence in the income tax rate might have a very little effect. A differential of five pence, ten pence, and perhaps, again, ironically, disproportionately at the relatively few people who are affected by this is much more likely to have that effect. That is, again, my evidence would come from capital gains tax, where people who end up paying a rate of 10 per cent of capital gains tax because of rules allowing them to do so are much, much more willing to say, right, we are not going to change our life, we are not going to move abroad for the necessary period to make that disposal to do that kind of thing. They are not going to uproot themselves at that kind of level, whereas, if they were higher, they would and have do exactly that. Given what you were saying, Alan Barth, a while ago, about the potential for a much more radical departure in terms of tax policy in Scotland from the rest of the UK, in reality, how much freedom of operation would any Scottish Government have, given the issue that we have just talked about? That assumes that the taxation is always tied to the person rather than to other things, consumption, land, other things that are less easy to uproot. The person is only one connecting factor, it is the most important, but there are other connecting factors, you know, location of business enterprises, location of companies. Now, some of them are, in a way, silly, the kind of nameplate effect of that on low taxes, but others are, you can make a much stronger connecting factor than the person if you wanted to do that radically. I just say good, I am not saying should. I am trying to get back. We are covering quite interesting areas here, but the purpose of today was around the principles and the high levels, so I am trying to get back into that, if I can. Ash, then I will come to James. Thank you. A number of your submissions mentioned the concept of simplicity, particularly the Royal Society of Edinburgh submission. You mentioned the UK tax code. You mentioned it again just now about one of the most complex in the world. I believe that it runs to thousands and thousands of pages and, as such, is also riddled with loopholes, which allows people to use the tax system to benefit themselves if they are able to. I do not think that anybody would probably be seeking to replicate that in Scotland, but, obviously, we are situated within that context. We did take evidence recently from Revenue Scotland, although it has had its first year of operation. Many of the people who gave evidence said that they felt that it was quite simple, that it was easy to use, that there were good lines of communication and so on. When you are mentioning simplicity in your submissions, are you talking about the tax code itself? Are you talking about maybe the operational side of it? Would you like to explain a little bit further? I think that all of those things are important in simplicity. It is not just about making the tax code shorter. That can be helpful in some ways. It is about the way that legislation is written as well can be helpful in reducing the need to go and change the legislation to close off loopholes. I think that the Allen submission has quite a bit on how you can frame legislation in a way that is almost future proofing it and stopping it from becoming even longer further down the line. Simplicity is also important in administration, obviously, but it is very important that it comes into efficiency. That is the ideal. Also for taxpayers, should you have to go to a tax lawyer or an accountant to understand tax, that is a big issue in Scotland. It is something that I am quite evangelical about, because taxpayers just do not understand tax. It should be more transparent and it should be more readily accessible to them. Let me give you, if I can, an example. I think that Revenue Scotland is absolutely right. For the vast majority of transactions and taxpayers, and I will stick to LBTT, I think that the system has worked well and is tolerably simple. What then happened, we got the introduction of additional dwelling supplement and that is creating now a range of uncertainties of things that people, including I suspect people who enacted the legislation, do not realise that it catches, that it should not catch and therefore they will do things to stop it catching. That is an absolutely classic example of you start with a tax that it taxes the purchase of a home and I am only dealing with the residential. That is straightforward, it is simple, it is extremely hard to avoid, it ticks all the boxes. You then put a layer on the top of that and it becomes complex, it becomes more difficult to deal with. We have absolute evidence of that with the additional dwelling supplement now, even in our comparatively baby tax system that we have. The other side of that was always there, the basic notion of purchasing property pay tax. When you move to more complex transactions, which involve multiple transactions or lease transactions or that kind of thing in the commercial world, which again has the additional point that came earlier, they also tend to be the ones that can or should produce large amounts of tax, that is where the complexity comes. There are almost two distinct levels there. The basic is fine and can be kept simple, it is when it gets more complex and the complexity sometimes comes from