 Fy fawr i gafoddhaf ni i gael i'r 16 oed, mewn ddefnyddiau gwahanol iawn i'r Cymru yng Nghymru dechrau i Greadau Llyrfaenoliaeth Cymru, could you please remind everyone present to turn off any mobile phones they may have or other electronic devices. Our first piece of business today is to decide whether to item 5 in private our members agreed. Yes. Members are agreed or set to into our businesses to continue to take evidence. I was part of inquiry into Scotland's fiscal framework. I would therefore like to welcome to the meeting today David Phillips and Professor Alan Trench. Mor Osbyd. Yn dweud yn unig iawn, i fynd i gael gweithio gwerthu'r ysgolwyr, ac mae'n gweithio gwirionedd, nad efallai mae'r calch iawn fawr, i f wrth gwrs drwy'r newid yn digwydd, ac mae'n gofyn nhw'n gallu ei gael gwirionedd, ac mae'n gweithio'r ysgolwyr i fawr, i fawr weithio'r cyffredin blaen. Rwy'n gweithi'r eich gwbl yn cenderdiadau ddechrau'r tegwydredu'r gwahol, rym ni'n ei bwysig i chi'n iawn. Alex Rowan, cymdeinidol, yn cymdeinidol, i atblio, i ddiful yn iwn iwn i-memor yown ac i ddiful yn iwn iwn iwn i-memor anlyw i holl dda. 2. gan gweithio'r principle nodetrwynt, rwy'n gweithio'r llti'r cyfrwyngu ei fod yn gweithio'r llti'r principle nodetrwynt. chael� будdol, es dependent effective and mechanical, but it is possible to design a system that is broadly fair if one is more flexible about the no detrimental principles. Such flexibility will be key to implementing a workable system and you will not only be able to explain why there are contradictions in what Smith has said in terms of no detrimental principles, but you can expand a wee bit more about that for the record. The two no detriment principles are, well, kind of three, but they're framed as two. The first no detriment principle is that when a tax is devolved to Scotland, Scotland shouldn't be made better or worse off just from the devolution of that tax. What that implies is that you take off the block grant, the amount of revenues you devolve to that. I have interpreted that as well as that the spirit of that principle also means that, in the years ahead, Scotland shouldn't be worse or better off if things would have continued on as they were going to anyway. If the Scottish economy performs in line with the UK economy, Scotland shouldn't be made worse or better off under the devolution there as well. It seems in the spirit of that first no detriment principle. The second no detriment principle is that if a policy decision is made in Westminster, that shouldn't make Scotland better or worse off if it's for an area of devolved competency. Likewise, if a policy is made in Hollywood, that shouldn't have an adverse or positive impact on the budgetary position of the UK Government. What I did in my presentation and summarised in my submission was to show examples of where those two principles can conflict. One of the reasons behind that is the differences in the relative size of the tax bases in Scotland and the rest of the UK. To give an example, income tax revenues in Scotland are about 15 per cent less per person than in the UK as a whole. Looking at the first no detriment principle, to satisfy that, you'd want a mechanism whereby if Scottish revenues grew in line in the same percentage terms at a similar rate to those in the rest of the UK, Scotland would be no better off or no worse off. Say that if revenues went up by 10 per cent in Scotland and 10 per cent in the UK, you don't want a mechanism that meant Scotland didn't suffer detriment because it's growing in line with the UK, it shouldn't suffer detriment under that principle. You can design a mechanism that does that. The mechanism would be that when you take off in year one, you take off an amount of the block grant and then in subsequent years you index that by indexing it to the percentage growth in revenues in the rest of the UK. If revenues go up by 10 per cent in the rest of the UK, you take that initial block grant reduction and increase that by 10 per cent, so you're now taking 10 per cent more off the block grant than you were originally. All that means is that if revenues go up by more than 10 per cent, Scotland gains, less than 10 per cent loses, but if it grows in line with the UK, it doesn't lose. So that kind of satisfies the spirit of the first no detriment principle. But suppose there was a change in tax policy in the rest of the UK, which was the reason why tax revenues were to go up by 10 per cent. They take that 10 per cent additional revenue in the rest of the UK, put it into the Barnett formula, Scotland gets more under the Barnett formula than it would have additional amount taken off its block grant. So what would happen in that circumstance is that Scotland would gain from a tax increase in the rest of the UK. That's not a detriment to Scotland, but it is a detriment to the rest of the UK, because Scotland is gaining from additional taxes that are being paid in the rest of the UK from a tax increase in the rest of the UK. It's not in Scotland. So that doesn't satisfy the second no detriment principle. So it's hard to do this in words. It's easier to have an example written down. Different methods of adjusting the block grant satisfy different principles. You can satisfy the first one, the no detriment just through the act of devolution, but the methods will satisfy that. Don't satisfy the no detriment from policy action principle. And vice versa, you can work it out. So in the presentation I forwarded to the committee, there's some worked examples that show that. So it's my view that you can't satisfy both, but you can satisfy one, and it's a choice of which of the principles you prioritise. Thank you for that, that's quite clear. Professor Trench, what's your view on that? I think I would very largely agree with that. I think no detriment is a perfectly sensible, high-level policy objective. I'm not sure that it's a workable practical principle to use in any system, but particularly one that is designed to work in a mechanical way. The principle by its nature is going to be pretty subjective in its application, and it's hard to see how it can serve that purpose. Now, if we think about the history of the idea of no detriment, the first time I'm aware of its use at all was in the context of what's now the Scotland Act 2012, the command paper published in November 2010 that set out the framework for that said there will be a no detriment principle to adjust the impact of UK tax decisions on the Scottish income tax take from the Scottish rate of income tax. My reaction on seeing that was to regard that as a broad and potentially dangerous principle. Of course, what subsequently happened was that the Treasury went away and looked at the work that had been done in a Welsh context about similar proposals by the Independent Commission on Funding and Finance in Wales, chaired by Gerald Holtham. It was, of course, originally, I think, expected to give evidence today, and I believe has sent a note to the committee. That helped resolve a lot of those problems because he formulated the principle of the index deduction approach that Mr Phillips has talked about. That, as it were, got solved one sequence of problems. The difficulty now is partly that excessive weight is being put on the principle in general, and partly that excessive weight is being put on the index deduction method. The analysis that the Holtham Commission carried out was a very careful one, and it said quite clearly that there are a number of ways that you can calculate the reduction from the block grant and adjust it. Different ones will be appropriate for different taxes because of the different profiles of risk that are involved. The logic of the index deduction method is essentially that it leaves with the Scottish Exchequer much of the responsibility for dealing with the consequences of devolved Scottish decisions, but it keeps at UK level and therefore protects Scotland from cyclic decisions that the UK Government would be responsible for under the current arrangements. That situation starts to change the more fiscal devolution that we talk about. Whether index deduction is the appropriate method to use for other taxes is one big question. Whether and when you need to use the no detriment principle in this way is the second question, and that is the bit that I think is particularly difficult. I think I have a slightly easier way of explaining what I was trying to get at in the first answer, if I may. I think that the fundamental issue relates to the different ways in which the Barnett formula and the index deduction methods can work. The reason you can't satisfy the two principles is thus that the Barnett formula works on changes in spending on a pounds per person basis. If you want to satisfy the second no detriment principle, the one that if you have a policy change in England that doesn't have detriment in Scotland, you need your indexation for the block grant reduction to also work on a pounds per person basis that offsets the Barnett formula. However, because a given percentage growth in revenues in Scotland is less in pounds per person, doing things on a pounds per person basis would mean that if revenues in Scotland were at the same rate as in England, Scotland would lose because it says lower growth in per pounds terms and therefore your per pounds growth in revenues wouldn't be as fast as the per pounds increase in the block grant reduction. On the other hand, if you do the indexation of the block grant reduction on a percentage basis, well then that is different to the Barnett formula's per pounds basis, so you don't satisfy the other no detriment