 Welcome to the 12th meeting in 2015 with the Finance and Committee of the Scottish Parliament. Could I just remind everyone present to turn off any mobile phones or other electronic devices? We have received apologies this morning from Richard Baker and Gavin Brown. Our first item of business today is to decide whether to take items 4 and 5 in private. Are members agreed? Members have indicated their agreement. Our second item of business is to take evidence from the Scottish Government. As part of our post-legisl of scrutiny of the local government finance, unoccupied properties, etc., Scotland Bill's financial memorandum. If I would like to welcome to the meeting the Minister for Local Government and Community Empowerment and the Minister for Housing and Welfare. The ministers are joined today by their official Stuart Law and Douglas McLaren. Members have copies of all written submissions received along with a space briefing. Before we go to questions from the committee, I would like to invite both ministers to make brief opening statements. I'll go first, convener, and thanks for the opportunity to give evidence to the committee today. The council tax increase for long-term empty homes was introduced as an additional tool for councils to use to encourage owners to bring their homes back into use. Councils have significant flexibility in how they can apply the increase, and in 2015-16, 16 councils are now applying the power. It is too soon to measure the full effect of implementation, as 2014-15 was the first year that a significant number of councils applied the increase after using the previous year to prepare for it. The legislative change is one of a number of measures that the Scottish Government is taking to encourage owners to bring their homes back into use. We continue to fund the Scottish empty homes partnership, including part funding, a number of empty homes officers who work directly with homeowners. We provide capital funding programmes, and collectively, those measures are having a positive effect in Scotland's communities. 278 homes were reported as brought back into use in 2013-14, and we expect over 500 to have been brought back into use in 2014-15. Some owners have reported that the council tax increase is what encouraged them to take action. By the end of the next three-year period, we expect to reach the point where 1,200 homes will be brought back into use per year. That is a significant number. Over 16,500 homes are empty for one year or more. I hope that it is as enjoyable as my last appearance in front of the committee. Our non-domestic rates regime has to support businesses to flourish, and it has to raise revenue to help to deliver the essential local services that businesses depend on. As part of that, the rates relief that is in total worth around £618 million this year has to be targeted to provide the right incentives for growth. The local government finance unoccupied properties etc Scotland Act 2012 enabled ministers to vary more widely the relief available for empty properties to incentivise their return to use. The changes that we subsequently made by regulations were, as notified at the bill introduction, to reduce relief for certain empty properties from 50 per cent to 10 per cent following the initial three-month rate-free period. The financial memorandum estimated that this would save around £18 million. The actual drop recorded in the cost of empty relief for the first year of a reform 2013-14 was £22.6 million compared to the previous year. Other factors bear on the year-to-year cost of this relief, but this figure would seem to be in reasonable agreement with the original estimate. This reform did not apply to industrial enlisted properties, and the cost of empty property relief in 2013-14 was still £146 million, a considerable subsidy to support rate payers. Members will also be aware that we responded to feedback from stakeholders and introduced the fresh start and new start reliefs in the same year, relating to long-term empty property and to new build, respectively. Derek Mackay, during the passage of the bill, committed to review the effect of the changes once they had started to bed in, and I can confirm that the Scottish Government will be undertaking that exercise this year. I welcome the committee's initiative to undertake post-legislative scrutiny, and I'm grateful for the chance to contribute and take any questions. Okay, thank you very much minister. Those statements were very helpful, as indeed was the documentation that's provided. Obviously, the reason why we're doing this is because when we actually look at financial memorandum, very stakeholders give us different opinions as to what the impact had been. I think that it really is time, but we saw how the legislation actually worked on the ground in terms of what was proposed, and this is the first exercise we've done in this, and we may do further ones in the future. Now, I'm going to open up with some questions, then, of course, I'll allow other committee members to come in and do course. When asked questions, either minister can answer, except yourselves who wishes to answer the question. One thing I would say that was the first question that I would like to put to Margaret. First, Margaret, when you talked about it, it was too soon to measure the impact of the legislation, given how long it's been out. Certainly, in terms of the space briefing that we received, I quote, in relation to non-domestic rates, there are no systems in place aimed at monitoring the impact of the legislative changes. How can we measure the impact if there are no monitoring systems in place? In terms of the empty homes, the council tax monitoring was changed to take into account that we could know the number of houses that are empty, the number of local authorities and reclassifying between long-term empty homes and second homes, and some of the empty homes officers are doing that. That's now recorded the difference between the two, and it's much more accurate. Also, the local authorities report and whether or not they are applying the additional council tax on the long-term empty homes, so we can monitor that and how much local authorities collect in from that, from doing that. That has been monitored in terms of empty homes. It's about nine local authorities that are implementing it in full. Nine local authorities are implementing the full increase. Three are doing a staged increase, and another one is doing it halfway through the year at the moment, so that is all recorded and that can be monitored. It is being monitored. Is the Scottish Government encouraging local authorities to impose the legislation with full 100 per cent increases, or is it allowing the local authorities to do their own thing to speak as they see fit? It's very much up to local authorities. There's a lot of flexibility around the legislation, and it's about where local authorities feel that in their area it is something that they should be doing. I think that Argyll and Bute were very supportive of the legislation from the outset that they felt they had so many empty homes, and their priority was bringing them back into use, not about getting additional resources. A number of other local authorities through the empty homes partnerships are working on that as well now, but it has to be recognised that there are some areas where it wouldn't be appropriate to let properties, where it wouldn't be appropriate for the local authority to apply that piece of legislation, so there's a lot of flexibility around it. I could come in on the ANDR side in monitoring. There is a lot of data collected here. We have the valuation rules, council returns and trend lines that took a fairly noticeable dip in the first year of effect for the numbers of unoccupied properties and the figures that I've already related to for relief. The important thing to consider when you're trying to monitor this and separate it out is that there are a lot of reliefs at play. There's £618 million worth of reliefs, and it may be the case that in some cases a property is brought back into use, but then triggers a small business bonus or a charity relief or so on. It can be quite hard to disentangle exactly where the change is arising from, but the trend that is there is pretty firm, is pretty obvious, and it's an evident one-year change. We believe that it fits in with the estimates that are put out in the financial memorandum and that we are seeing those happen. In terms of what the bill is trying to achieve, the finance committee set a number of questions to local authorities, for example. I'm looking at North Ayrshire because both Margaret and I are MSPs for that area, but we obviously have others here. We asked what extent can any changes be attributed to the empty property relief reforms, as distinct from wider economic factors? North Ayrshire said that there is no evidence to suggest the change in the empty charge from 50 to 90 per cent that is encouraged in order to sell a lease of empty commercial properties. Aberdeenshire said no evidence. Angus said no evidence. Most of the other local authorities said no evidence. We also asked a similar question. Is there any evidence to suggest that reforms have an impact on speculative development and on regeneration activity? North Ayrshire said no evidence to suggest reforms have an impact on speculative development or regeneration activity. Angus said no evidence. Aberdeenshire said no evidence. I realise that the legislation has not been out for a very long time, but there are not some concerns that the Scottish Common Government has. There is nothing to suggest that the legislation itself has much of an impact. It seems to be a general restoration of economic fortunes that have reduced the amount of empty properties. When you look at the objectives of the bill, in part it was to better target reliefs and, in part, it was to deal with the empty properties issue. It may well be that in individual local authorities that are looking at a small piece of the overall cake, they are not seeing the overall effect. The long-term trend line—I have a graph that I would be very happy to provide in writing to you—showed a significant dip in the percentage of unoccupied properties on the valuation roll. That is collected by looking at the data from across Scotland. You can question how much one local authority is dealing with the whole range of businesses that will be involved, the whole range of considerations. That is not a great sweeping measure that was going to wipe out all empty property relief and try to fill every property overnight. That was an incremental step to target those reliefs that we provide more accurately. As a result, we have lower contributions in empty property relief and we have signs across the country of properties moving back into use. I believe that, in response to question 3, North Ayrshire did highlight that they had 26 commercial properties coming back into use. They might not be able to allocate the exact reason for that, based on their own analytical resources and their own contacts, but when you have that picture happening across the country, you are seeing something that is incremental, yes, but positive. The issue is whether that is due to the legislation that is due to the economy picking up. That is one of the things that we are trying to pin down. One of the issues that Spice has brought to our attention is that there was not really a baseline for the number of vacancy rates in the first place, so it is hard to see where there is an impact. I will ask another question to move on a wee bit, because I like colleagues in here given time constraints this morning. That is with regard to pop-up shops. Highland council referred to an increased number of pop-up shops, which felt maybe a response to changes to empty property relief. Again, North Ayrshire council talked about the fact that one property is being used for storage purposes for six weeks, then claims a further three-month 100 per cent paid in accordance with legislation, etc. Do you have concerns about the possibility of people developing ways around that legislation? If so, are there any proposals that the Scottish Government might have to try and counter that? Whenever you try and raise revenue, people will try and find ways to get around the system or to make the system most advantageous for them. Let's not rule out pop-up shops as a terrible thing. Those protections for three-month leases were put in with fine intentions. If there are expansions of that, if it is being misused, that is something that we would be considering as part of our own post-legislative scrutiny and any evidence that the committee finds in this process would help to inform us, and that would be something that we would be keeping under review. One or two local authorities, just a final question before I open out to colleagues, is concerned about additional costs. In western Bartonshire, who has to be honest in terms of the evidence and a whole series of legislation often raise concerns about additional costs to more than maybe other local authorities, but that is notwithstanding. They have said that they have additional costs of approximately £45,000 per year on year, and they do not seem to say that the legislations had had much evidence of a positive impact, but their cost basis increased. What would you say to local authorities like that? In your review, are you going to be looking at the impact on local authorities in terms of additional costs that this legislation is imposing on them? There is a varied picture. Argyll and Bute quantified its costs as being lower than that of the financial memorandum, so there is a broad range of views out there, and I do not know exactly what Easton-Bartonshire has done that has caused their costs to go up while others have perhaps caused them to go down. That would be something that again would be worthy of review, but if there are local authorities out there that have managed to do that sufficiently, local authorities should be looking at each other to find good practice in collection. Thanks, convener. Perhaps following on from some of the questions that we had already, the point has been made that only one authority on council tax, which was the Western Isles, brought the full powers in absolutely immediately. Was that disappointing, or was that just to be expected, or does it matter? No, I do not think that, from the Government's point of view, it was disappointing at the time it was introduced. It was something new. Local authorities had been looking for it. It was never meant to be something that was prescriptive by government on to councils. It was to encourage local authorities to look at empty homes and how they could be brought back into use and to give them another tool to do so. For those local authorities that want to use that tool, it is there for them. That is what it is about, and there is much more of a focus on bringing empty homes back into use. That is another tool in the toolbox. I do not know whether I have anticipated it, but some local authorities are taking a bit of time to think about it and introduce it gradually and so on, which seems to make sense to me. Have you any idea when would be a good time to look back? Are we looking at this too soon as my ultimate question? Should we wait maybe say five years and