policy decisions that you create the problems that lead to, if I had brought the entire UK tax code you would not be able to see me for it, if a raid in front of you, seven fat volumes of very, very closely printed pages. I will give you an example where, in effect, the tax base has been extended to some extent. I think that our submission argued for wide tax bases that were easily understood where tax rates could therefore be kept lower and therefore would be less distortionary in terms of behaviour. An example in the Mirli's review concerns confectionary and where you draw the line as far as confectionary is concerned as to what attracts VAT and what attracts doesn't VAT. I recall the eye decoration of a figure made in chocolate that had something to do with the definition of whether it attracted VAT or didn't attract VAT. That is the kind of area where people eventually end up going to law because there are commercial interests involved and the whole thing, dare I say it with two lawyers beside me, becomes slow-moving and liable to, well, it requires clarity in the legislation appointed that has already been made. I suppose I see a conflict there, though, if you're situated in an extremely complex system, as we are, and if you bring in a replacement tax or a different tax, you are already adding to the complexity, even if your new tax is very simple and easy to use, so there's attention there, isn't there? There is absolutely attention there, but sometimes the complexity comes from the policy rather than simplicity. Again, if I can give a UK example, well-covered in the press, is in relation to film investment, film partnerships. We have all seen the tales of usually celebrities investing in this and getting caught out by it, but, of course, that started from an understandable drive to encourage actual investment in actual UK films. It was only by that, and my profession is on the line in relation to that of people saying, oh, well, we can exploit that differently because of the lack of simplicity of it, because you were able to construct things that were no longer the simple policy involved, and that led to people investing, and that weren't really investing completely in the films that were the original laudable intention. It's a question of where you start the policy from. Is it simply to raise money, or is it to do other things? Those are very different policy aims. I'm sure that a lot of the exemptions and reliefs in the system—I know that there's over a thousand—were well-meaning at the time. It's just become so clunky with so many of them, and, of course, politically, once you put in relief for an exemption or an extension to something in place, it's very hard to quote back politically. I even think that you're a supplementary in this area before I count the dreams. Yeah, I. Thanks very much for coming along and talking to us today. I suppose one of the benefits of talking about a subject like this is that it gives us a bit of space out of the day-to-day and look at the bigger picture of your life. I suppose the whole concept of a principle is it something that withstands the test of time when we're talking about Adam Smith's principles that are obviously coming around for a wee while. Clearly, if you look over the medium term, we've got a moving feast in terms of what's devolved and what isn't, and that's changed at least twice in the last three or four years, and I've no doubt contained the change. That's even before you start talking about the constitutional question. I suppose what I like to do is leave all that to one side and just go back to the principles and the four principles that are there. Do you think that they're the right ones? Do you think that there's something that shouldn't be there? Do you think that there's something that aren't there that should be there? Just for a starter for 10, we've talked about simplicity, which I think has got a huge bearing on at least three of those, to convenience and efficiency are all impacted by simplicity. The other one that I'd like to throw on the table for your thoughts on is about behavioural change. We often talk about that in a negative sense, how are people going to be mobile etc, but clearly there's a huge positivity there in terms of whether you use it for consumption taxes on things that would otherwise cause your health service or you use it to drive low-carbon behaviour or to drive capital investment or to encourage people to employ people. There's a whole bunch of positive behaviours that you can drive through the use of the tax system. Do you just like your reflection on that? Are the principles right? Should we have different ones? There's certainly a case to be made for taxes that tax bads rather than goods. There's a question of whether we all agree what our bads are and whether we feel that the state should be trying to influence our behaviour as to what it is that we consume or don't consume. I'm not saying that I'm on any particular side on that, but I think that the argument has to be put there. Certainly around the taxation of the use of carbon, the UK has taken fairly strong action in that respect. Maybe it's rolling back on that a bit recently, but in general I don't have a problem, although there has to be a clear consensus around—again, this is where I'm talking about consultation and transparency