principle. It's all to do with the fact that Barnett is per pounds per person and the most sensible way to do the indexation, in my view, is likely to be on a percentage basis given that a given percentage growth in Scottish revenues is different in per pounds terms. It's all to do with Barnett and the block grant reductions being on different basis. That's why you can't satisfy the two principles at the same time. Percentage growth would surely be impacted by demographic means. For example, the population growth is a proportion higher than in the UK as a whole, as opposed to Scotland. That would also have an impact, would it not? That could have an impact. There is a real debate about whether or not the indexation method should account for the demographic change. There are two points worth mentioning there. First is that the Barnett formula on the spending side doesn't account for differential population growth. It does update the population factors every couple of years, but it never updates the baseline spending, it only applies to the increment, so in effect it doesn't account for differential population growth. You could say, well, if the spending side doesn't account for differential population growth, should the tax side as well, or are you just picking the ways that benefit Scotland as opposed to the ways that are consistent? Secondly, one of the other people giving evidence suggested that if you account for differential population growth in the indexation, you remove any incentive Scotland has to improve its demographic profile. For instance, the Scottish Government has said that it would like to see faster growth in the working-age population in Scotland. If you adjusted the indexation method for the population growth, Scotland would get no benefit from that. On the one hand, adjusting population growth would benefit Scotland, which would mean that you would take less of the block grant because you are accounting for the fact that Scotland's population is growing less quickly, but it would not be consistent with the Barnett formula and it would remove incentives to grow the population, which the Scottish Government said it would like to see faster and popular. It would like to see better demographics in Scotland. You have said that an independent body should be set up to help me to resolve disputes and given what we have just heard, which would be very helpful. You have also said that we should keep systems under regular review rather than believing that a system can be reduced and simply lift to work. I think that we have a fundamental problem with the institutions that we use to deal with financial matters by now. They have been apparent for some time, but they have now become acute. Essentially, we have one institution that does all these things at the moment. It is called HM Treasury. It is also the finance ministry, as it were, for England, as well as for the UK as a whole. The whole system rests on nothing more than a Treasury statement of funding policy. It does not have a direct statutory or constitutional underpinning. It operates through the mechanism of annual supply and appropriations act at Westminster. Any disputes, disagreements, need to be raised with the Treasury first. If one could really be bothered, they can be pressed in due course subsequently to the joint ministerial committee and its dispute resolution mechanism, and to be blunt, a fat lot of good that is likely to do anyone other than Treasury. What I think we need are going to be at the very least, at the very least, two new bodies, both of which I am afraid for Treasury, will impinge on Treasury's ability to make decisions. The first of those is that there needs to be some genuinely independent body that is responsible for, if not making, then advising on the calculations that underpin the system, whether it is the calculation of the quantum of the block grant, the calculation of the amount of any reductions in the block grant by whatever mechanism you use, and I think also for then doing post-fact audit to review what has gone on and see what has actually happened. It is remarkable how little anyone does that. I referred in a footnote in my note to the only example of doing that that I am aware of, which was undertaken by David Heald and Alistair McLeod, published in 2005, based on data from memory surfs 2000 to 2003, for a very early spending review period post-evolution. Only possible because Professor Heald had access as a committee adviser to detail quantitative information from Treasury that it was not normally published then, is not published now. There is no particular reason as far as I could see why it should not be published, it just is not. The forensic examination does not show that there appears to be something of a black hole in how the numbers worked, even at the time when they were relatively straightforward. This is a material issue. Institutional structure of that body, well, one could draw on the parallel of the Office of Budgetary Responsibility, the OBR. I prefer the example, and we have discussed that in some detail in our recent report from the Bingham Centre, which I have referred to as a constitutional crossroads. There are many features of the Australian system that I think are problematic, but the structure of the Commonwealth Grants Commission has proved to be a very effective and durable one. The CGC has been in being since the 1930s. It is composed of independent experts. They usually are mostly from public service backgrounds. They have worked for both state and federal governments. There is usually one or two academics on there. They are very expressly not elected politicians. They have never been held at any political office like that. They are understood to be accepted as being politically impartial. They are able to do a job of work of advising the Commonwealth Treasurer about how the system works sufficiently effectively that the treasurer has always accepted their advice. He or she has never tried to alter the recommendations that have come from the CGC. Institutionally, that is attractive. The second body that we need is some better mechanism to deal with disputes and disagreements between Governments. It becomes very difficult to have a UK Government minister deciding about a dispute between a UK Government department and a devolved administration. There needs to be something that can be genuinely impartial and that can impose some stronger sanction on the UK Government than the practically non-existent consequences that there are at the moment. At the very least, there is a publishing report that says that the UK Government is refusing to act in a responsible manner here, if that were its finding. I think that that is where you would need to get to in institutional terms. I am afraid that I have forgotten the second part of the question. Basically, what I was asking you was about systems being asked about the independent body to resolve disputes that you have touched on and also asked you about keeping systems under regular review around believing systems. Again, it is commonplace in federal systems that you are going to review these mechanisms periodically. The Australians, being remarkably well organised, have a five-yearly review of the basic framework that is used by the Commonwealth Grants Commission. Every five years, a fairly systematic route and branch review is carried out of the indicators that are used and what they should be. That is in the light of directions from the Commonwealth Treasurer about what the system should be seeking to achieve. They are told what the system should achieve, and they go away and work out how to achieve that. Other systems, for example, Canada, would review less frequently. You have three, four significant elements in how the Canadian system works. You have the equalisation fund, two transfers—the Commonwealth, the Canada health transfer and the Canada social transfer—from federal government to the provinces. You have a separate mechanism that funds the three territories. They then have the tax capacity of the provinces themselves. Each of those is reviewed on a different cycle, but they are each reviewed. Equalisation, which is the largest of those transfer programmes, is reviewed about every seven to ten years. They are gearing up for another review now, I believe. I will stick with you before I move on to David. You said that the mechanism proposed by the UK Government in the command paper of Scotland, the United Kingdom, and the enduring settlement of significant shortcomings and the likely to rely on negotiations that will, on themselves, be based on data of questionable accuracy. The system is unlikely to breed confidence in its fairness and is unlikely to be stable. I wonder if you can comment on that. As a treasury gras, the need for a transformation is one thing for us to talk about, but do they believe that that has to take place? Can improvements be implemented prior to Smith being rolled out? I think that treasury is starting to learn the nature of the situation that arises, and it is a learning experience for them. I do not think that they are where they need to be yet, but I would not say that that means that they will not get there. Whether they will get there in time, as you put it, for the roll-out of Smith, will depend on the timescale for that. I understand that we are expecting a bill in today's Queen's speech, which should be announced in today's Queen's speech, to be published shortly thereafter and likely to be passed probably before the end of the current session here, during the Westminster parliamentary session that opens today. I do not