then look back and we get a better picture? Is that too late because we might want to tweak things before then? I think that it is something that should be looked at in stages. I think that it is looking at it just now. It is a useful exercise to look at it just now to see what local authorities are doing, to see the benefits of it, the projections that we have, but certainly it is too early to make any real indication of the impact of it at this stage, given that the 16 authorities applying it last year was 14 the year before that was just one. We have to look at it over a longer period to see the impact. For councils, that is not about raising revenue. It is about bringing much-needed homes back into use for people who need them. Presumably that is a bigger question than some local authorities and others. You are not anticipating that all 32 will actually act on this, are you? No, I do not necessarily see that all 32 will be acting on it. More and more councils are using this tool and, as we have the empty homes partnerships and their working together in sharing good practice, it may be something that a local authority had previously thought was something that they would not want to do or not necessarily benefit to them. They may see benefits when they see what is happening in other local authority areas. It is about sharing that and getting that message out there. I think that that is happening through the empty homes partnerships. The whole question of when can we really get a good view of this? Some of us feel this is quite early to be looking at it. You said that there is a dip in your trend or whatever it is, but there are other things happening. The economy is maybe growing a little bit. There are different things happening. When do you think that we can get a really good view of this? There is the old saying about the French revolution that we are still trying to work out what the consequences are now. You can take a point to any point in the future and look back with ever greater information. At the moment, we have just a mid-year estimate for 2014-15, whereas we have the full figures for 2013-14. Once we have at least two proper data points, we have some better understanding of trends and we can work with that rather than simply working with estimates. That is the reason why we are doing our post-legislative scrutiny on the NDR site this year when that sort of data is available. You can wait two more years and get two more data points and continue to analyse with an even more informed position. It is really when you want to draw the line and say that this is the appropriate time. I think that this is a little on the early side, but it is certainly valuable to be able to canvas opinions to gather what data there is and to look at it. Post-legislative scrutiny in general is something that we welcome. I think that one of the challenges is what is the right time to look at it. Just following up, the convener mentioned Westin Bartonshire. I was also interested in their paper. It does not go into huge detail, but it seems to be that they have set aside certain property and are going to do redevelopment, so they are deliberately holding on to certain empty properties because they want to put a few together. Have they been caught unexpectedly by this legislation that they are sitting in empty property for a good reason or is this just one of the things that we would have expected to happen? Is that an NDR measure that I am not familiar with? Yes, I think so. They talk about a medical centre, for example, which is very difficult for them to let as anything else. I think that they are just taking time over that, but there is obviously pressure on them to immediately be paying rates. Westin Bartonshire has some particular issues with regard to occupancy in both the non-domestic and the domestic sectors. They are noted for having a relatively large proportion of their properties that are hard to let, whether that is domestic or non-domestic. That is clearly an issue for them. At the same time, the purpose of the legislation is to incentivise and to get people thinking about alternative uses and to get these things back on the market as much as possible. You have to ask where does that become too far and where is that at the right level of pressure and the right level of stick? Without knowing exactly the local circumstances in Westin Bartonshire, there are 32 sets of local circumstances here. I would not be able to comment on exactly the issues that are facing them, but the aim here is to come up with alternative uses and to be able to bring those buildings back into use. I would hope that there would be ways. Fair enough. If you can assure us that you would be listening to the local authorities and if there was any area that was being caught that maybe we hadn't intended that you would be open to looking at them. Yes, indeed. We would be open to that in our own review and, in general, in dialogue with local authorities. I have met Westin Bartonshire Council on other issues, on general issues, on introductory issues, and I have had correspondence with them on a range of issues that were financial in nature. This has not been something that they have raised, so it may not be at the top of their concerns themselves. That is great. Thank you very much. A couple of questions about the non-domestic rates. The convener mentioned the lack of evidence in terms of impact on speculative development. I seem to remember during the evidence-taking that one of the concerns that was raised at the time was that this would act as a deterrent to speculative development. Do you think that it is maybe a bit early for us to be saying categorically that that has been the case, or is there evidence that, within the sort of year and a bit that you've got information for, that speculative developments that were likely to take place have continued to do so? That's probably something that's more collected in information terms at the local authority level. We have been in dialogue with local authorities and, in particular, Fresh Start and New Start, they have been put in place to try and deal with the innovative, the risk-taking, the entrepreneurial side to property development to allow these new developments to continue. I represent Edinburgh Central, and I remember when the bill was being proposed, business centres in particular were having a lot of issues because they were having people coming in and coming out. This is something that the Government has listened to and, by putting those two measures in place, I think that we have addressed that. Indeed, by doing that through regulations rather than straight away, it shows that we have been willing to adapt that in light of evidence that has come forward. In terms of the broad picture on speculative development, while speculative development tends to have very long horizons for planning, it tends to have very substantial numbers of considerations at play. I would definitely say that it's too early to tell overall the impact, but we have been happy to take steps to try and address that and to force all that happening. I always took the view during the evidence-taking and the debate around the legislation that you couldn't view those measures in and of themselves as some sort of magic bullet and that they would interact with other circumstances, for example, the wider economic situation. Do you think that it is possible to completely disaggregate the impact of those measures from other factors, or do you think that it's a case of those measures being complementary to other factors in perhaps bringing properties back into use quicker? We have a multiplicity of factors pulling mostly in the same direction now. If that had happened four or five years ago, the committee might have been faced with a flat situation whereby the removal of relief would be pushing towards filling the properties and the economic circumstances would be pushing in the opposite direction, and you might have ended up looking at it and saying, well, nothing is happening. Now we have two factors broadly that are pushing in the same direction, so it's always going to be hard through a simple look at the numbers to be able to say exactly what that difference is, but you've got a £22.6 million drop in the relief. The estimate that we had originally was 18 when you factor in some of the things that you can assess quantitative terms in terms of other reliefs changing poundages, there is still a fairly large chunk there that is in the vicinity of the £18 million that was the objective to try and realise, so you could perform interviews with every single owner of property across the country, you could go into all kinds of possibly disproportionate scale of research to try and tease out the mental processes and the decision making, and assuming everybody was taking it their word for that and weren't being commercially sensitive and commercially confidential, you might have something, or you can look at the numbers and say, there's been a drop, and under the principle that the fairly obvious factor that has come into play in that period is the removal of the empty properties relief by and large, then that is the by far the likely suspect and anybody who wants to try and prove otherwise really has a case to make there. Just turning finally to the long-term empty dwellings, and I'm just looking at a table here which shows sort of numbers of empty dwellings per local authority, and there are obviously some local authorities which have quite high levels of empty dwellings but don't appear to have taken any action at this stage to implement the changes to the reliefs that the Government has put in place. Has there been any indication as to why, for example, Glasgow City, for example, don't appear to have taken those steps according to the table that I'm looking at, but yet they have in excess of 2,000 long-term empty dwellings? It's not something that the Government has looked at at this point, and it would depend on some instances of the spreads all around the city for that. If they were in one area, for example, they could exempt that particular area from the additional charge, but if they're spread around the city in among hard-to-let areas, areas of regeneration where people are being moved from properties to another property, it may not be appropriate at that point to apply the charge, but we do have now, we're working in partnership with Glasgow through the empty homes process to look at what can be done, but they have to look at mean local authorities can use discretion. They've got to look and say, is this appropriate just now at this place, and if it's just pockets throughout the city and it's hard to let properties, how do they actually exempt areas where there's clearly issues in some areas that they may not want to, it may not be appropriate to apply the charge? Certainly, that may be something that, if the committee wishes, it may be something that we would want to follow up as the legislation progresses. If some authorities are not picking up at all, we can certainly look at the reasons why they're doing it, but there can be a variety of reasons, and it is about flexibility. In terms of the headline figures, it looks as if the financial memorandum was more accurate in its predictions in relation to the non-domestic rates in the council tax. If we can just start with the council tax, the costings in the financial memorandum assumed that all local authorities would apply the maximum 100 per cent increase for eligible empty properties, and that's not actually happened. Did the Government at the time actually ask local authorities or on what was that assumption based, as it were? It was the assumption that looked at, if, for example, as you rightly pointed out, that the financial memorandum was based on every local authority applying the full 100 per cent charge, and that it was based on very limited information that we had at the time, that around 70 per cent of properties would be empty for a year or more, and that's not the case. Also, local authorities are looking at it and putting the flexibilities in. At the time, whether local authorities were asked about that, we had to make an estimate in the financial memorandum, and it seemed appropriate to take it to that level of what could be additional resources within local authorities. At the time, Alex Neil made it very clear and said that it was not about the resources, it was about bringing empty homes back into use. That is really what this was about, the focus was in bringing homes into use, not about councils raising additional resources. I think that councils have been clear on that and have also been very supportive of having that tool to do that, should they wish to use it. Councils were certainly asked at the time if they were going to use the power, but at that time, quite rightly, they wanted to see what was proposed on the regulations before they would commit to that, given that the primary legislation was primarily on enabling power and the regulations then set out how it would work in practice and that they had factored that into their business planning. The minister said that the key issue was the reduction in the number of long-term empty homes. Again, the financial memorandum assumed a reduction of 10 per cent, and, in fact, there has only been—what you are at an evidence suggests—a net reduction of 5 per cent. Again, even on that criteria, it seems to have been—I do not know whether—it is almost as if there are two overestimates going on and there it is going to save more money and it is going to release more homes, and yet it seems to be very significantly out on both counters. That is a 5 per cent reduction in empty homes over the authorities that are applying it, if I am correct and saying that over the local authorities that are applying the increase. It is a tool that is early in the stage. It has been used in conjunction with the empty homes partnership and the empty homes officers. Together, we are estimating an increase of 1,200 empty homes a year being brought back into use. We hope to see that very soon. That is significant. Local authorities are now looking at it. They are now reclassifying between empty homes and second homes. They have spent a lot of time and effort in the first couple of years doing that. That is what the empty homes officers have come to see. What is an empty home, a long-term empty home, where a charge should be applied if the local authorities are applying it, or what is a second home? That is part of the work that is early in the process. It was based on every local authority applying a charge at 100 per cent, and that is not what has happened. They have had to look at the flexibility, the circumstances and areas where, for example, if properties are hard to let, is it appropriate to apply a charge there when they are going to be lying empty for perhaps longer than they wanted? Just moving on to the non-domestic rates, the minister said that the savings were in reasonable agreement with the original estimate. I suppose that we have already been over the territory to some extent, but to what extent is that by chance, or to what extent is there a causal relationship there? I always like to think that the estimates are good and that if we get numbers that add up, I do not immediately go looking for nefarious reasons