involving many stakeholders in the design of your tax policy rather than just a small number of people in your Treasury or finance ministry or whatever. However, the general principle is probably an acceptable one. Inevitably, there will be pushback by whatever commercial interests are maybe harmed by that, but it may also add to innovation. You might force airlines to adopt more fuel-efficient planes or, as we've seen today, tobacco companies to adopt less toxic cigarettes. There is that behavioural response that you might get as a result of taxing so-called bads, which is perhaps a good thing. I don't think that behavioural effects come into the principles that are put forward. Whether behaviour, driving good behaviour or stopping bad behaviour should be another principle is something to argue about, but I think that it would be additional. To answer your original question, I'm sorry that these principles are reasonable ones. Yes, I do. I think that they are. They may be limited, but I think that they are affected by other things. Proportionality, certainty, convenience and efficiency are pretty good principles. I don't think that behavioural effects interact with those particularly well. If you want behavioural effects to stop doing bad and start doing good, that would have to be another principle. Of course, large numbers of us might differ on what were the good and what were the bads and what were also within those other principles the effective ways of stopping or encouraging them. I don't think that behavioural effects fit very well into a principle notion of taxation. In terms of whether we should have them, yes, I think that we should. I think that these are as good as any. Their long life, their long quoting over literally hundreds of years is indicative that they caught something pretty well. They are not complete, as you have just demonstrated, but I think that they are pretty good stuff. Is there anything that you would add? I'm not sure that I would, because that gets away from one of them in the terms of simplicity and certainty. Four is enough, could we get? One of them, that's the point. Could we get to three? Yes, but simplicity flows through quite a lot of them, no question. Just on the point about taxing on bads, I don't think that the Law Society has a view on that particularly. One criticism of that is that it can be quite regressive, particularly if you're taxing things like sugar drinks, for example. That could be quite a regressive policy. On the principles generally, I think, as Alan says, if you define these widely, particularly ability to pay, if you look at that in the round, then I think these do cover what you would be wanting in an ideal tax system. In terms of the submissions you've made, you've emphasised the themes of certainty and efficiency around the tax system, and we've had a lot of commentary already today, both on the press and the committee, about the new income tax powers that have arrived. I just wondered how the system of allocation of income tax revenues to the Scottish budget fitted with those principles bearing in mind that, initially, it's based on forecast numbers and they then feed into the block grant adjustment. It actually takes 18 months before we get the actual figures and then it's into the next financial year before once the reconciliation is completed and those numbers are actually allocated. There's a time lag between, there's much hype about these new powers today, but there's going to be at least a two-year time lag between the raising of tax revenues and the allocation of the precise figures to the Scottish budget. How does that fit with those principles of efficiency and certainty? Those principles are based on the perspective of society as a whole. The issue that you're raising is to do with the Government's budgetary process and how that is made more difficult as a result of those time lags. Those time lags are inevitable given the structure of the income tax that is the main power that is being devolved. There's a question about forecasting and whether forecasting is accurate or not. What we've seen recently is that the OBR has been very optimistic about income tax revenues in particular. Therefore, my feeling would be that whoever in the Scottish Fiscal Commission has to look very carefully at whether similarly optimistic forecasts for Scotland would make sense in the future. However, there are borrowing powers there to deal with the issue of forecasts that could go awry in either direction, of course. That's possible. However, part of the implication of getting tax powers is that you have to take on additional risk. Things could go better, things could go worse, but we have to accept that, with new tax powers, it has to be the case that the Scottish Government's budget faces more risk than it has done in the past. I mean direct answer to your question. I don't think that the process that you've described fits with these principles at all, but they nor can it be expected to. I mean, those principles are to do with the relationship between the taxpayer and the tax-raising authority, whatever that tax-raising authority is. The process of allocation is, as it were, after that stage has been reached. The goose has been plucked. What are you going to do with the feathers is the extension of the analogy between the various