know what that means in terms of applying those further powers in a Scottish context. That will mean that a year or two after the Scottish rate of income tax comes into effect next year. The long-ball option would, of course, be after the next Scottish Parliament elections. I have no idea what the position is regarding that. The white paper does not tell us anything very useful about that. We may learn more when the bill is published. Can you remind me of the first part of your question? I asked about transparency and how it could be good ahead of Smith. You said in your paper that the system is unlikely to breed confidence in its fairness and is unlikely to be stable. Indeed. I am not sure that I can say very much more that that appears to me to be the case. As you will know, we have quite problematic data about tax receipts across the UK. We also have revenue and customs struggling to identify Scottish taxpayers in order to make even the Scottish rate of income tax system work. That is not helpful because it can become of all the taxes that we are talking about one of the easiest to develop. A lot more work needs to go into understanding how we attribute the origin of taxes in a geographical sense. That is necessary on both sides of the equation, not just to work out what Scottish revenues are or might be, but to understand what they notionally would be in order to assess how the first of the no detriment principles that Mr Phillips talked about will actually operate. If that is meant to be revenue neutral, we need to have better data in order to do better protections from that data than we do at the moment. I think that the first and foremost point to start with this is better data and more published data. We have, of course, reasonable data for Scotland. It is not perfect, but it is better than we have for anywhere else in the form of the GERS survey. We have rather dubious, similarly calculated data for Northern Ireland. We do not have anything for Wales. We have some very generalised figures for the UK as a whole, and we have experimental data from HMRC. We have to do much more work to make that useful. David, on the same area, you talk about the need to ensure transparency and effective scrutiny. Is such information, for example, on the scrutiny of the block grant and Barnett formula, should be published and filled at every fiscal event that affects the devolved Governments block grants? Yes. I tried to do a similar exercise to that paper that you mentioned from 2005 just recently. One of the issues that Professor Trent was touching upon in an early answer was the fact that, while the principles of how the Barnett formula work are published, and there is quite a lot of detail about how the individual departments' budgets and Westminster should feed into the Barnett formula, they do not publish information on the calculations that get made at the time of the spending review or the time of each budget, and there are complicated things about how baselines change between different periods. The actual implementation of it is quite opaque and information is not published. The House of Lords Committee on the Barnett formula recommended that it was published back in 2009. It has not been acted upon. I managed to pester to the Treasury and get hold of the spreadsheets that they use to do the calculations, but I should not have to do that. Those are spreadsheets that should be made publicly available so that the work can be critiqued and analysed so that people can understand what the budget allocation is for Scotland and for Wales and Northern Ireland. In the answer to that question, I think that the Treasury, or the independent body, should publish the information, so that it is available there for public scrutiny and parliamentary scrutiny, both by Westminster and the devolved Governments. The Barnett formula is not just a principle, it is an operational thing as well. A lot of the decisions are about what specific things are counted towards the Barnett formula. Do they decide whether to count the Olympics towards the Barnett formula, cue gardens or these various things, and actually seeing how all these things get counted into it and being able to replicate the figures assess them is important for transparency and it is important to maintain the integrity of the system. I was adviser to the Lord's Committee on the Barnett formula. It is not quite correct to say that the changes are not published. They have been subsequently. It is one of those things that the UK Government has done without formally announcing it is done. It puts them into some very old places. I forget when I found them for Scotland, but what they publish each year are figures for changes that have been made in relation to the baseline, or when there has been something that triggers a consequential. So, there is a little addendum published each year that says this. I happen to follow this for Wales rather more closely than I do for Scotland. For Wales, these are slightly oddly published in the Wales Office annual report, even though it is quite hard to work out what it particularly has to do with the Wales Office. That is where the information is published. It is, although the only issue there is that it does not actually break down the calculations of individual subcomponents. It gives a total amount for the— Indeed. No, it is a very broad brush, but it is more than we ever had before. Okay. I just want to touch on one other area because I want to allow colleagues to come in here. That is an issue of borrowing and, interestingly, you both get a different view on that, which is always interesting for the committee. David, you have talked about what for local government borrowing are effective means for central government to deal with any problems that may arise if a particular authority borrows what is felt to be an imprudent amount. You go on to say that the Scottish and UK governments should agree a limit on capital borrowing powers, whereas you, Professor Trench, say that Scotland and the United Kingdom in particular suggests a highly constrained approach, most notably in paragraph 2.2.6. You go on to say that borrowing choices are a zero-sum game in which devolved decisions count against UK ones is an inappropriate way to ensure fiscal devolution works. First of all, David. Okay. I was asking this question on the borrowing powers with the ideas of SIPFA in mind. SIPFA submitted in its submission the idea that Scotland should move towards a system of prudential borrowing for capital borrowing powers in a manner similar to local authority borrowing. It works well for local authorities. You have not seen local authorities getting into trouble. Why not give the Scottish Government a similar regime of borrowing powers? What a prudential borrowing regime is, effectively, is that the Scottish Government determines its own limits of borrowing, subject to affordability and the amount to borrow being used only for capital expenditure, not for borrowing current expenditure on this basis, and an overall prudential regime. I am not saying that this is definitely the wrong approach. What I was saying is that there are potentially some differences in the politics between how things work at the local authority level and how they would work for the Scottish Government level. In particular, I think that the reason that this works well at the local authority level is twofold. Firstly, there is the political power, in effect, for the UK Government in England or the Scottish Government in Scotland to intervene if it thinks that the local authorities are borrowing imprudently, even though they have this regime that they are not acting prudently and they are borrowing. It could cat-borrowing powers, it could intervene, it could send in commissioners, it could effectively take control back of those borrowing powers. In principle, you could have a regime like that for Scotland in the UK, but I think that the political ramifications of that would be substantially different than they would be at the local government level. I think that it would cause a constitutional crisis if the UK Government cannot do this prudential borrowing power and then, at some point in future, took it back off Scotland. Assuming that Scotland would get into some kind of border? Indeed. I am not saying that it would, but there is a potential for it. Given the political situation, there may not be goodwill on either side in order for the system to necessarily work. There is a risk of that, at least, in my view. Secondly, the other issue is bail-out. If local authorities get into trouble and they need to be bailed out, well, one, actually, if they were to fail, they would be relatively small, but I think that more likely they would be bailed out. The politics of bailing out would be people would grumble, people would not like it, but people in Glasgow would bail out people in Edinburgh, maybe. The politics of bail-out between the UK Government and the Scottish Government after fiscal autonomy or after further devolution would be, again, a different order of magnitude. I am not saying that the prudential borrowing regime is a non-starter, but I am saying that the political issues in it are quite different to the issues that arise with prudential borrowing at a local authority level and that those would need to be really considered by both the Scottish and the UK Governments before going down that route. If those risks are seen as being too high, then a regime with an expanded amount of capital borrowing powers, with a limit, might be a more workable approach that does not have those political problems, because you have