to suggest that somebody was at fault. It is interesting, though, that one of the points that was raised before about whether we are too early for the post-legislative scrutiny is that there are lessons in the financial memorandum where the estimates for 2012-13 that were available at the time proved to be a little bit different to what the actual figures were. 152 was in the financial memorandum and 169 was the actual outturn. However, we have moved down from 169 to 146, which, as I said before, in terms of its scale is broadly where the financial memorandum was. We had the issue on this one, of course, that it was imposed in the same way across the country rather than simply being introduced in a local authority by local authority basis. Perhaps that meant that those projections were always going to be a little bit firmer. I noticed your reference to Moutsey Toon's thoughts on the French Revolution, but do you think that, years down the line, it will be easier to know whether there is a causal relationship or is it always going to be a bit uncertain because it is related to the economic circumstances, et cetera, or could that become clearer as the economy becomes more stable? The more data points you have, the easier it is to model the different factors that are active on it. I think that any economist would tell you that or accountant. However, as I said before, I see what we predicted happening, and I am fairly relaxed about that. The relationship with other reliefs—again, is there any causal relationship, for example, in terms of the increase in the small business bonus reliefs associated with that? They seem to have gone up quite a lot over a two-year period, while the unoccupied property one went in the opposite direction. Is there any relationship there in your opinion? We have estimated that there is about £4 million additional on the small business bonus relief as a result of small business properties coming back into use. Other changes in that will be down to other factors. I think that empty homes must be just about the worst thing that we can have in a country where housing is such a priority for us. I noticed in the SPICE briefing that it says that without information coming from much larger conurbations, such as Glasgow and Edinburgh, where the population is, it is difficult to use the evidence that we have where the largest number of properties are. Do we still have incentives for district councils to help to bring some of those homes? Some of them are in really poor condition and so on. How do we measure that? Do you have that kind of information that says that, of the 2,000 homes in Glasgow or whatever, there are empty properties? How many of them will it be viable? Is there ongoing work to reduce that? I do not have exactly off the top head. There is ongoing work throughout Scotland in every local authority area to reduce the number of empty homes. I would have to go back and check if some of the ones in Glasgow are due for demolition as part of the transformational regeneration work that has gone on in Glasgow. There will be empty homes that will be empty and not intended to be filled, but the Scottish Government has a number of incentives to local authorities to bring empty homes back into use. That includes the empty homes partnerships and the empty homes officers. We are about to launch the Town Centre empty homes fund. We had a loan fund to bring empty homes back into use, which was used and has brought a number back into use. I am more than willing to go away from today in terms of the point of empty homes and look at some of the points that you make in Glasgow that was raised earlier. If there is something more that the Scottish Government can do to assist or get more detail of why the homes are empty, I am sure that that information will be there somewhere within the Scottish Government statistics, but not necessarily sitting within the council tax, because there are a number of factors about empty properties. However, it is the priority for all of us to get them brought back into use because there are blight in the community, as well as a home that is not in use, which is not helping them do that is homeless. On the Glasgow point, Shelter Scotland, through the empty homes partnership in Glasgow Council, is looking at some preparatory work as to how it could have a joint effort between Glasgow City Council and GHA to look at a possibility of a shared empty homes officer, potentially with funding from the Scottish Government. Edinburgh City Council has an empty homes officer in place and they are making great strides in trying to target those problem-empty homes. Edinburgh City Council has an empty homes loan fund operating. Glasgow City Council, through GHA and another RSL, also had a share of that and brought over 23 homes back into use through that funding. So, behind the scenes, there is some significant work going on in both Edinburgh and Glasgow. Good. On the non-domestic rates, as I remember the debate that we had in the chamber, the Conservatives got very excited about the property owners being outraged that they would have to, in a period of recession and so on, that we were being very hard on the owners of property and being able to pay this amount of money. Have you had a lot of representation in that respect from people, individuals? I think that there was certainly a strong representation during the passage of the bill, but I may have to defer to my official on that since then. No, not particularly. Clearly, when we come to do our review this year, we will be engaging stakeholders and seeking their views on that, but it has not been particularly prominent since the passage of the bill. Thank you very much. That appears to have exhausted the questions from colleagues around the table. Are there any further points that any of our ministers would like to make to commit at this stage? Thank you very much for your contributions this morning. I am now going to call a five-minute suspension in order to have a change-over of witnesses and give members a natural break. First, let's reconvene the session. We're nice and early, so we'll get plenty of time to ruthlessly interrogate our witnesses today. Not that that's going to be the plan. We will be asking a number of questions from two very fascinating papers. I'll just open, though, by saying to Jim that your hope of indexation in relative population growth equation caused a lot of chat in the pub last night. A lot of the lads were disputing some of the actual equation findings. No doubt we'll continue that tonight while watching the football. Let's go straight into it with the formal proceedings. Our next item of business today is to take evidence as part of our inquiry into Scotland's fiscal framework. Therefore, I'd like to welcome to the meeting Jim Cuthbert of the Jim Reid Foundation and John McClearn of Fiscal Affairs Scotland. Members have received papers from both of our witnesses who will move straight to questions from the committee with myself opening first. A lot of the questions I'm going to ask you, you've actually provided detail of some of the answers in the papers, but obviously for the record and for discussion purposes, I'm going to be asking some of those questions anyway, just in case you wonder if I've actually read your paper. I can assure you that I've read both of your papers, but I would like to expand on some of the issues here. First of all, in your introduction, Dr Cuthbert, you talk about, you say that it's extremely difficult to see how the Smith commission of proposals can be implemented in a fair and equitable way without adverse unintended consequences and less deep-rooted reforms in the constitutional and funding arrangements of Westminster that are also implemented in the morning in great detail to explain yourself. I'm just wondering to start off in terms of that. I wonder if you can talk about the no detriment principle as you understand it and the impact you believe that would have on public expenditure in Scotland. Sorry, I should say Dr McClaren. Once obviously Dr Cuthbert has answered, I'd be more than happy for you to respond to his comments and I would be asking Dr Cuthbert to respond to yours if he so wish. As he explained in the paper, there appears to be a basic problem if you let changes in rest of UK income tax affect public expenditure on reserved services in the UK as a whole, and I call that the gearing problem in the paper. The Smith commission didn't specifically mention that problem in their report, but on the other hand, it brought in the principle that changes in public expenditure, sorry, changes in taxes in the rest of the UK, which are devolved to Scotland, should not affect public expenditure in Scotland and conversely. That principle, I would argue, is difficult to implement properly unless you bring something out of full federalism. The way in which the command 8.990 proposals implement that paper is spelled out in that particular clause 2.144 or whatever. What I do in the answer to question 5 is to spell out how that might actually work. On the assumption that the gearing problem has been satisfactory and removed, somehow the rest of UK income tax receipts have been devolved to services in the rest of the UK. Even if that has been achieved, which I would regard as a very difficult thing to achieve, you still have the implications of that particular clause, the no detriment principle 2.4.14. What that says is that when there is a change in taxation in the rest of the UK, a policy change in taxation in the rest of the UK, if the proceeds of that are hypothecated to devolved services in the rest of the UK, I put devolved in those services in the rest of the UK, which are devolved in Scotland, that will have an effect on public expenditure on devolved services, and there will be barren at consequentials. What 2.4.14 says is that there should be an adjustment to the block grant to cancel out those effects so that there is no overall effect on public expenditure in Scotland from the policy change in income elsewhere. The example that we give naturally is Trident. If the rest of the UK Government decided to increase income tax to fund extra spending on Trident, then since that is reserved expenditure covering the whole of the UK, Scotland, given the current GERS methodology, would be attributed to population share of that. Overall, public expenditure in Scotland would have gone up by that amount, so to prevent that happening in line with the 2.4.14 principle, there would need to be a reduction in Scotland's block grant to which the Scottish Government could either respond by cutting devolved services here or by increasing income tax. That seems to be an unacceptable position and one that runs quite counter to what we might regard as the principle of Smith that we would be in charge of our own income tax and be able to make those decisions. In a sense, there would be a mechanism here whereby decisions made by the rest of the UK Government would, in a sense, yank the chain of the Scottish Government and force it to react either by increasing tax or cutting devolved services. That is the mechanism that is spelled out here and seems to be an unacceptable mechanism in terms of what the Scottish people thought they were getting out of the Smith reforms. Dr McClearn, what is your view on that particular issue? That is a correct interpretation. However, if that is seen as unacceptable, then if you reverse it and say that the UK wanted to increase spending on something like Trident, or defence, or foreign affairs, and that money only came, and that was obviously that the benefits would be spread across the UK, and that was only to come from the rest of the UK tax rises, then that would be a free lunch for Scotland. That would perhaps be seen as more unacceptable in certain parts of the UK. Inevitably, there is not going to be a perfect solution to that, although it will be things and roundabouts and compromise needed. I think that Smith knew that people discussing and agreeing with Smith knew that that would be what was happening if they did not go into the implications very far. I think that the parties who were discussing that internally or agreed to that would be what would happen in practice. I am not sure how it would be a free lunch for Scotland. If the rest of the UK raises its income tax to spend on Trident and Scotland does not raise its income tax, or to spend on ground force troops, then Scotland does not pay for the extra troops. That is not an advantage that you do not pay for. I think that we are getting into questions of democracy there and questions of where decisions are taken. I used the Trident example specifically in this paper, because that is one that will clearly be counter to what a majority of people in Scotland would wish. Effectively, if the decision is being taken by whoever is deciding to raise the rest of the UK income tax Westminster or sub-Westminster chamber, which is forcing actions upon the Scottish Government, and John Smith has an increase in Trident. It would be a free lunch for Scotland. Clearly, the majority of the population in Scotland would not regard that as a free lunch, they would regard that as a penalty, which they were then being forced to pay for. I think that we are getting into questions of where decisions are taken and the nature of decisions are being taken. That comes right back to the fundamental point that one of the fundamental points I am making in this paper, which is that, really, if this is going to work properly, you would need some sort of federal system. You could not have, essentially, South Parliament making decisions that were forcing upon Scotland things like increases in Trident and forcing them to pay for them. Another point that I made here is forcing them to pay for them away, which goes beyond what happened at present. If Westminster decides to fund Trident by raising income tax, what Scotland will pay will be what that rise in income tax would yield over Scotland. Under the new system, what we would have to pay would be the population share of the increase in expenditure. Given that our income tax seats are lower than our population share, we are actually being forced to pay more than under the present system for such a change. However, the fundamental thing is what sort of decisions are being taken and by what chamber. Our satisfactory resolution to that, to my mind, would involve there being some sort of overarching federal parliament who would make those decisions, jointly in the names of all parts of the UK. Then, questions about our UK income tax would have to affect only England and the other parts of the UK. The only feasible way of doing that, really, is to think of there being separate block grants to the different parts of the UK with own resources on top of that being a matter for separate chambers for those different parts. However, as soon as you bring together the chamber that is making the decisions about the rest of the UK block grant and Trident, you are really getting back to the sort of unacceptable situation that we are in at present. It is difficult to see how the problems can be resolved without that sort of separation of decision making. We are where we are and whether federalism comes up on the agenda post May is another issue, but we really have to look at what we have at