pluckers of them. That is not something that I think that Adam Smith's principles can properly address. I mean, whether that process should be simpler and swifter is a matter of course of great concern and importance, and it probably should, but if it cannot be, it cannot be. I don't know whether it can be or not. James, on the other hand? I want to just press David Bell on me a bit further. It's not just a question of numbers that end up in the budget. It's pounds and pens and this affects people's lives. When you take it down to a level of a council, you know, potentially having to decide on a budget that might impact on jobs and on services, and is there, I accept, a complicated process that's not straightforward? Is there any suggestions as to how the process could be speeded up to allow the accurate figures to be allocated to the budget more quickly? The issue here is to do with tax receipts and HMRC and partly to do with people who submit tax returns after the year-end and may not actually pay until 12 months effectively after the year-end. That inevitably introduces a delay before the full accounts can be drawn up. I don't know whether that process can be speeded up, but probably HMRC could not do it just for Scotland. It would have to be a change that would affect the UK as a whole, and I suspect that there are many interest groups who would like to have the process as long as possible, and those who may have to pay up. Within the current constraints that HMRC is operating under, it does not seem to me that there is an obvious way to speed the process up. There may be ways of introducing more evidence as the period progresses. For example, could HMRC make all the PAYE returns or their value available to the Scottish Government so that at least it would have that part of the income tax information available to it and could do that almost immediately? At the moment, I am not sure how it could be done, but there may be tweaks that might improve the system. A borrowing facility has been put out there that is meant to cover errors that could be derived from the forecasts. I understand what you are saying about HMRC. Once it is completed, the stage of the process is in. I understand that there is a reconciliation that takes place around the 18-month mark. Do you think that there is value in looking at how that could be carried out quickly in order that the allocations take place in that financial year instead of waiting for the next financial year? I am just thinking that there may be ways of collecting survey evidence on people's income tax payments in year calculations that could be done in the way that we refer to the problems about survey evidence in relation to VAT. There is a way of collecting survey evidence in relation to both income tax and VAT. HMRC has an ambitious programme called making tax digital at the moment, which is directed at the uncertainties and the delayed payment of tax to some significant extent. That will take a while to bed in. I say that a lot of people think that they are a little bit ambitious in demanding that information up front, but one thing is that, to the extent that it comes into effect, it will have the effect of both knowledge and perhaps payment being made much more quickly than the delay that David was talking about. Once that is bedded in, the information at least should be available from that particular source earlier. That might then have a knock-back effect, if I could call it that, on the kind of timescales of the necessity to wait for the end and then a time after the end, because the information will be available earlier. People want to ask questions, and we have 20 minutes left. I was hoping to complicate things even more and to talk about corporation tax. As I mentioned in Professor Bell's paper, as you know, the UK was planning to give Northern Ireland—or may still be planning to give Northern Ireland—a reduced corporation tax rate, and then Brexit happened, and the UK suggested that it might lower it anyway, which must have delighted our friends in Northern Ireland. Do you think that there is a case for a variable corporation tax system in the UK so that Scotland does not have a differential disadvantage between us and Northern Ireland if we inevitably get a reduced corporation tax rate? One of the things that we have already mentioned is the possibility of people doing things for tax motives and trying to avoid that happening, if possible, because it will move economic activity from where it may be most efficiently located to somewhere else. Ireland, the Republic, has got a very significant advantage economically in recent decades because it has managed to get people to move their for-tax motives. That leaves the UK in a somewhat difficult position, but, if the UK is going to reduce to 15 per cent against Ireland's 12, the band between the two becomes fairly narrow, and whether it becomes sufficiently narrow that it becomes not worthwhile—obviously, there are costs to moving location—remains to be seen, and I suspect that most countries do not think that corporation tax is an ideal one to drop down to the sub-national level, particularly for that reason. Having said that, it does happen in the States and elsewhere, I am not sure what part of the space between 12 per cent and 15 per cent of Scotland could adventagiously locate it