an advance what the limit is, so you have not got the potential for grievance later on. It seems to me that your approach is a wholly negative one, and it seems odd that a Government in Edinburgh would have less powers than the local authorities over which it has significant powers itself, but in borrowing we would have fewer powers than councils. That is a pretty illogical place to actually be, do not you think? I agree that, if you look at the levels of the Government and you say which level is the higher level and it has less powers than the lower level of Government, taking that on its own, you might come to that conclusion. However, I think that what I was raising in my submission was the fact that there are different political risks in this context. It is not just a question of the level of Government, it is a question of actually, given the political situation and the institutional arrangements, the same mechanism is appropriate. I am not saying that a potential borrowing regime would not be the right answer. I am saying that there are political issues that mean that it may not be the right answer, even though it works well for a lower level of Government. Thank you, convener. I find it quite hard to find any objection to the idea that the Scottish Government should have a power for the actual borrowing. That does not particularly concern me at all. Much greater issues arise as a result of the more serious borrowing power that is necessarily implicit in fiscal devolution. There has to be a power to borrow to deal with the volatility implications of that. If one looks at the figures, the amounts that you borrow in those circumstances are much greater than you are likely to be borrowing certainly in any year or any five-year period under any prudential power. That is the point at which things can start to become difficult because you can be talking about very substantial amounts of money, you can be talking about running fiscal deficits, you are talking about substantial costs by way of debt service, and you have to address from the outset the question of bail-out. You have to work out who is the lender of last resort in relation to that. There are experiences around the world. There are some countries that have very constrained borrowing powers for sub-state Governments, in some cases because sub-state Governments have gone bust in the past, and the result has been to constrain their borrowing thereafter very considerably. By contrast, there are Governments that operate with practically no constraints whatsoever. Canada is, I always find, an intriguing one, where the provincial Governments go off and borrow very substantial amounts of money on the capital markets, by treating their own bonds. There is no guarantee whatever of a bail-out from the federal Government, and the markets appear to believe that. There are cases where they do not believe that, and they believe that there would be a bail-out from the federal Government, which, in effect, reduces the risk premium that sub-state Governments pay on their interest charge. Equally, the Canadian provinces have quite a wide spread of interest rates and risk premium, even though I do not believe that anyone has ever defaulted since Newfoundland entered confederation. Newfoundland has to be set an example, not as a province of Canada, when it was an independent dominion, of overborrowing and going bust as a result. That is a story that results in Newfoundland ultimately becoming part of Canada. Certainly in federal countries—and it is not a risk that presents itself in the UK context—this can affect federal-level public finances as well. This has affected Brazil's public finances. When the richer states of Brazil went off and borrowed a great deal, were unable to pay back, they had to be bailed out by the federal Government, the result was the need to reconstruct the whole borrowing regime in Brazil, because this was affecting the credit worthiness of Brazil and the exchange rate of its currency. That is in the context of some of the largest, as well as the most prosperous states of a pretty large country. In relation to Scotland, the risk from a UK point of view has to be different, because Scotland is less than 10 per cent of the population of the UK as a whole. The issue then becomes also one of UK-wide equity. A system cannot, as it were, grant Scotland free money simply because Scotland wants it if that causes disadvantage to the rest of the UK. Finding the way through that is, I think, the difficult part. I hesitate to offer an advanced answer. I am sure that you and your advisers have been following the work of Angus Armstrong of the National Institute of Economic and Social Research, who has been considering this question in some detail, and who is strongly of the view that there needs to be an extended borrowing power with the scope to go bust. I disagree with Dr Armstrong, because I think that there is sufficient risk for the UK Government in this that it cannot simply say that there will be no bailout of Scotland. Scotland can go off and borrow freely, but it is at its own risk without there being an implicit assumption in the market that there would be some bailout if it would go wrong. My own view at the moment—and it is not a particularly carefully researched one—is that the best way through this thicket is probably for there to be some sort of ceiling—how you calculate that, I do not know—up to which the UK Government expressly agrees to indemnify Scottish bonds. It expressly says that it will not indemnify any borrowing above that ceiling. If Scotland wants to go off and borrow beyond that amount, it will very clearly do so at its own risk. I think that that is about the best way of balancing the various considerations that are involved. Do you want to make a final point before we move on then? On the current borrowing powers, there is a real need for Scotland to have further current borrowing powers to smooth the cyclical volatility. To some extent, depending on what block grant adjustment mechanism is used, some of that volatility will be taken up by the block grant mechanism. That is the whole point about the index method of Haltham insulating Scotland from the aggregate cyclical risk. There still will be idiosyncratic Scotland-only cyclical risk, which could be substantial more taxes that have developed to Scotland. At the moment, under the Scotland Act, the current borrowing can only be used to borrow for forecast errors, but you might forecast a recession and be able to borrow for that. There is a need for substantially larger powers on the current side. That is one area that we do not go much further than is there at the moment. There was no indication of that in the command paper that they were pushing down that road. There is a need for substantial more borrowing on the current side. We will now open out the session. The first person to ask questions will be Malcolm to be followed by Joan. Just briefly on the block grant adjustment, David Phillips, your scenarios were useful. My sense is from listening to different people that the percentage change in UK tax revenues is the one that is commanding the most support. I would imagine that that is the one that is going to happen. I may be missing something here, but you said that Scotland would benefit from tax increases in the rest of the UK. Does that not work in two ways? Is that the assumption that it would get more through the consequentials barnet? Should that increase the tax taken in the rest of the UK and therefore increase the amount taken off the block grant now? The scenarios that I was talking about with Scotland would benefit from spending in the rest of the UK. I will give you a simple example that shows that. Let us suppose that in the rest of the UK they put up income tax by £2 in the pound. That raises about £10 billion in the rest of the UK. That is about 8 per cent of income tax revenues in Scotland. That is 8 per cent of income tax revenues in the rest of the UK. The percentage indexation method would say that income tax revenues in the rest of the UK have gone up by 8 per cent. We are now going to take 8 per cent more off the Scottish block grant to account for that. 8 per cent of Scottish income tax revenues will be about £850 million. You take an additional £850 million off the block grant. Under the Barnett formula, a £10 billion increase in spending, if that additional revenue is spent in the rest of the UK, £10 billion would lead to about £1 billion to the Barnett formula for Scotland. You have taken £850 million off the block grant for the higher revenues in the rest of the UK, and Scotland gets £1 billion through the Barnett formula. Scotland gains about £150 million from a tax change that has an effect of Scotland that is only effected in England, Wales and Northern Ireland. It is because the Barnett formula works on a £1 per person basis, and the percentage method of indexation is percentage. The pounds and percentage do not necessarily line up, because a given percentage increase in revenues in Scotland is not the same pounds per person increase as in the rest of the UK. Scotland gains a bit from tax increases in the rest of the UK, and Scotland loses a bit from tax decreases in the rest of the UK. The reason why I think that, from Scotland's sake, that this would be okay is that these things are balanced out over time. Income tax, taxes will sometimes go up in the rest of the UK, sometimes go down in the rest of the UK, and these things should balance out over time. There can be some small knock-on effects on individual tax changes in the rest of the UK. Just because the interaction