the moment and where we are going forward. Dr McLaren, in your paper you say that with regard to no detriment principle, one of the key issues relates to the position where the raising of existing taxes is not equally spread across the UK. In fact, Dr Cuthbert comments something similar. In his paper, for example, Scotland's share of income tax is not the lowest population share. I am just wondering how you feel this is likely to impact on Scotland in terms of the Smith proposals. If, as has happened in periods of recent history, the wealthier become richer quicker than the majority of the population, then more of income tax will come from higher earners. I think that already the top 10% contribute about 50% of income tax. Scotland has noticeably less of the richer people higher tax payers than the UK as a whole, which is why in GERS Scotland's income tax contribution is 7.3% rather than its population share of 8.3%. That means that the UK income tax is likely to grow quicker if it is still the richer people whose earnings grow quicker. That could have a knock-on effect. If you are adjusting that by population, you are taking more money away from Scotland than it would be raising an income tax itself. Like a number of issues here, some of those things take a bit of time to get in your head. I mean, I have done the same thing myself. If I need to explain myself again, feel free to do so because those are not equally when you ask me questions. I will probably take a while to answer some of them, because those are kind of mind-meld questions sometimes. There is a reverse to that, which could be that if Scotland decided to cut a higher rate of income tax significantly, that might act as an attractor for wealthier people in London to move to Scotland and disproportionately increase the income tax that is raised in Scotland. Equally, it might lose even more if it decided to raise the higher rate of income tax to above what happens in the rest of the UK. However, because so much money in income tax comes from that higher rate, it is quite a key issue whether you win or you lose. Recent history suggests that Scotland would lose because it has been the higher rate of income tax that has been the prime generator of any increases in UK income tax. Yes, I agree with all that. I think that I put a slight gloss on it and say that it is very difficult to project how relative income tax receipts will move, and history has shown that it has been a fairly volatile tax. John Smith said that we have to take a long-term view, and because of the differences in the income tax base and the many fewer of the high-earning salaries in Scotland, what one can say is that there will definitely be periods when the tax base in Scotland grows less fast, and then, under Hulton indexation, Scotland will be penalised. The danger is that, if, once such a period starts, the Scottish Government would have to react either by cutting services or by raising tax. There is a danger that taxes would be raised, which would have detrimental knock-on detrimental effect on the economy, which would further damage the tax base, and you would get into a self-perpetuating cycle of relative decline. The two points that I would make would really be this place to the wisdom of the choice of income tax as being the primary vehicle for giving Scotland fiscal responsibility. It brings in the question of Hulton indexation as being vitally important, and it also brings in the question of whether Scotland will be able to grow its economy. I mean, the solution to this is, can Scotland get the economy moving on a par with the rest of the UK? But Scotland actually has relatively few economic powers to enable it to do that. I mean, the phrase that we tend to use about this whole Smith proposal is, responsibility for living within your tax base without the power to do much to influence that tax base. So, you know, there are deep issues here about the proponies of income tax, about the indexation and about the other powers that are necessary if this thing is going to work and avoid the danger of Scotland slipping into, you know, a virtually permanent cycle of the relative economic decline. Okay, a brief supplementary on that mark. I was just looking to come in. Exactly, so I thought you wanted to ask a specific point. Following on from that, Dr Cull, you say, it's impossible to implement a satisfactory Scottish fiscal framework in the absence of fundamental UK changes, and you've already touched on that. You say, the technical complexities of satisfactorily implementing the arrangements that are currently proposed are so great that it is likely to prove impossible to operate the resulting system in a fair, transparent and exceptional manner. Now, it may be that we're trying to excuse a quite interpine plot, but obviously we have the Smith proposals as they are. How can we, therefore, optimise those in Scotland's interests, assuming that it is the Smith commission proposals that are implemented after the election, not any further change in powers? I understand that the indexation arrangements for the abatement of the block grant are not yet set in stone. The one specific proposal that goes back to the famous annex, and I note also that John Mason makes the same proposal in his paper, is that rather than indexing the abatement for income tax in line with the movement in the whole UK tax base, it would be done in terms of the per capita tax base. I think that that would be a potentially important step. It won't solve the problem, but it's something that nevertheless should be done. Given the arrangements that are not set in stone, the arrangements for reviewing what is happening are very important. A point that is made in Jim Reid's paper is that the arrangement being mechanical is not necessarily a good thing. We are, after all, in a monetary union. A point that was made ad nauseam in the referendum campaign was that monetary union implies political union. You cannot operate a monetary union without mechanisms for fiscal transfer. That is not arguing that the previous arrangements that we had were satisfactory for the oil receipts that went out of Scotland without being noticed, and we got inadequately compensated by Barnett in response. I'm not saying that the previous arrangements were good, but we're in danger of moving to a situation where the arrangements for fiscal transfers within a monetary union are seriously weakened. Scotland could find itself in a position even worse than Greece, where it's in a malfunctioning monetary union with inadequate arrangements for fiscal transfers, but without control of its own resources and economic policies. I think that arguing for appropriate oversight mechanisms would have to be high-level mechanisms where, at a high political level, a view was taken about the total flows of resources in the UK and, if the economic pressure within the different parts of the UK—whether that was just or not—and adjustments were made, would be one thing that, as long as we are in the monetary union, we should be arguing for. Thank you for that. Dr McClearn, just on those points that I've raised with Dr Cuthbert in a fair, transparent, acceptable manner, how can that be delivered within the arrangements that is proposed by Smith? As I've said in my submission, you have to define what each of those things are. Transparent is fairly obvious, but, again, there are degrees of transparency. Fair, people's interpretation of what fair is, will vary. Effective, again, what is effective. Mechanical, I think that both Jim and I have said that you probably don't want something that's mechanical. You want it to be reasonably mechanical, but not wholly mechanical. This is one of the big things that was left over that the Smith commission didn't do. It got a political agreement to something, but it didn't explain what the economic and fiscal rationale was for that package, possibly because there was none. That makes it difficult to say why you are doing those things and then defend something and say what the perfect way of implementing it is because you can't go back to a basic set of principles or rationale for them in the first place. From the Scottish end, if you define or clearly what you believe those things to be, what are the elements of prioritisation in them, that would help. Clearly, the things that you need to look out for for Scotland that Jim and I have brought up in their papers are the issue over income tax, Scotland's relative position on that population change. I feel that that's not straightforward because if Scotland was to do particularly well through implementing what powers it has, it would actually want the population element to work in your favour, as it works against us at the minute, but it could work in our favour. Without perhaps the more powers towards immigration, that's perhaps not something that's likely to rise in the short term. The demographics, which are as well as the population working against Scotland, the two are related. The last point that I would make on this is that Scotland needs to, if you like, arm itself as best it can. By that, I mean that a Scottish OBR, Office of Budget Responsibility, and a beefed-up Scottish Finance Department, more like a Scottish Treasury, will be in a position that the inevitable negotiation, because there is so much uncertainty here, will take place that the Scottish side of it has sufficient or better ammunition than the other side in terms of determining what would be fair and what are the likely consequences of something happening. Although Barnett is fairly mechanical, that happened even under Barnett. A classic example that I have used before is that to work out the consequentials, you had to decide whether something that was in place in the rest of the UK also happened in Scotland. When a lot of money was being put into the underground, there was the claim from the Treasury that no money should go to Scotland because there was no consequentials until somebody pointed out that Glasgow had its own underground. There was a settlement made, and that again is not mechanical. That is a pretty obvious one, but there will be other areas where you need to know the detail in what will ultimately be some form of negotiation. Fairness is surely what does not be detrimental to both the UK and Scotland, but the issue is how he chuds that. Sticking with you, Dr McLean, because you touched on the issue of population changes, you said that any adjustment process might want to move in line with changes in UK income tax per capita. The downside is that it does not allow Scotland to benefit from a net migration rise through being seen as a more attractive place to live and work. I am just wondering if you can comment a bit further on that. The hope, even in a partial form of greater devolution, but short of full fiscal autonomy or independence, is that those extra powers, along with the existing powers over economic spending in areas like that, will improve Scotland's economic performance, and, through that, make it a more attractive place to come and work, therefore attract more migrants into Scotland and therefore raise its population. Now, if that worked, Scotland's income tax would be rising faster than the UK's, so you would not want it to be per person adjusted. You would want to take all that benefit yourself. The difficulty is, A, getting the growth rate up and, B, getting increased migration when the migration targets are, in part, still retained by the UK Government rather than the Scottish Government, which might want more laxer restrictions on who can come into Scotland. That is the potential, but also the drawback and the current position of it being realised. I disagree slightly with that, because there is probably an asymmetry in that. If we are in a position of relative decline, it is important to avoid that at all costs. If we were in a position where we got the economy turned round and it was going faster than the rest of the UK, I do not think that we would necessarily want to grab all the benefits for ourselves. In those circumstances, the economy would be prospering and we would be having all sorts of beneficial multiplier effects, and we would not be worried too much if we were losing out slightly, because Holtum indexation was still on a per capita basis. Both in the spirit of operating a proper monetary union and in nature of real politics, there is an asymmetry here, and it is more damaging to be caught into a cycle of relative decline than to lose out slightly in population indexation if our economy was booming. I will touch on one more area, because I want to let colleagues come in, and all of them want to come in. Again, Dr Clifford, on your own paper, you have talked to me about, and I quote, the Treasury has signally failed to operate the Banat formula transparently, over other witnesses who have said something similar over recent months. You talk about the Treasury funding statement, which indicates a fairly detailed level, which items of expenditure reserved are disballed. You also talk about the public expenditure statistical analysis, and you talk about these databases, TFS and PESA, and not being aligned. Therefore, it is not possible to calculate or learn by fairly crude estimates what the out turn expenditure for England has been on those services that are devolved respectively to Scotland, etc. I am just wondering what impact do you feel that it would have if those were aligned and that there was greater transparency in how that could enhance Scotland's fiscal position? I think that it would have had a huge impact upon the economic and political debate in the past, because there is always room for argument about to what extent the Banat formula was delivering conversions of per capita spend or not. It should have been much clearer what was happening in the past, and if it had been clearer, things would have moved forward differently. However, it is not just that—that is just one suggestion. The whole process of setting Scotland's block grant should be open and transparent, and we can see a couple of examples of how things have gone very badly wrong in the past. One example is the paper by the Institute for Fiscal Studies on how non-domestic rates were handled in the Banat formula, and they argue that Scotland has benefited to the tune of £1 billion because of mistakes that the Treasury made, which were not at all apparent. I do not know whether their figures are right, but, certainly, there is room for a huge argument there about whether we benefited unduly or not, which would not have happened if the system had been plain and open. Another one, going further back, was the one that we identified some years ago, which is that the way that European structural fund receipts were handled in the Banat formula in the penalised Scotland, we argued to the tune of £1 billion. Officials in the Scottish Government agreed with us that that, indeed, was the order of magnitude to which Scotland had suffered. In the past, the lack of transparency has meant that there have been mistakes, probably on both sides, which have been huge. That was in the days when we just had the Banat formula. We are now moving into this much more complicated system whereby we are still trying to link changes in the block grant to public expenditure in the rest of the UK or in England, while, at the