itself. There is quite a differential advantage there for Northern Ireland, particularly when Brexit happened and we would be at a further disadvantage in my view between Scotland and Northern Ireland if it had a 12.5 per cent rate compared to the Republic of Ireland, and we were stuck at 17 per cent. We have lived with that disadvantage for some time, and I guess that, although there is some evidence that companies are certainly willing to move to Ireland, so whether Scotland would be similarly affected if it managed to have a very similar rate to Northern Ireland, I am not sure in terms of evidence, but I guess that it is possible that that could happen. Corporation tax is again a difficult one, because the location of the company is not necessarily the end of the story of the rate of corporation tax that it pays. Hence, again, the huge press coverage of Google, Facebook and those entities, whose economic activity is happening in very different places from where the company is, in any legal sense, resident. Without the extension of powers to cover that exactly, what would be taxed in Scotland would then ironically be open to the same kind of it is perceived as abuse of directing the profits to places where the rate might be less if that was possible to be done. The actual defining corporation tax by residents of the corporation is only part of the story, and it may actually be the smaller part of the story, the greater the differential between rates. I mean, Northern Ireland think that they will benefit money. Sorry, but we have gone quite a bit on that, will we? Can I just see what Yvonne wants to do? I think that she wants to make a good one. Well, whilst I do not intend to make comments on rates in particular, I would say that I would just generally agree with the points made. Tax competition, obviously, what you do not want to trigger is just a race to the bottom, because then everyone loses. That is one thing to consider. Sorry, I will, on you go. I mean, what I am reading here is that Northern Ireland think that they will benefit by £4 billion a year and 32,000 jobs if they get that reduced corporation tax rate to help them to compete with the Republic. It seems to me that there is no advantage for us in having a similar model here, otherwise the reverse effect could happen here and we will be in direct competition with Northern Ireland. I mean, I am not sure where these numbers come from, and as has been said, it is not necessarily the case that economic activity is associated with the location of the payment of corporation tax, so I am not sure whether, at the moment, that can be treated as a very credible set of statistics. Patrick Stewart Thank you very much. On another occasion, convener, there will be time to challenge the assumption that ever lower corporation tax is a benefit or that decades of continual cuts to corporation tax have driven the level of inequality that we see in society, but sadly that will not be today. Can I just ask about one comment in the RSE paper around the principle of proportionality? The Scottish Government uses the term proportionality to the ability to pay and yourselves, as well as some other written submissions, including from the Poverty Alliance, have talked about using the term distributional fairness instead. I think that I can see what is the intention here. I wonder whether the word fairness is also open to criticism for being not sufficiently specific, given that quite a lot of very wealthy people think that it is very fair for them to dodge tax through every loophole that they can manage. I think that we were a bit dubious about the term proportionality, because it might be taken to imply a strictly proportional tax, which is not a progressive tax, and that was a concern. On equity, the ability to pay is a concept that is quite difficult to define, partly because most people take it to be directly related to income, but that means that one is ignoring wealth, which is an important component that people may have in terms of their ability to access goods and services. The question about how you assess equity. I remember that the Scottish budget has an equalities impact assessment. We mostly think about equalities in terms of their effect on individuals or households, but I think that there is a case, as is the case in relation to the equalities report, where you look at groups. You might look at people by gender. You might also look at people by age group, which is not something that the Scottish Government has done all that much in the past. We were a little concerned about a strict taking of the word proportionality and wanted to think about equity or distributional equity in the round. Would one way of framing that principle be that the tax system should seek to reduce or limit wealth and income inequality? That could be one of the objectives, a distributional motive for the tax system. It is certainly there, but there are other objectives that tax systems typically do try to invoke. One of those might be stabilisation. You use the tax system to make sure that the economy is kept on an even keel. You might use the tax system to support growth. You could argue that that is one of the key purposes for the tax system. That is one of the other principles, but there is a way of framing that question about proportionality. Rwbann mentioned