of the Barnett formula with the block grant changes— That is assuming that all the tax increases that are spent on devolved— Devolved, yes. If it does not go on devolved spending, you get into an interesting situation. I am going to have a slightly different perspective on this than one of the people that give evidence at the committee. If they spent that money on something that was non-devolved, say that they spent it on defence, you would not have any additional money flowing through to the Scottish Government, but you would still have this £850 million taken off the block grant. Some people have suggested that that is unfair, that you have had a tax change in the rest of the UK to fund some non-devolved spending, and that is caused by the reduction in the Scottish Government's budget, which means either cutting spending in Scotland or having to increase Scotland's own income tax to make up the difference. That is unfair. In the context of a system where there is still reserved non-devolved matters, it is not unfair. That is the way that the system has to work for fairness to be in place. If Scots are benefiting from spending that is being done at the UK level, whether that is defence spending or whether that is state pension spending or foreign affairs spending or payments for existing national debt, fairness requires that Scots, as well as those in the rest of the UK, contribute to that spending. The first instance is by cutting the Scottish Government's block grant. In the second instance, if the Scottish Government wants to make up for that, it can also increase its income tax just as in the rest of the UK. My perspective is that it is a bit different to someone else's evidence. We could make lots of comments on that, but at least it is very clear that that was a very helpful explanation of that. Moving on to the Barnett formula, you, like most intellectuals, want to change it or get rid of it. I suppose that a lot of backbench MPs do as well. I suppose that my own sense is that it is very significant that none of the front benches in the House of Commons do because they understand the politics of it. However, I suppose that what I want to pursue here is whether you need to do that or whether, under the new regime, it will operate as it is supposed to operate in terms of convergence. The main reason that it is not converged, as far as I understand, is because of the rest of the UK population growing faster than the Scottish population. However, under the new regime, if the rest of the UK's population grows faster than the Scottish population, we will lose out in terms of the block grant adjustment, because our tax revenues will increase at a higher percentage than ours. Will the new regime of block grant adjustment actually make the Barnett formula work more as it is supposed to in terms of convergence and, therefore, there will not be any need to get rid of it as you are proposing? To some extent, it depends on what indexation method is used to index the block grant reductions for the tax devolution. In order of which will lead to the Barnett squeeze taking place more quickly, the first one is if you were to index it—not in percentage terms, but index it in pounds per person terms—that would lead to the fastest squeeze, as Professor David Bell showed in his analysis. That would lead, because a given percentage increase in revenues in the rest of the UK is more in pounds per person terms than in Scotland. If you were to index it in pounds per person, Scotland would have to grow faster just to keep up with the rest of the UK. The squeeze would definitely take place under a pounds per person indexation, and if the percentage indexation—the one that I talk about mostly—you are right, you would still see a—if the Scottish population grew less quickly and the growth in rare news per person in percentage terms was the same, that would also lead to the squeeze increase today. Finally, if you were to increase the block grant reductions not in percentage terms, but in percentage per person terms, that would not lead to any squeeze at all, because you would be counteracting the population effects there. It depends on the precise indexation method used to adjust the block grant over time, but you are right. Under the method that I discussed, that squeeze would take place. I think differential population change is one of the reasons that is affecting why the Barnett squeeze has not happened so much. In recent years, it is also because the squeeze does not take place when spending is being cut. It only takes place when spending is being increased. However, I think that there have been some other factors going on in the background as well that have meant that the squeeze has not taken place. One of the big factors was the devolution of rail spending in 2006-07, because Scotland went up from getting about 3% of rail spending to 8% of rail spending overnight. So, spending jumped in those years. I think that there are some other changes as well. Formal bypass happens as well, where top-ups get made for the devolved Governments. Let me just try to address the convergence issues. The arithmetic of the structure of the Barnett formula means that there should have been very dramatic convergence, particularly during the huge public spending boom of the early noughties. Roughly 1999-2002-2007-2008. It did not happen. It should have done it, but it did not. Part of the reason—I may be the rail spending point that Mr Phillips mentioned, because I am not sure about that—is that I am dubious about formula bypass, because there is very little evidence that formula bypass was going on at that time. And, indeed, formula bypass is something that has become very hard to achieve and very open when it does, because there are decisions made about what is and within and out with the block ground. What is material during that period is what was happening to Scotland's population, not what was happening to the UK's population as a whole, but what was happening to Scotland's population. For most of that period, it was still falling at really quite a dramatic rate—0.3 per cent per year, or thereabouts, I believe. What that means is that, since 1997 to 1999, we have rebased the numbers used for the Barnett formula every three years through the spending review process, which had not been happening regularly before then. That is part of the reason why convergence did not happen through the 80s and the 90s. However, it would appear that, even during those short spending review periods, the rate of population decline in Scotland was sufficient to cancel out the convergence effect when you look at spending on a per capita basis. The population factor has become really very important here and the accuracy of those, and it is worth noting that the ONS figures for population change for the next 50 and 20 years suggest a much slower rate of population decline in Scotland, something like 0.1 per cent per year. That means that convergence should start to happen. Do you want me to talk a little bit about Barnett? No, that was the point that I was raising. I think that you are agreeing with me, so there will be more convergence. I think that is very likely. You addressed Mr Phillips' question of people wanting to get rid of the Barnett formula. I have to admit to being a member of that club as well. We very explicitly say that in the recent Bingham Centre report. Part of the reason for that, when we were drafting that, we did consider whether how to put those recommendations. We thought that there was very little point in not saying get rid of the Barnett formula because what we were proposing amounted to doing that. We could have said that we could not have talked about getting rid of the Barnett formula, which would not have got us a headline, but it would actually have been misleading. If you think about what the Barnett formula is, we use the term the Barnett formula to cover three things. One is the quantum of money that is paid to devolve Governments every year from Treasury. The second is the formula itself, the means by which we calculate that amount. The third is the administrative machinery that goes with it, and the fact that Treasury retains so much authority in relation to all decisions regarding it. As I was saying in my answers to the convener earlier, once you have started to take apart and reconstruct the administrative machinery, once you have started to do the fairly systematic review you need to do of the formula and how you calculate the numbers, you are ultimately going to have an effect on the quantum anyway. The quantum is not the target here, but once you have taken apart the two things that lead to the quantum, you might as well say we are getting rid of it because what you would end up with would have certain characteristics, I suspect, in common with the Barnett formula now. I cannot see any way that you can reconstruct the grant element of funding without using England as your reference point, which is what the Barnett formula does, because you get a consequential share of changes that are made in spending for England. It is inevitable that that is going to have to be your reference point, because there is no other reference point that is suitable to use. With that exception, I think that you are going to end up with something that has changed so much that, even posthumously, it would be a favour to Lord Barnett to take his day with a formula that he has long been seeking to disoad. Okay, I could pursue that, but I just want to ask one more brief question, and I have not really got time to pursue that. This is really about David Phillips' update, which