same time, parts of that public expenditure we want to discount because it is public funded by our own resources in England. Trying to work around that is horrendously complex. If, in the past system, we did not know what was happening to the tune of mio billions either way, in future, the potential for argument and the potential for mistakes is going to be immense. It looks like almost an unworkable system. It certainly looks like one that is fraught with difficulty and dispute. Dr Lam, can you comment on that issue? In your own paper, you talk about the convergence feature that remains part of our revised Banat formula, with no lower limit over how close the spending per head levels can get. On the transparency issue, although there are problems with transparency over Barnett, there will be as nothing in comparison to what will be in place with this much more complicated situation, unless a very simple form of it is introduced at which point fairness might be an issue. With regard to the IFS figures, I discussed those in great detail with David Phillips. I think that they are right, but it was not intended that way. It could have happened the other way around. Scotland could have lost out and may still lose out in the future, because it is not driven by politics. It is just the way that things happened in terms of the way that business rates moved in England. The reason that convergence basically does not happen is because the UK's population keeps rising faster than Scotland's population, which means that, although Scotland only gets a population share of the extra, which would produce convergence, the existing amount of money block that is there before you add the extra is then divided by a larger number of people in the rest of the UK than Scotland if that population continues to grow faster than Scotland. That has been basically what has tempered or even reversed in some cases the convergence in how Bannock would work. Bannock basically is supposed to work if both countries were growing at the same rate. It will converge over time unless spending falls, which it has in recent years, but it is assumed that it will continue to rise and therefore fall. It will fall until it is zero, which is below the relative needs on anybody's estimate between Scotland and England. Of course, because we are nowhere near it, nobody pays much attention to it, but technically that is what it is there to do. It just hasn't done it. I am going up to the session to colleagues on the table. We have been very patient this last half hour on the first call to ask question. We welcome to 4 by Jeane. Two very interesting papers on the way. We have covered most of the main issues, but they are quite complex, so no doubt they can be revisited perhaps in a different way. I think that the one area where you both strongly seem to agree is on this issue of Holtam indexation being based on growth per capita UK tax base rather than the overall growth in the UK tax base, notwithstanding the population opportunities for Scotland theoretically. I think that you agreed on that if you don't, you will tell me. That was an interesting proposed adjustment to the Holtam methodology, which seems to be accepted by both Governments. That is something that could certainly be pursued. I suppose that perhaps the bigger problem than the population variation is this issue about the higher tax payers particularly in the south-east of England. Is there any solution to that problem although, within Holtam, you just have to live with it? I cannot think of a solution, but presumably theoretically, if you excluded the top 1 per cent of tax payers from indexation, would that help? Is there any solution possible to that? It might not be acceptable to the rest of the UK, but I wonder if there is any theoretical way of dealing with that problem of the top-rate tax payers particularly in London? That could be a possibility that one divides a synthetic tax base, which in some sense is a bit like the Scottish tax base, and then sees how that grows in UK tabs. However, one is getting very complex here, and again, one is increasing the room for argument. The other solution that one has already mentioned is that one attempts not to make this too mechanistic. One has an oversight mechanism that keeps good tabs on what is actually happening and takes one's view as to whether, in fact, Scotland is being penalised or not. The difficulty with that is that one suspects that the different parties who signed up to Smith are actually coming from different world views, if you like. I suspect that the majority party in the current Westminster Government may well be taking a sort of neoliberal view that the main thing about a country is that you balance its budget and preferably shrink its state, and then the economy will look after itself and the equity will look after itself. That is a view to which I myself would certainly not ascribe, and I think that you need powers and also within the Monash union you need on-going oversight, and you need active adjustment of fiscal transfers to achieve some desired aim. Probably some synthetic index could be put. I suppose that the main thing is that if you divide up at different income levels, you track the UK in a different way depending on, so to say, a population share up to the top level of tax, and then you track it slightly differently because Scotland has a lower share of higher tax earners, and you could probably find a way of doing that. However, you are introducing a level of complexity that may change in the future, so you would have to have a review to decide whether it had changed and how you do change it. It has become quite another level of complication, so it could be done negotiated, but it would have to probably keep on being negotiated over time and it would not be straightforward. That is helpful, but we probably need to keep thinking about that. Just a brief question to Jim Cuthbert. You have two or three times talked about monetary union and fiscal transfers. How would you be able to identify specifically what fiscal transfers were necessary for monetary union rather than other kinds of fiscal transfers that might be necessary for other reasons, if you see what I mean? I think that one probably could, but one is asking a lot for political and economic goals to be identified. Some sort of overall goal is that the economic pressures in the different parts of the UK should be equalised, so that no part gets too far ahead, like the south-east is doing at present, or likes too far behind, as Scotland might under Smith or Scotland indeed has in the past. Equally, we are not just thinking about the Scotland England, but about the different parts within England as well. We need to have some sort of view about how one wanted this country to evolve in terms of overall economic pressure and then have some way of adjusting for that. The way of adjusting might not necessarily be fiscal transfers. Mark Knight did a paper some time ago when there was a symposium in which David Heald held on fiscal autonomy. We were saying that one possible way within the union is not in terms of fiscal transfers, but actually adjustments of tax rates. That would not be local determination of tax rates. That would be a central body taking a view that tax rates should be adjusted in a particular way to even out economic pressure. There are a number of ways in which one could do it, but one would have to have the political will and the kind of body that could make those decisions independent of narrow sectarian or narrow political or geographic interests. Two issues that I have not really got my head round completely, but they are important issues. One is the gearing issue, which a lot of your paper was about, Dr Cuthbert. I can see why you took the example of Trident in relation to raising income tax, but if we had taken the example of the state pension, for example, would that perhaps throw a different light on it and it might not appear quite so bad as you are obviously implying it is? I mean, I think that obviously some kind of changes, the Scottish Parliament or the Scottish people might say, yes, we agree with that change, we are willing to either cut education to healthier or increase tax to fund that or not, but I think that even with changes like that, you got back to the question of the democratic element of this. If changes like that are being made in which we have limited democratic or inadequate democratic representation, then it could still be something that irked and was unfortunate. Particularly if there are too many of such changes, it would mean that the freedom of action of the Scottish Government to determine its own policy on income tax etc, which is what is presumably anticipated under Smith, would be overridden by the adjustments that would have to make, as I said, its chain was being jerked by decisions made by another chamber. Yes, there are good changes and bad changes, but the underlying problem still remains. If tax goes up to pay for Trident or, indeed, pensions, that would be dealt with by some adjustment to the Barnett formula. Then surely if income tax was reduced in order to abolish Trident, for example, or reduced the pension, which presumably would not happen, would Barnett not take care of that as well? If it is bad going in one direction, it is liable to be good going in another, but in the sense that both are unacceptable if one is suffering from arbitrary gains or losses due to decisions that are taken by another chamber, possibly not in a fully democratic fashion, particularly after English votes for English laws. That alike is unacceptable. Obviously, when one is giving the example, one gives the example which will be strikingly bad, but both the pluses and the minuses in that sense, the system that throws those random pluses and minuses at you in a non-democratic fashion, is not a good system. Dr McLaren's point about Barnett, which, again, I have never totally got my head round why convergence is not happening, but you have got in bold letters existing fault, so I do not know whether convergence is a fault or whether, indeed, that is part of the intention of Barnett. It was interesting your explanation, because I have never really totally understood it, but I am still struggling a bit, because you are saying that the reason that there is not convergence is that the UK's population keeps rising faster than Scotland's, but surely, if that is the case, Scotland's share of any UK expenditure and devolved areas will be a lesser percentage. If the English population is rising more, then we will get 8 per cent rather than 9 per cent or whatever. But only of the extra, not of the money that has already been committed. The extra is a pittance on comparison to what you are adding it on to, and what you are adding it on to is being divided by more people in England because there are a population rising faster than in Scotland. So it is not about the increase, it is about the base. No, I understand that. That is helpful. Are you suggesting in that paragraph as well that that could be to the detriment of Scotland if people started aggressively applying the convergence principle, which does not happen in practice, but should happen in theory? There have been shifts over time. Initially, they did not update populations, which was a pretty obvious one to do. They also did it on real terms and then they changed it to cash terms and introduced that. All of those things made the convergence tighter, but it still is not enough to overcome that. However, you could start to introduce something that can adjust the base as well as the increase over time to make sure that convergence happened to some extent. It could be at any pace, but you could quite easily introduce it. I published a paper in the phase of Algebra bulleton some time ago, which set out the algebra of rail to population change in relation to Barnett formula. Unfortunately, the algebra is difficult, but nevertheless it is fascinating what the effect is and it is a major effect. The way rail to population change can cause actual divergence is very interesting and I am happy to send a copy of that paper. We all love your algebra, so if you could send us that, that would be good. The last point is interesting as well from Dr McLaren about, with regards to the boring for current versus capital spending, it is unclear whether such limits can be strictly applied. Then it suggests that they should not apply in Scotland, which I would certainly agree with, but why can they not be applied in practice? Through Barnett at the minute? Well, no. Is that what you are referring to? I am referring to Barnett at the minute that you are not allowed to transfer to the current side, but you are allowed to do it the other way around. It seems a little bit like you really should not do that and we are not going to allow you to do that. I agree with you that they should not apply, but you seem to be suggesting that they could not, in principle, be applied strictly anyway. Is that because you cannot distinguish properly between… There is an issue about what is capital and what is current increasingly these days, but no. The point that I was making there was just to do with the Barnett thing and that that should change to make it… In terms of UK expenditure, what is current and what is capital? I am sort of relevant to current election debates in a kind of way, but is it absolutely clear which is which in that regard? It is clear in the sense that it is defined. It is not clear in the sense of how much what in terms of education is really a capital investment rather than just the bricks and mortar versus other elements of… Is that PPP payment? Do they count as capital? I do not think that they come off… I think that they are separately identified in terms of the budget, but I do not think that they are on the capital side, Jim, do you know? No, I do not know. It is not an insignificant sum in both Scotland and the UK. It heats into the budget considerably. I must try and find that out because I presume that would be resource or current expenditure, the actual annual payment. I think that it must be because it is payments on an annual basis, so I am pretty sure that it would be on the current side. Plus, it would be eating into your capital… If you set yourself a capital limit, it would be eating into that considerably over time. That is a problem because in practice there is not a capital limit. There is a resource limit, is it not? You can turn resource into capital, but you cannot turn capital. But I think quite often that people put limits in terms of how much, I suppose, is more of a debt point. Okay, thanks. Thank you. Jeane Freeman, to be followed by John. Thank you. I love the idea of having a mind-melt question, but I suspect that I do not have that. I also like the idea of any Government trying to raise tax specifically for Trident. That would be really interesting. However, it is on that theory that I do want to ask my question of John McLaren. When we were talking about that, you said that it would look like Scotland had a free lunch if all of the costs of that were met by the rest of the UK. However, would the no detriment principle not kick in on something like that? The no detriment principle is full of complexities, but who will be the arbiter of that? In terms of the