something that I have not heard of before. The first person to mention it in that context is about horizontal equity. Could you tell us more about what lies behind that? That is slightly different from other things. That is where two taxpayers are getting very similar amounts of income. One is a self-employed person and one is an employed person. You would expect, under perfect horizontal equity, that those people would be taxed in exactly the same way. That is very much not the reality in our tax system when you look at both income tax and national insurance and how those two taxpayers are treated. You also have vertical equity, which is to do with proportionality and progressivity in the system. I was going to come on as well and talk about some of the issues that Ivan raised, which Alan Barr had discussed about other policy objectives, such as behavioural change, being driven by systems in taxation. The efficiency principle relates, as I understand it, to the idea that the system should minimise negative effects on welfare and economic efficiency. Rather than adding an additional principle, which I think was Alan Barr's concern, surely the way to capture this is that we should be seeking to maximise social, environmental and economic benefits from the operation of the tax system. Would that not capture what is being sought without adding additional complexity? That sounds to me more like a policy than a principle. The tax system may be a lever to do those things, but whether you want to do those things in a principled way is determined by policy. Indeed, what you said about wealth inequality struck me as a more policy-driven than principle driven. The policy may well be to reduce wealth inequality, and that is a perfectly reasonable policy, but the principle on which it should be done is much more likely to involve actual proportionality, for example, as a principle of doing so, rather than an absolute. The principle is proportionality to the ability to pay. That also hangs on a policy assumption. It does, but not necessarily of reducing wealth inequality, because the fact that the richer or those with the greater income can pay a great deal more and should, under that principle, pay a great deal more does not mean that that necessarily will reduce, in any absolute sense, the inequality. David Bell's paper also gives an example of the other objectives. The carrier bag charge is the one that is mentioned specifically. I think that very few people would disagree with the claim that successive Governments' approach to taxation of cigarettes has been socially beneficial, has been driven to achieve a change in behaviour and not necessarily an increase in revenue. It seems to me that there is a question about the principle of the operation of the tax system that is implicit here, rather than explicit. It is simply a question of whether we should make it explicit. It also relates to generality in the tax system, rather than being raised specifically attacks from people who gain a benefit from a particular kind of public services. There are some people who would make the case for that kind of hypothesisation. Others would say that it is important to the cohesive nature of our society that tax tends to be general, rather than specific. I wonder whether it is important to get those principles stated, rather than having them hanging around in an unstated way. I think that the issue of acceptability in terms of behavioural effects of the taxes that one might apply seems to me to be an important area to keep bearing in mind. The issue of hypothecation is an interesting one, because it seems to me that the political acceptability of certain changes in the tax system that can be made. Increasingly, politicians think that that is only going to be acceptable if we hypothecate whatever extra revenue that we raise to a specific public spending objective. The UK Treasury has always tended to try to avoid hypothecation, because it argues that it ties its hands. It seems to me that there are serious dangers about having a large chunk of your tax system that is very specifically hypothecated to particular purposes. Who knows that, through time, public priorities may change and people may wish to do other things. In the short run, it probably helps the acceptability of changes to taxation. For example, the increase in the council tax bans, the additional revenue from that has clearly been hypothecated to the education budget. That raises all kinds of questions that probably do not have time to go into now, but you can see that it carries political risk as well as potential gain. I was only to say that we sometimes understate the pure revenue-raising effects of some of those behaviourally driven taxis. If they were entirely behaviourally driven, taxis would be set at a prohibitive level. They would be aimed at stopping people from doing things or restricting it to a very low level. The revenue-raising of the sin taxis—if I can call them that—is extremely important in a mixed-tax system. It might be slightly cynical to suggest that, but that revenue-raising is an important part of what they are doing. Otherwise, if it is truly behavioural and they should be banned, they should be banned. This is on the principle of transparency. Transparency, it seems to me, should not just be about how the system works but what