is, of course, very topical and very interesting. I can just ask briefly about national insurance contributions. You make two statements that appear to be contradictory, because, on the one hand, you say that it is just another income tax on earned income, and you refer to Merleys, and we know that Merleys wants to merge those two, but then you go on to say, oh, well, no, who would pay for the pensions of people who had worked in England and retired to Scotland? I do not really understand why you asked that question, because I do not think that the SNP is proposing that pensions should be paid any way differently than they are at present under the devolution of national insurance contributions, unless I misunderstand their position. No, so my initial reading of the manifesto suggested that they were looking for the devolution, not only of national insurance, but also, potentially, of welfare in its entirety as well, so that is why the point why I raised that. Also, I completely agree with you, and it is a long-standing position of many researchers at IFS that national insurance is just another income tax, but the UK Government maintains the pretense that it is a social security contribution, so there are these notional links between NI contributions and benefits received. I mentioned this part about who would pay these pensions, because, if you did go to this full devolution of NICs and welfare, there would be these questions that, at least notionally, need to be answered. I think that the answer would be that the pensions get paid by the Government where the pensions live, and there is some adjustment to the bloc grant that accounts for a pensioner population. However, there would be some technical issues involved, given the pretense that we have of a contributory system in this country. Is the general view of the entity of fiscal studies in support of the marlies position that really we should just get rid of, because at present there still is a fund, but it is not clear to me what the purpose of the fund is. The fund is notional, it does not really link in any way to what actually gets paid out in benefits. Is it notional or does it still, because you still hear about so much is coming from the fund and so much is coming from general taxation? You do, but it, unless something is actually completely set foot, it is just what we call dodgy hypofication. It does not matter where the money comes from, because you just pay whatever it comes, so whatever you label it as, it does not really matter. The intricacies of the national insurance side are something that I do not think I would ever recommend anyone to get their heads around, but are quite bizarre, because the fund both is underwritten by general taxation, by the consolidated fund, so any shortfall gets made up from general taxation. However, the fund is then used to pay not only benefits like pensions, but also a variety of other bizarre charges, including an element of funding for the NHS. It is a system that is badly needed reconstruction for a long time, but no one has done anything to it since I think 1975, and in essence it is the system that was put in place in 1948. It is still our view that these systems should be merged by the devolution settlement as it stands. Having income tax devolved and national insurance not devolved stops that happening. Devolving NICs as well could give you a situation where either Scotland or the rest of the UK or both could seek to merge those, notwithstanding the political difficulties of making people realise how much tax they pay in. John Finch, you fall by Mark. Probably to touch on some of the areas that we have touched on already, including Barnett. Professor Trench, you talk about a more rationally constructed grant, which I assume means less than we are getting at the moment. Mr Phillips, you also say that such a system would be fairer than the existing system, which involves block grant that has no relation to current needs. Again, I assume that means that we would get less. Is that in fact the case? I have not done a needs assessment myself, so I would not want to come to any firm conclusions on that. I would have to recognise the most recent needs assessment. I think that it was a good piece of work. Jerry Hawthorne's work in Wales suggested that Scotland was receiving more funding than it would if it was getting the amount equivalent to what it would need relative to England. That is not saying the absolute amount. You could argue what the absolute amount should be, but the relative amount compared to England that Jerry Hawthorne's work suggested was higher than it would need to be. Scotland does stand out being relatively well off in terms of income per capita, and yet having very high spending. While needs is part of the equation, the other part of the equation would be that a no vote was meant to make sure that we were not any worse off, so there is a kind of commitment there. We need compensation because we have given up sovereignty. Are those not factors as well? On the politics side, you are right. Fundamentally, there is a question about what form of fiscal redistribution should take place in a fiscal union. There are various ways you can look at that. You can look at a needs basis. You can look at a revenue equalisation basis, which is not equalising on needs, just on the revenue's capacity side. You can look at a contributions basis, how much they are paying in is what they get out. The whole range of options on the political issue about whether a commitment has been made or not to the Scottish people to keep the Barnett formula seems to be the position of the Scottish Government and the UK Government at the moment that the Barnett formula is there to stay. That is a political decision whether or not that decision is fair and around politicians to decide. However, the levels of spending in Scotland compared to other parts of the UK on the most recent assessment—not my own, Gerry Hawthorne's—do look to be relatively high. On that basis, moving towards a needs basis assessment would seem favour on that. There is a question about how does that fit into the kind of political promises or pledges that have been made to the Scottish people. I agree. Professor Jenner, do you want to say anything on that? I have already talked about the problems that are implicit in the present Barnett arrangement. I do not want to repeat that, but all that is relevant in this context. That is the first point. The second point is that a rationally constructed grant has to be—we sketched out a way of doing this in the funding lever wallpaper that I am sure that you have seen before that we published in 2013. That would become a much more effective way of trying to manage devolution finance generally to combine the elements of grant and fiscal devolution. It is worth bearing in mind that, under the Smith proposals, the taxes that flow directly to the Scottish taxpayer, both fully devolved taxes and the assigned share of VAT, would be equating for something, depending on how you cut the figures for the Scottish budget, between 50% and 60% of that budget of Scottish devolved spending. The Barnett formula is only accounting for about half of that or even a little bit less. There is and there can be no objection to higher levels of public spending in Scotland if Scottish taxpayers are paying for it. The question is how much of that any higher level of spending should be covered by taxpayers from outwith Scotland. Was that not the promise that was made in the vow and so on? The promise that was made in the vow is to maintain the Barnett formula, but it is also subject to what became the Smith proposals for fiscal devolution. What was the implication not that Scotland would not lose out, though? The problem with that as an implication is that it is involving a set of assertions or assumptions about what is going to happen in the future, which, by definition, you cannot guarantee, not least because of the behavioural effects of devolved taxation, which is what we have essentially been grappling about when we talk about no detriment. The problem that you have inevitably is that devolved tax decisions may indeed, if they are working, should shape the tax environment. They should shape your public revenues by whatever decisions they make. The question is where also the responsibility for that lies. I should also add that the Barnett formula, if we move from a situation where the Scottish population is not growing less quickly than the rest of the UK, the Barnett formula does itself imply that the squeeze has taken place. In the longer term, it is not necessarily the case that the Barnett formula itself would be beneficial to Scotland. In the longer term, a needs-based formula would actually deliver more than the Barnett formula if the squeeze does start coming to effect. The whole thing was that Scotland's relative needs come in at about 105% of those of England. The Barnett element of block grant funding is something in the order of about 118% of UK average. On the one hand, there is a substantial degree of benefit to Scotland from that at the moment. That is, I would have thought, a logical argument for the SNP actually to resist any call for fiscal devolution, whatever. I know that there has been a remarkable absence of that demand. The Scottish, the convergence factor will take a long time to get down to that level, but ultimately it would, because convergence will drive Scotland down to 100% of English spending. That would be where, logically and ultimately, convergence would take you. I would like to move on to something else. We have mentioned the whole