Trident, as was said in the last series of questions, it is not just Trident, it could be international aid, it could be pensions, it could be any of those things that the money was raised for in the rest of the UK. Is Scotland allowed to decide whether it agrees to participate in those things or not? It seems to me that the decision was taken by Smith and the Smith Agreement that those are reserved areas. Therefore, if more money is to be spent in those reserved areas, it is for the UK to decide it. The implication is probably that Scotland will have to raise its taxes equally, but if it does not, it will have to cut elsewhere. Ultimately, the rest of the UK will get that money back. There may be issues of democracy there, but it seems to me that that was the deal that Smith agreed on, so be it, but those are the areas that we still have control of. Whether that is right or wrong, it is where Smith came down on. In terms of arbiters of no detriment, it will be initially negotiations between a Scottish OBR and a Scottish and a UK OBR or some bodies of that ilk, both supplied with information and complemented by Scottish Treasury and the UK Treasury, which will then ultimately go to a meeting of senior politicians to negotiate almost in a similar way to what happened to Smith, but perhaps without a Smith figure. It will be partly based on the evidence that the officials bring together, and the politicians will agree or negotiate what the final no detriment should be. My main comment would be who it should not be and it should not be the Treasury. There, you run into difficulty with the OBR, although I have a good regard for the OBR. It is a largely treasury staffed organisation. If one has a criticism of it and one does, it would be that it has not been sufficiently critical of the assumptions being fed to it by the UK Government. There is a problem if we say that OBR should play a major part in this process, but certainly it should not be the Treasury that does this. Treasury has a bad role in the past under Barnett of making this sort of decision. They decided, for example, that structural funds coming to Scotland should not actually come to Scotland because they have just come out of the existing block grant that should be determined by the Barnett formula. They would not be on top of the Barnett formula, so Scotland lost out the tune of a billion because of that. The main thing is that the process should be open so that everyone can see what judgments are being made, and ultimately it should be the court of public opinion that decides whether that is operating properly or not. If Scotland does not trust the UK Treasury and UK OBR, and presumably the other way around, the UK does not trust the Scottish Treasury and the Scottish OBR, I do not think that we are going to get very far, and how you then go to the people who I have no problem with, although Smith did not go to the people and explain it and get them in, then I do not know how exactly do you go to the people and get them to decide how to arbitrate. I think that there may be problems on both sides, but I still think that it is probably the best practical solution. I do not see how we can trust the Treasury given the history of that, as I have mentioned, of what happened on the structural fund receipts. I am not saying that the OBR is in any sense of political organisation, but I think that they are hamstrung by their remit, and having adopted a basically forecasting remit, they will not give you an appropriate appreciation of the various risks involved. It is this old question that, in a policy-influenced environment, if you are forecasting, the normal assumption is to assume the success of policy. Secondly, if you are forecasting, you do not adequately allow for black swan events. You may know that some things cannot go on like they are going on for 20 years, and some things are going to happen in that 20 years, but you do not know when. If you are doing a forecast, you are going to assume that it is not going to happen in the next five. With no criticism of political bias on the part of the OBR, there are good reasons why it is not really the appropriate body to adequately fulfil this kind of remit. At a recent evidence session, we heard of the example of air passenger duty, which has been something that the Scottish Government at least has desired to have control over. The example was that, if we reduced air passenger duty and therefore attracted business that might normally be going through Newcastle airport, that would be seen as detriment to Newcastle. Therefore, Scotland would have to make recompense. If we were talking about openness and fairness and explaining everything to the public, what would be the point of that? I think that that particular example is just ridiculous. It is clear that the first order effects that one might want to compensate for, but the whole point of Smith, in a sense, is to enable Scotland, hopefully, to do better. We do not have the powers to do that, but if the Scottish economy post Smith did start to thrive, there is endoscope for argument as to whether that is an overall, everyone is better off, or whether that is the expense of elsewhere in the UK. One could argue about that forever. There should be no concept that we are going into that sort of debate and working out second order penalties based on that. The example of Newcastle is that, rather than Newcastle complaining to Scotland, what would be more workable if Newcastle complained to the rest of the UK and said, because of this settlement, we have suffered. What can we do to improve Newcastle within the rest of the UK or England, so that it can compete better against Edinburgh airport, which then takes you into a slightly more federal system that could be introduced throughout the UK, which perhaps would not be a bad thing. However, I would see it more as an issue for the rest of the UK Government to find compensation for, rather than for Scotland in that example. If there were local income tax rates, how would that be squared with Smith? It is up to the Scottish Government to decide, as it controls income tax, what level it wants to do that, whether it wants to introduce some degree of local income tax or not. Would that be out with the income tax calculations? I think that the income tax calculations would still be as before, but in terms of any compensating amounts, but within Scotland you could devolve further income tax either partly between local and central or retain it all centrally. That issue is one that has not been looked at or thought about much post Smith, which also feeds into things such as borrowing. When Scotland gets its borrowing limit to whatever it is, it is fixed or flexible or whatever, how much of that goes to local government? Should local government be involved in the negotiations about the level of borrowing that Scotland needs as a whole? I do not think that they are at all at the minute, but it has not been given much priority in terms of the discussions post Smith so far. I do not think that the local income tax rates that you are envisaging would necessarily greatly complicate what is happening with Smith. I think that the key calculation of Smith will be what the initial abatement of the Barnett formula for letting Scotland have control over income tax, and that will be based upon the existing tax structure. You have then got the whole question of indexation that we have been talking about, but the key modelling there will be done either on an overall UK or on a rest-of-UK income tax base, so that will not be affected by local income tax decisions, and then you have got the question of what adjustments are necessary to the block grant for policy decisions in income tax down south, which affect devolved services. Again, those calculations should be the rest of UK calculations, so I think that the key calculations would not necessarily be affected by the possibility of a local income tax in Scotland. Just two very quick points. One on immigration. It seems to me that Scotland needs people and that we could have immigrants from England. That is one point. The other point is that there is opinion that the Smith commission was done in haste, too much haste, and will inevitably be unraveled to a certain extent, given any debate in Westminster regardless of the Government. Is that how you see it? On the English migrants thing, most years for the last couple of decades we have had net immigration from England and not of old people retiring across the spectrum, not huge numbers, but by and large. Probably the most obvious way to increase that would be to reduce income tax, particularly at a higher rate. You might not find that morally acceptable, but that is probably going to increase the number of people coming here and the amount of tax that stays within Scotland. There are other possibilities. On Smith in haste, I think that it clearly was done in haste, but it was demanded in haste, so he was kind of meeting his remit, if you like. I think that my main criticisms of Smith were that there was an element of what we need is world peace, and I think that we are all agreed on that, but I will leave it to the Governments to work out the details on how we achieve that. Obviously, it is not quite as bad as that, but there is an element of, well, this is what we have decided. You work out the adjustments, you work out the no detriment, I am off. I do not think that that has not helped for taking the next stages forward. There is also the fact that it was done in a way that there were meetings with the general public, but I do not know what from those meetings was taken and fed into the final agreement. As far as I can see, it was the politicians behind a closed door, which I do not think was a particularly good way of necessarily meaning that the population that they liked to have agreed with it. On the Magor one, I would not want to say much, but the critical thing is that migration might be a useful way of getting the economy going, but the critical thing is to get the economy going. In a sense, what we want to stem is the Scottish syndrome of educating our own population to take jobs abroad. The critical thing is to get our economy going with high-level jobs, which either migrants or our own young people, well-qualified young people, can take in Scotland. On Smith, I think that it was done far too much for a rush. I mean, I think that it was seven weeks from beginning to end. You cannot redesign the constitution in seven weeks, just not possible. It was a botched job in certain important respects, but in certain other important respects it was a remarkable job. I think that you got a group basically of politicians together under an accountant, and you got what was in many ways a remarkable political document. I mean, some of the things that it said about the Sewell convention, about the Crown Estate, some of the political aspects of Smith were actually remarkably good, but there was the wrong skill set on the wrong timescale, and they completely underestimated the importance of giving economic powers, and they did not adequately realise the drawbacks of the tax that they chose, income tax, or the inherent limitation if you just give one major single lever, you're not actually giving much power at all, because in one single lever, income tax, Scotland and the Scottish Government will never be able to deviate too much from what's happening down south, so it's a constrained lever. What do you want to do? You want to improve social equity, you want to grow the economy, you want to raise money for counter-sterity or to do socially just things. You cannot achieve three objectives in three dimensions with a single constrained control lever, so I think in certain respects Smith was a terrible job, but in other respects, reflecting the nature of the panel of politicians, it was remarkable. Thank you. Thank you. John, to be followed by Mark. Thank you, convener. I mean, we've covered quite a lot of areas and some of, I think, my questions would be kind of building on what has gone before. For example, on no detriment, I mean, we've had previous witnesses here who have basically said that, yeah, we can make the no detriment work at the beginning, so when a power is transferred, there should be kind of compensation or whatever around that, but going forward and the whole concept in Smith that policy decisions that affect tax receipts expenditure will either reimburse the other or there'll be an additional cost. I mean, that just is not possible. It doesn't happen anywhere else in the world, and we can pretty well forget about it. I mean, do you agree with that? That's not what's in command 8.990. I mean, command 8.990 has this particular interpretation of the Smith no detriment clause spelled out in paragraph 2.4.14, which is the one that has the consequences, which, you know, explained to my paper and also in the annex to John's paper, so if the powers that be are now saying actually 2.4.14 is a dead letter, well and since, well and good, that means that that is a huge change to what they said is going to happen in command 8.990. Are you aware that it happens anywhere else in the world, this kind of thing? No, I'm not, but I'm not an expert on that, and in most other parts of the world, what you've got are federal systems, and the difficulties, the whole we've dug for ourselves, both in terms of the complexity, in terms of the need for oversight, and in terms of the gearing problem, all these problems would disappear under a federal system, so if you had a federal system, we just would not be in this sort of what I would call mess. Do they not still have a problem in Australia sharing out the resources? Oh, they probably do, but resources are difficult to share out, but if you are in a proper or federal type system, then, with openness and a good will, you can get around those problems. There's quite a lot of devolution of taxes in quite a lot of different countries. They come with very strong strings attached, or there is quite a lot of, yes, you've raised that yourself, but then we make compensations so that we're all about the same. I think what is being set up here is close to unique. I think maybe Spain is, you know, it's very asymmetric system, might be similar to some regards, but I don't think, I think either there's a strong central grip still on what is the final settlement, as there still is here, with Barnett to some extent. So I don't think, I mean there's a spice paper on this, which I think went into a number of different countries, so perhaps they can get you more examples of that happening, but I don't think there'll be an awful lot of lessons to make it easier from other countries, and if there are, it'll probably be keep it as simple as possible, and then no, no detriment is a very difficult thing to do. I mean, that actually was my next point. You used the word simple there, because I think Dr Guthbott, in your paper, you mentioned the will that transparency and effective scrutiny have been mentioned but not equity, and it struck me that also simplicity has not been put in there as one of the key factors. I mean, how important is simplicity, because if we want even the politicians to understand it, let alone the public, you know, some kind of simple system is presumably an advantage? Absolutely, I would say, yes, but