it is for as well. I think that the only communication that I have had from any level of government as a taxpayer about what my taxes are used for is a flyer that comes from the council, with my annual council tax bill, usually with a picture of a bend being emptied. If we want people to have confidence in their new Scottish approach to taxation, should the Scottish Government be spending some time thinking about how it communicates to taxpayers as individuals what it is trying to achieve and, more particularly, why? Why taxation relates to the challenges that we face collectively as a society? I tend to agree with that. Earlier on, I alluded to what I do not think is a very good way of defining or setting our tax system, which is the way that the UK has done it for the last, goodness knows how long. I know that Neil Warren from the University of New South Wales gave you evidence some time ago, and I was particularly struck by his reporting of the system that is used in New Zealand, which seems to be much more encompassing and goes through various stages. What I am talking about is changing the tax system involves various stages, strategic, tactical, operational and so on. At the strategic level, large numbers of stakeholders are involved in the process, so that they can better understand not only the gains, but also the potential costs associated with significant changes to the system. I agree with that. As long as one does not get too hung up on or devote ridiculous very large resources to it or, indeed, it then gets used as a political football, if it gets slightly wrong, that should not be the end of the world. That kind of transparency is extremely important and will be helpful in the people's acceptance of the taxes, because in the end, a tax system has to be acceptable to those who pay the taxes. I am being boring and I am agreeing with them as well. I think that HMRC at the moment sends you a statement every year and it has a pie chart and it tells you broadly where your tax has been spent. There are some criticisms of that because it is just income tax and national insurance that it covers, so it does not really explain where all of your tax is going. There has been some attempt, but I think that we would welcome more transparency. My question is more technical than relating to principles of taxation. It relates to the correlation between GDP growth and tax take by the Scottish Government. Professor Bell, in paragraph 22 of your paper, you say that the make-up of the tax basin for income tax in Scotland is noticeably different from that of the rest of the UK. In Scotland, just 0.7 per cent of taxpayers pay the additional rate of income tax compared to 1.1 per cent in the UK as a whole. Does that mean that the same level of GDP growth in Scotland may result in lower tax take in Scotland compared to the rest of the UK? The reason is that, under the new fiscal framework, relative tax take in Scotland versus the rest of the UK will, in part, determine the level of public spending. That relates to the block grant adjustment and the per capita indexed adjustment mechanism. I do not think of itself the fact that we have a lower proportion of additional rate tax payers necessarily means that, with a given rate of GDP growth, income tax revenues in Scotland will grow less fast. It all depends on where that growth is coming. Part of the reason why I am a bit concerned about income tax revenues is not at the end of the income spectrum but at the lower end. A lot of the increase in employment since the Great Recession has been relatively low wage, the kind of people who are employed at levels of income that are below the income tax threshold. We could see a pretty significant increase in Scottish GDP and a big growth in employment without necessarily seeing any significant increase in income tax revenues. I think that that is an issue that is of considerable importance. It is difficult to predict based on the distribution of taxpayers at the different levels, but the additional rate taxpayers are very important. There is no question that that is the case. Scotland could not afford to lose a significant number of them. I ran a survey of personal incomes recently to look at the most recent data and the top 1 per cent of taxpayers, which goes beyond the additional rate taxpayers in Scotland, contribute 23 per cent of the total income tax revenues. They are a critical group in terms of the overall tax take and their issues around how they account for their income become very, very important. Not my feel, but I would agree. I do not think that there is a direct correlation between—that is not two things that go particularly well together—the number or proportion of additional rate taxpayers and GDP growth. I do not think that we are likely to fit particularly well together as parallel indicators. Thank you very much for the witnesses for coming along today and beginning our discussion into tax principles. This is the first session that we have had on that. It is obviously a bit more complicated than I anticipated at the beginning of the process, but it is going to be an important discussion that we will have as the months go on. I thank the witnesses for coming. At the start of the meeting, we agreed to take the next items in private and, if there are no, close the public part of this meeting.