concept of an independent body to arbitrate between the two Governments and if there were disputes in a range of areas. The example has been given of Australia, which is fine. Does it not work in Australia because you have a proper federal system and you have a written constitution? To have an independent body would be for the Treasury and Westminster to give up the ultimate control, and surely that is impossible for them? I do not see why. Devolution fundamentally means that they are graciously granting us a little bit of freedom. I do not believe that that is how devolution works. I am not sure that that sort of way of thinking about things is a particularly useful way of trying to understand the relationships that are emerging in these islands. Do you think that the actual relationship will change? I think that for the UK to work as a devolved union, it needs to. It seems to me that, to set the budget, the whole thing needs to change because the bigger part, i.e., the UK, would set its budget first and then the smaller part, Scotland, Wales and Northern Ireland, would tweak around the edges whereas, at the moment, it is exactly the reverse. I would have hoped that Westminster might be willing to change that. Do you think that there is any likelihood of them changing that? Do you want to say anything, Mr Phillips? When I talked about an independent body to deal with, I was rather doubtful that the idea of arbitrating disputes is necessarily where this would need to go to. I think that this is more likely to be a form of mediation than arbitration. That is not part of the Australian architecture that I ought to add. It is a measure of the success of the way that the Commonwealth Grant Commission does its job, but there has never been a need for that sort of dispute resolution mechanism. If there is a political dispute, it goes to the equivalent of the Lloyd Ministerial Committee, which has a body called COAG, the Council of Australian Government. If there were a legal dispute, it would go to the courts. So, effectively, it makes a decision and all sides have so far have always accepted it. Because it is able to and in a position to do it. Do you think that we could get to that position here where— I think that that has to be the aim. That has to be the aim, right? I agree that that has to be the aim. Politics is rather different year than it is in Australia. I think that we are definitely mindful of the fact that potentially, at least, one of the parties does not want to be part of the overall union. The politics of that could have an impact on the operation of these systems. I am not sure whether we are around that, but everyone has to be mindful of the fact that the political situation is not as stable a union as Australia. The final point that I wanted to touch on is that we have talked to previous witnesses about the idea that, on the one hand, mechanical has been used, or I think that automaticity came into one of your papers, whereby you set something up and it kind of works its way through and you can leave it to get on with it. On the other hand, you have a review and we negotiate. Some people have suggested that we can negotiate every year, but that takes away virtually all of the mechanical side. I think that you said five years for Australia and maybe seven years for Canada. Is there a right answer to that? I mean, partly, I would like to set up a system that would work for, say, 10 years, 15 years before we had to go back and look at it. I think that if you could do something that would work for as long as 10 or even 15 years, that would have many attractions, but I suspect that you would find yourself needing to do quite a lot of maintenance along the way. I think that you are probably better off, as it were, going in for a regular service and knowing in advance that you have to go in for a regular service, rather than having to go in periodically when things take as it were, this metaphorical car to its garage, rather more often because this bit has gone wrong or that bit has gone wrong and the windscreen wipers have fallen off or you suddenly need to replace the wheels or something. I would say that I think that these two things should not be seen as in conflict. I think that the idea of something mechanical, working on a year-to-year basis, does have attractions to it. That is why these methods of indexing along the hawtham lines where you deal with the tax changes directly and the interactions of the Barnett formula fall out directly have their attractions. It avoids the year-to-year negotiations that you would need. Even on a year-to-year basis, it will not all be automatic though, particularly if you start invoking the no detriment principles for knock-on effects of policies, the compensating transfers between the different Governments. However, in as far as possible year-to-year, I think that there is a benefit to it being mechanical, but I agree that it will need to be reviewed. I am not sure if it is an optimum duration. I am not sure politically whether it makes sense to have these reviews taking place in non-election years to take up some politics or whether that is just hoping for too much. Thank you very much. I will touch a little further on the issue of the process and around the budget. Professor Trent, you were very confident in your consideration that the Treasury's behaviours will change and develop. That is slightly out of step with some of the other evidence that the committee has received where the indication has been that the Treasury is unlikely to alter the way in which, for example, UK budget setting takes place. I wonder what leads you to assume that that change is likely to take place. At the moment, the rabbit out of the hat approach by the Chancellor has been there for quite some time, and that has become behaviourally entrenched within UK Treasury budgets. I think that we have to distinguish between the various elements of what Treasury does and how it does it. The central element of that, unquestionably, is the annual UK budget. I agree with people who say that Treasury is not going to change that or certainly not going to change it very likely. In other respects, the Treasury needs to accept and recognise that aspects of what it does have got to change, because that is the logic of the situation. The politics of it seem to me to be such that there is increasing awareness of that and will to address those questions. One of the areas that you have both spoken about is about the more information around how the block grant operates. I think that there is a great deal of mystery that surrounds how it operates, and more transparency is something that is being called for. Is there any reason why that could not happen in advance of the July budget, for example, as opposed to having to wait until the inaction of either the SRIT or the Smith powers? I think that there would be practical difficulties in providing more information about how Barnett works, not least because we need to specify much more clearly than I suspect we have. I suspect that Mr Phillips and I both have ideas about what would be needed, but we would need to make sure that Treasury understood that and published it. I think that there was practical difficulties. I do not think that in relation to this year's budget there is any particular reason why historic data could not be provided. I think that they could publish the spreadsheets that they sent me. Those spreadsheets exist on their hard drives, and they are relatively easy to understand. I am not in the decision to publish them because I have them directly from them, but they can be published. I cannot see the reason why people agree that there is no reason why they cannot be published on the day of the budget, along with the other documentation. In the IFS submission, it talks about devolution of social security and may result in the system better suited to Scotland's particular needs and preferences. We took evidence last week from Professor Michael Keating, who spoke of the tax and welfare mix in Quebec. He said that Quebec has been able to resist the tendency to greater social and economic inequality in the rest of Canada. Do you see that there is the opportunity, perhaps, for that same approach to be taken in a Scottish context following devolution of powers? I think that I would raise two points there. First, if there was substantial further devolution of welfare powers, if there was potentially devolution of nicks alongside income tax, that would give a much greater scope for policy variation. As I said in my update to my submission, it is not just about increasing or decreasing benefit rates. It is also about completely restructuring the system. In principle, there is scope there to do things quite differently. You can have higher taxes and you could have higher tax credits and benefits. You could reshape the system to redistribute more or less of those life cycles, which is a whole range of things that you could do. However, you would be constrained by the extent to which people's behaviour responds. People living within Scotland are changing the amount that they work, changing how much they report to the tax authorities and the migration response. People moving between Scotland and the rest of the UK. If there were substantially higher taxes at the top in Scotland, you might see people leave Scotland to live in the North England or even move down to London if they are in the financial services industry. I think that whilst there would be scope for policy variation and policy difference, the extent to which that could achieve drastic changes would be affected by mobility