it's not obvious that you can, in fact, get a simple system if you're staying with Barnett, if you're saying, one of the things that will drive changes in the Scottish, lock ground of the Scottish budget is changes in public expenditure down south, that is the principle of Barnett, but then you're saying that part of those changes in public expenditure down south are driven by local, what will in the future be, local decisions and income tax down south, so we need to take those out. If you set up those as the basics of your system, it is a complex system. Complexity is inherent in the basic approach that has been adopted. There are two simple systems, Barnett and full fiscal autonomy, and as soon as you move away from those extremes, it doesn't really matter by how much it becomes much more complex, because you're going to have to work out what the adjustment bit is for them. I mean, both of you have been quite critical of this kind of word, mechanical, which suggests that it would just happen according to whatever formula was set up, and yet does mechanical not also suggest that it would stop the squabbling that goes on, because we have not had a great success with the two small taxes that we've already got, LBTT and landfill tax, and it's only been a one-year adjustment, and that adjustment, as I understand it, was just the midpoint between the two sides. So, that idea of let's negotiate and talk about it every year has not been very successful, so that would indicate to me that maybe a mechanical system would be better? The system that we've had, which has not been a fully mechanical system, that has been more mechanical, as I've already said, has led to some very large potential errors creeping in, sort of under the radar, with the much more complex system we're going to, and with the larger sums involved in dealing with income tax and also VAT, the potential for errors under a mechanical system are magnified many-fold. Once those errors became apparent, and I don't know which way the errors would go, on the income tax side, they potentially penalised Scotland badly, but once they became apparent, the apparent harmony that you had under a mechanical system would rapidly disappear. So, would you need to pick that up every year, or could you just say, because we've previously also had evidence that any system we have, you're going to have to have a major review, say, every 20 years or some kind of time like that. Can we not rely on that kind of longer-term review to pick up the ups and downs that happen in the short-term? 20 years is far too long a time period, an awful lot can happen in a 20-year period. I would have thought that one, probably an annual review is too often, 20 years is far too infrequent. I would have thought maybe something like a five-year review, but it's a question of who would conduct that review. It would have to be conducted on a very statesman-like, non-partisan basis, and one doesn't really see the evidence when the political institutions in the UK at present, particularly what's happening coming out of some of the parties in the current election campaign of that, the ability to take that sort of statesman-like overview. Just on the last couple of points, I think the idea that mechanical will stop squabbles is right if the mechanics are good. If the mechanics are bad, they'll increase the squabbles because it's so blatantly unfair. I think what we're going through at the minute is a learning process that has taken quite a long time, because we still haven't got all the Scotland stuff sorted out, but hopefully, as a result of that learning process, we'll get a better understanding and a better mechanism in place. I think that it will always need adjustment, but to get it as mechanical as possible without introducing unfairness and people accepting that there could be an adjustment almost at any time, but it will be reviewed every, say, five years, but at any time, something else could arise. Changes in UK tax rates, changes in UK benefits, post-an-election, politics will play a big part in this. One of the things that I mentioned in my paper is fiscal rules. Fiscal rules will change willy-nilly, and Scotland will probably still have to go along with what the UK's ones are as the junior partner, if you like. I imagine that in practice that's what will happen. You might find yourself having to change the mechanics on a regular basis if you want to keep it mechanical. I take your point that you'd like a federal system, and it's all clearly laid out, and we all know where we are. The reality is that it is devolution that we're dealing with. The purse remains at Westminster. It's going to remain at Westminster. We have to accept what they give us. Is that not the case? That's where we are, but at present the dust has not quite settled, and we should be arguing for the best that we can. As I said earlier, part of making this work will be arguing for the most appropriate oversight mechanisms. Mr McLearn, you mentioned borrowing earlier on, and I saw it was in your paper. I was quite interested in that. Is there an issue, then, that, at the moment, we have local authorities with prudential borrowing, so they don't have a fixed limit? They can borrow what they can afford, and, as far as I can see, that has largely worked. We've had evidence on that as well. Scotland is potentially going to have some kind of limit, although I personally would like to see it also having a prudential borrowing purse. Do we need to tie the two together? Is that inevitable? Presumably Westminster could give us an overall limit, but are there just a suggesting and a limit for the Scottish Parliament rather than local government as well? I suppose that, theoretically, your borrowing should be related to your income, what income you can guarantee, especially if you're going to borrow from the market, which, ultimately, most of it will come from. That's one way of putting it, but then what is the most appropriate way for local governments? How much money do they actually raise themselves? How guaranteed is it the money that they get from the Scottish central government? The markets and whoever was borrowing would have a view on that as to how reliable they are, but I think that those things are fairly subjective. In this area in particular, we're going to get to a political solution, and I should have no idea where it's going to be. Can we just leave local government aside for the time being and concentrate on what powers the Scottish Parliament can have, or do we need to think about local government at the same time? I would have thought that we needed to think of local government at the same time. The Scottish Government controls a large part of the budget for local authorities, and borrowing within Scotland is secured on Scottish tax resources, so it's basically secured on income tax, non-domestic rates and council tax, plus the smaller ones. Given the commonality in the budget setting process and given that the whole thing will have to be funded out of the three resources, I thought that you had to take, in some sense, an overview of what the overall borrowing capacity was. In terms of local government, there's got to be a bigger issue of—Smith was there to decide a change in responsibilities between central UK Government and the Scottish Government, which then begs the question of, well, there should be a similar conversation going on about what should be the relationship between local government in Scotland and central government, in particular given the fact that non-domestic rates are fairly centrally set and council tax is impinged upon, shall we say, which doesn't leave an awful lot for local government. Perhaps the next step after Smith is to have a Smith within Scotland to see what the right—both in terms of what the public want and in terms of economic arguments rationale for what is the best split between local and central. I mean, from my understanding—or from your understanding—Smith doesn't stop either the Scottish Parliament starting a completely new tax or a local authority starting a completely new tax? No, I think it allows them that power. It also allows them the power to increase any benefit, including UK benefits or introduce new benefits. So it's pretty wide-ranging in that sense. I don't know how widely understood that is in Scotland as a whole, but technically there are a lot of powers. There are some constraints, which means that it's difficult to use those powers, but the powers are technically there. Okay, and the final area I just want to touch on was the Scottish Fiscal Commission, which I think you both mentioned already and how much of a resource do we need. I mean, they're only looking at two small taxes at the moment, but we did get the impression when they were in that they were quite under pressure, certainly having to put a lot of time into it. How quickly do you think we need to beef them up for the kind of negotiation process, which I think you suggested? But as soon as possible, I mean, you need to experience people in these positions, not just new people who you train up, people who've got experience of the data they'll be using and how to understand and analyse it, and there aren't that many of them in Scotland, I don't think. On the urgent side, on the other side, there's something that can't be done very quickly, which is to get a good economic model of the Scottish economy, because the data just isn't there. And where it is there, the quality is probably not particularly good. So that will take time to, possibly quite a lot of time to develop. I mean, there's two parts of the model, the economic model itself, and then there's the tax side of the model, which tends to be quite big in the UK sense. The tax side will be easier to develop, but it's the economic impact on those taxes and the relationships between the two that is tricky and takes time to build up. Can I mention another area where I think some attention needs to be paid? When we haven't discussed VAT at all, but that is going to be very significant. I mean, Scotland has no control over VAT, but we'll be getting about half of VAT revenues. And yet, the apportionment of VAT revenues is based upon the household survey data for the UK as a whole. In other words, it's based upon an estimation procedure. And maybe as a result of that, Scotland's historic share of VAT revenues has been fairly volatile. I think that a lot of attention needs to be paid to putting those estimates on a much sounder footing and also to coping with the potential volatility of VAT. The scenario in which Margaret has been doing, my wife has been doing some work recently, and it's quite interesting to see how tenuous the estimation of VAT receipts is at present. We had the point that came up here before about VAT, that would it be based purely on the final payment by the consumer, or would we also get a share of VAT all the way through? My feeling was that, if a factory is making a lot of products, we should get part of that VAT, even if the products were exported. Is that an issue? There are issues there. I think that it is based present on the methodology basis upon the final payments, but there are issues there to be explored. The sheer data that is involved is estimate based, and the presentation is not very good at present. Thank you very much, convener. I think that, in terms of some of the powers discussion that there has been having, as somebody who is sitting also on the devolution and further powers committee, I think that, certainly around the benefit stuff, there has been something of a disconnect between what is envisaged by Smith and what appears in the command paper, but that is maybe a discussion for another day. I just wanted to touch on—it has been touched on a few times—the no detriment principle, because, again, at the devolution committee, you can pick your definition of no detriment, it would seem, and where no detriment is intended to apply. I just wondered from your own perspectives what your understanding of no detriment was and how it ought to apply certainly to the powers under taxation that are coming, but, in general terms, what your understanding is of what is envisaged by no detriment? I think that if I could go first on that one. I would regard the no-bed detriment principle, as I said earlier, as being a recognition, that Smith recognised that there was this problem, the gearing problem, that if you allowed changes in income tax in the rest of the UK to affect reserve services, you were in all sorts of trouble, and you had to stop that somehow. I think that John Simpson did that very well. If the Smith commission were in favour of peace, they brought forward a no-d detriment principle, which was in general terms, and, fine, that would solve the problem, but they did not see how you implemented it. The detail of what you have got in command 8-9-9-0 is a particularly inappropriate way of implementing that. The problem is that I myself do not see a way of solving the gearing problem without fundamental change. As I said, the federal argument is what would solve it, but that is not where we are, unfortunately. In other words, there is a fundamental problem around it. I think that the basic adjustments for changing different taxes and income tax, and I should stick with that one for the minute, in the rest of the UK and Scotland, that was the main thing, and that is where the big money will be involved, that no detriment should apply. There is then the smaller things of, if you change one benefit here or a little policy there, the airport example sort of thing, should that have a knock-on effect, and that is a little bit more, yes, but maybe so it is less clear how the... In the first one, there is a clear detriment or gain that has to be adjusted for, and that one is less clear, and then there is a third category, which is the second round impacts that we discussed before, of changing something on income tax might have a knock-on effect on VAT or something else, and do you adjust for those? I do not think that that was really addressed at all in Smith or what I have seen, so that is kind of, I guess, up for grabs or up for negotiation. One of the points that is being raised and raised by Professor Heald is around the possibility of gaming, and where you have the potential, for example, that you could have a decision taken at Westminster to say dramatically reduce income tax, but compensate or offset that with, for example, a VAT rise. Now, what you would have in the situation there is that while there is a hypothecation of VAT, it is only, I think, the first 50 per cent of VAT, which would be unaffected by a rise, but you would have a situation where the income tax variations that would exist across the border might reduce Scotland's ability to react to that. Do you see that as a very real risk that exists or is it simply a hypothetical one? I do not think that there will be intentional gaming of that degree because it is so extreme and it would put other things out of kilter. To be honest, I do not think that the rest of the UK Government will be bothering that much about Scotland, that it will spend a much time on it. However, there will be unintentional, it would not be gaming, but there will be unintentional impacts from, say, at the next election somebody decides what we are going to have a super tax above the 50 per cent, going to be a 70 per cent tax. That would change things or we are going to change what the allowances are and how high you have to pay for no tax. Those things could have knock-on impacts that could be difficult to work out exactly what is no benefit, no detriment. I do not think that it is gaming, but what he is talking about could happen in a normal scheme. I think that I would be more pessimistic. I think that there is a real possibility that certain Westminster Governments would set out to game the system if they could. It is interesting to refer back to the future of England survey, whose results were published just before the referendum. The headline was more or less English desire to punish Scots, whatever the outcome of the referendum. We have issues with the future of England survey and the unfortunate leading question that was asked that led to that result. Nevertheless, there is a wide perception out there of a desire to punish Scotland to reduce levels of public expansion in Scotland to the UK average. It takes too much imagination to imagine a Conservative-Uquip coalition at Westminster setting out precisely to exploit the features of the system to achieve that kind of result. Gaming is a real possibility. Just on the issue of benefit detriment, if decisions were taken at Scottish level, which resulted in increased economic activity in a post-Smith environment, then, obviously, there is a benefit that accrues through increase in income tax. At the same time, there are also benefits that would accrue at an RUK level around, for example, reduction in job-seeker allowance payments being required through DWP, increase in national insurance contributions, which I think I am right in saying would not float to Scotland but would remain at a reserved level. How do you envisage that sort of—what on paper looks a fairly simple scenario of more people and jobs equals more tax, but there are sort of more factors to it than that? How do you envisage that being worked out under a sort of post-Smith environment? Everyone should just say hooray. I do not think that there should be any question of trying to compensate for that or whatever. That will be a well-functioning monetary union where we are doing better through income tax, etc. The economy is doing well. Westminster is benefiting, as you said, to national insurance, its share of VAT, it receives the co-operation tax, etc. I think that everyone should just say that that is how the system is meant to work. The danger is that the system does not work like that and that Scotland gets locked into a cycle of relative decline for the sort of reasons that I have set out. I think that the first example that you gave in the rest of the UK benefits went down because it was more successful policy going through. I think that there is an intention to adjust for that, so Scotland would get some of that money back from the UK. It is not 100 per cent understood, but in the evidence that was given to the Scottish Affairs Committee on Smith, when I did a session with David Phillips from the IFS, and I think that was certainly his opinion, and that seemed to be what was in the final report that was written up, which I guess they were checked with other people. I think that that is certainly one that might be a no-determined impact, whether it is right or wrong, but I think that that is what they might be intending to do. Again, it is difficult to calculate, but in terms of the other taxes, higher growth leading to higher sales taxes and VAT and national insurance, that would stay at the UK level. Just on nurse scenario, and just to get something clear in my head, there has been discussion around living of taxes and how that money is therefore allocated. For example, there has been discussion around the use of the 50p tax and how the proceeds of that could be spent, with a view that, for example, money that the 50p tax applied in London could lead to revenue flowing to Scotland. For example, one of the figures that has been spoken about is £250 million to the NHS as a result of the 50p tax in Scotland. There are the level of incomes in Scotland among higher-rate taxpayers for that money to be generated within Scotland, so it would have to be a portion from elsewhere. Barnett consequentials would not seem to generate that level of consequential effect. Is there a scenario under post-smith scenario where you could have a 50p rate that applies both in Scotland and in the rest of the UK, but there is essentially that hypothecation of revenue still taking place? I have explained that clearly enough. If you had mentioned mine melt, I think that mine has just partially melted. I think that mine melted a bit as well, but I think that what my mind was groping towards was that this is really something that needs to be modelled. You are going to get Barnett consequentials flowing, but Barnett consequentials are going to be heavily modified by the abatement and by whatever form of Hultum indexation we have, so there are going to be pluses and minuses and potentially different economic trajectories of the different parts of the UK. Really, before we could understand the balance of what was going to happen, one would need some sort of proper modelling of all the effects, it seems to me, and we are rather groping towards this new system, which is going to have fairly profound effects, without having that sort of modelling being done. If it hadn't been done in a seven-week period, that is the sort of study that should have been done and some scenarios worked out. I very much agree with that point. By working out different scenarios and seeing what the impacts are, then you can determine what the outcomes are and determine whether they are fair and negotiate whether they are fair or not. That can then mean that you can put in place agreed mechanisms that are not going to lead to an argument but are more likely to lead to what you had assumed in advance. However, as Jim Smith says, I do not think that anybody is doing that if they are, it is just the OBR, because there is no Scottish organisation set up to pitch its own bit in, but I suspect that they are not being done at all. However, it would be something that you and the Scottish Parliament in general would want to see before a final mechanism was signed up to, and not just an income tax but a variety of areas. Thank you very much for that. That has concluded questions for the committee. I just want to, on the Scottish Fiscal Commission issue, what progress is being made in terms of being able to acquire the kind of macroeconomic data that is required for some of the discussions and debates that are going forward in Scotland? In terms of getting an economic model for Scotland, we are in a pretty low position. There are clear... Scotland, even in something like GDP, what the economy produces as a whole, and we have produced papers on that in the past, constant price GDP for Scotland, including a share of North Sea oil, would be a terrible measure. That is what everybody uses to measure their economic performance. It would be a terrible measure for Scotland because the North Sea would completely make it irrelevant because it is the cash price of the North Sea that counts, not the constant price. That is just one example. I am trying to understand Scotland because of the North Sea element, even though it is not in here, you still have to take it as part of understanding the Scottish economy. You then have a large foreign ownership, which could impact on things like income tax and that as well. You need other measures to try to understand that. We do not have any... We have a very poor understanding of the current account balance of payments. We have got some understanding of trade. These are just some of the basic building blocks. I imagine that our data on capital investment and stuff like that is probably pretty poor as well. It is a big job. Not only do you have to start collecting that data, but you have to collect that data for a long period of time before you can work out trends in it and work out patterns. You are talking over a decade before you are probably talking about a well-working model. It is not so difficult in terms of working out perhaps what the impacts of different taxes might be. Although, again, if Scotland's behavioural changes to different tax alterations are different from the UK, you have to work those out yourself, and that again takes time to do. It is a big task that we are not in a very good place to start, which means that we should start all the quicker. We will have to make shortcuts initially to try to work out. I comment on a slightly different aspect, which is the jazz aspect. We have had the jazz exercise running for many years, and a lot of improvements took place in jazz, particularly on the expenditure side. Even on the expenditure side of jazz, the position is not, by no means, perfect. If you look into the detail, you will find that the same apportionment factor is being used by Whitehall departments of apportioning expenditure to Scotland. We cannot even be confident that, despite the improvements, the expenditure side of jazz is good. Suddenly, the revenue side of jazz becomes very important. Income tax, probably the changes that have been taken place in terms of collecting the Scottish rate of income tax, will lead to improvement in the data. As I have already mentioned, on the VAT side, what we have is an apportionment of VAT based on the sample data. That is suddenly going to become very important, and I suspect that it is not up to the weight that it is being asked to carry. As the situation evolves, other weaknesses in the apportionment of revenues as well are going to come to the fore. Again, it is very important that improvements will be put in train there if the new system is going to be soundly based. I will add a little detail to that. The big tax measures that we are very unclear about are corporation tax, because we do not really have a very good understanding of where that would end up. We do not have corporation tax in the Smith. We should not, but we do not. However, we do have it in Northern Ireland, and therefore that change has to be modelled to see what the impact would be on Scotland from what it does. It becomes always back to asymmetry of the devolution of those powers. It becomes very complicated. Yes, I take on more what you have said. In terms of jails, I understand that it defends £3 billion a portion to Scotland, but less than £2 billion is spent in Scotland, for example. Given what you have said and the lack of an adequate macroeconomic model, what should the responsibilities be for the Scottish Fiscal Commission as it grows, if you like, and becomes more established? I think that looking at the example of the OBR is a good place to start, because it has already done it, so there is quite a lot of experience there that the Scottish OBR can draw on. That does not mean to say that you use their figures, that means how you set up the model and how it works. There is also the advantage that, depending on what your final mechanisms are to negotiate no detriment and things like that, if there is a Scottish OBR and an English or the UK OBR, the closer they are to what they do, the easier it will be to compare data, compare analysis and negotiate between themselves. That, as a starting point at least, is a good one. I think that it is more difficult to work out what a Scottish Finance and Finance Department committee should look like, because, obviously, we do not have a lot of the macro powers, but nevertheless, it still needs to be beefed up considerably. I think that I would differ slightly on the question of relationship with the OBR. I think that the referendum campaign was interesting that the tendency was on the part of the people at the Institute of Physical Studies to take the latest OBR projection of the UK economy and to split it down to Scotland and to look at the risks associated with the Scottish forecast. That led to an asymmetry in the handling of risks in the whole referendum campaign. If all we are doing is tagging along behind the OBR and looking at a breakdown of the OBR projection, then we are missing from the whole debate important things about risk, because OBR does not handle risk properly. If there are closer risk links with the OBR, it should be used to influence the OBR itself, so that we are taking a more informed view about risk. That is relevant, because if we look at the current general election campaign, certain parties are putting forward policies based on saying that they do not need to cut the deficit as fast as the current coalition is arguing. Indeed, their arguments seem to be correct, provided that you assume that the OBR, relatively optimistic forecasts of what happens to the UK economy, comes true. However, if you factor in risks surrounding the UK economy, the deficit reduction arguments do not need to reduce the deficit quickly and become a slightly riskier strategy. The whole debate is conditioned by what the OBR is producing and the way that it does not adequately handle UK risk at present, so it would be a pity to just tag on to them and continue that mistake. Thank you very much, gentlemen. It has been a very interesting session. I just want to have any further points to make before we finally conclude. I have one point, which is that we have discussed the node edwin principle at length, but one aspect that we have not discussed is the question of whether they are making section 2.14 adjustments. There will be issues of indexing those. If they are not making them, and that is being swept under the carpet, then the issue does not arise. However, if those adjustments are made, they will have to be indexed somehow, and very difficult issues will arise there. However, it will be very dangerous to let the Treasury say, we will sweep all the adjustments and abatements together, and we will do it by holding an indexation or something like that. Because, as I point out in the paper, probably for the kind of 2.4.14 adjustments, the whole-term indexation will be totally inappropriate. The only other point that I would make is that this is quite complex, as we have seen, and it is not something, despite your experience in the pub last night, that is being debated, I do not think, and certainly not understood outside. When the final solution comes, I do not know how much of a surprise it will be to the Scottish public, and I think that some way of somehow getting over what is involved here and getting some sort of feedback in terms of whether it is what people want or not would be beneficial, quite how you do that, I am not quite sure, but it does seem to, you know, we had the referendum, we had Smith, and now that we are going to give people something that they may not understand, may not want, may want, but not exactly in that form, and I think that just that interaction with the public, increased interaction with the public, would be good. I think that that is a point well made. On that, I shall end the session. I would like to thank the witnesses for their contributions, and at the start of the meeting we agreed to take the next item in private, and therefore I would like to close the public part of the meeting, and we will just have a quick two minute break to enable witnesses and a official report to leave.