of people and behaviour of response. I am not sure that the specifics in Canada by impression is that Quebec's economy has done somewhat less well over the past 30 or 40 years than in the rest of Canada. I think that there has been some movement of top owners and top businesses from Montreal to Toronto. The extent to which that is because of differences in tax regimes compared with the potential for a succession, I am not sure. However, differences in tax rates when they are large or differences in benefits when they are large can have behavioural responses. In your submission, you also look at the Scottish National Party's Scottish Government preference to increase carer allowance and other social security measures. None of those could be delivered by the Scottish Government under plans set out in draft legislation to implement the Smith commission, which does not seem to tally what you have just been saying around use of tax powers and things like that. I do not think that that is so. I think that this was in one of my other, I have not got one with me at the moment. So it was not in one of my formal submissions. Was it on the website or was it as I sent over? It says, I have not got the page marked, I have pulled it out to put in my questions. Oh, and it is. Oh, yeah, yeah, sorry, I can see it, yeah. Right, yes. I can see that. Under the Smith commission proposals, the Scottish Government will have the power to make changes to the systems in the devolved areas of competency. With some of those, they could make the changes, others they could not. Maybe there was a small mistake there. On universal credit, you cannot change the local ounces on universal credit. Haulting the volume of disability to PIPs. Most of that will have been done by the time that the powers of the Smith are there. PIPs will be one of the things that is devolved by the Scottish Government under the Smith commission's powers. They will, at that stage, be able to undo those changes if they wanted to, but they will not be able to halt the transition as it actually takes place. Forgive me, on this. I cannot remember if carers allowance is one of the ones that is being devolved. Yes, it is. It is being devolved. Yeah, so actually, unfortunately, I made a mistake in this document. I admit that, so yeah. So universal credit, they cannot do, but DLA and PIPs, they will be able to do once those are once those powers are fully devolved to the Scottish Government. What they will not be more generally able to do is increase other benefits. As we saw in the draft clauses, the top-up powers that people initially thought would allow people to top up any benefit seem to be restricted to top-ups for discretionary payments. Also, they will not be able to make any further structural changes to the benefit system. I was saying here that further powers for devolution would allow much more in the way of changes to the benefit system. There are some mistakes in that submission, unfortunately, but there will be some powers under the Smith commission. We are looking at the fiscal framework that is going to be established. We have spoken about the no detriment principle. From your perspectives, how much flexibility you see there being for there to be meaningful policy divergence, given that there is going to be a fiscal framework to be developed, but within that fiscal framework there are going to be multiple no detriment elements? How constraining do you see them being in terms of the flexibility for there to be real policy divergence and taking a different economic approach? It depends on how seriously the no detriment principles are taking in terms of the compensation elements of those. One of the things that is talked about in the no detriment principles is that, for instance, if the Scottish Government was to decide to have a more generous system of support for higher benefit rates for unemployed people, one of the things that the Treasury has said is that, in that case, if the Scottish Government tops up an employment benefit, people might stay on an employment benefit for longer because they get more income under it. That means that not only is the Scottish Government paying more, but the UK Government is paying more because the standard element of unemployment benefit and the university credit will remain part of the UK Government. That was one of the reasons why the UK Government was concerned about top-up payments and the initial interpretation of the Smith commission powers of top-ups. They talked about the need for maybe compensating packages for the Scottish Government to pay the UK Government for the impact of those things. Similarly, there was a discussion about whether the Scottish version of the work programme was going to be less effective than the UK version. Would the Scottish Government have to pay the UK Government for the additional benefit payments? Surely there is a flip side to this as well. If it is successful in Scotland and there is a compensatory saving to DWP, does that simply get retained at the UK level? No, the idea would be that those compensation payments would work in both directions. The issue here is that, I guess there are two ways you can think about this. One is that if these compensation payments have to be made and people think that these have to be made at every single time, there is potentially knock-on effects, knock-on effects happen whenever there is policy differences. Calculating those will be fought with great difficulty. There will be different assumptions used, different modelling used by the different sides. It will be very hard to get agreement. On the one hand, if this has taken seriously, people say that we need to have these compensation payments made in either direction every time there is an effect, it will become incredibly difficult very quickly to calculate those. That could discourage policy differentiation. On the other hand, if there is an acceptance that actually there are no detriment principles, we cannot apply this compensation in every single instance, but it has to be where there is a particularly egregious example of a knock-on effect, how you agree on what these examples are is another question. If it is seen as these chances being the exception rather than the rule, they will not have such an influence and there could be more scope for policy differentiation. There will always be knock-on effects, but that is part of policy differentiation. Other countries, the United States, for instance, do not have this no detriment principle in this system. They have great policy variation in income tax rates, in corporation tax rates, in sales tax rates and even benefit rates across the United States. Although behavioural response will impose some kind of limits on how far differentiation can go or at least give costs for giving differentiation too great, no detriment principles may or may not have an impact depending on whether or not they are invoked every time or they are used only for very serious cases. I think that I would agree with most of what Mr Oates has said regarding no detriment and how it should work. In relation to top-up powers, as one of those responsible for first proposing this approach to allowing the Scottish Government to be able to top up and supplement welfare levels or introduce new benefits, I do find it a matter for regret that the command paper and the draft clauses do not go as far as they ought to in actually delivering that principle. It seems to me that is a very important element of how, as it were, a post-Smith world should work. I do regret that that is not there. I understand from the UK Government point of view that there are some serious practical difficulties, but I do not think that they have been adequately addressed. Just to say something about Quebec, I think that Professor Keating may slightly exaggerate the extent to which Quebec has pursued a different social policy to other parts of Canada to a degree. This may be a matter of nuance and I am not quite sure about what period he is talking about. I think that the one very important thing to bear in mind in a Quebec context is language, not because it reinforces Quebec different, but because it segments labour markets. That means that mobility of labour is a very different business between Quebec and the rest of Canada compared to what it is would be between Scotland and the rest of the United Kingdom. It is very much harder for people to move from Quebec to other parts of Canada because they need to have good English in order to do so, as well as a desire. Of course, that language hurdle does not exist in a Scottish context. Finally, if I may convener, just around inter-governmental relations and interactions, there has been evidence received by the committee that there needs to be a much more formalised process of inter-governmental relations than that which exists presently. Do you have any views on how that should operate? I have plenty of views. I am never quite sure what formalised means. I am very sceptical about things like statutory underpinnings because I am not sure that they do any good and I am not sure how well they will ever work. They seldom exist and even more rarely do any use, so they have any real useful purpose in other parts of the world. I think that we need to be more systematic about this and we need much better information about this. I think that the best people to get information out of the executives that conduct most of these things are legislatures. I would look particularly therefore at members of the Scottish Parliament to be trying to get more information about what is going on for the Scottish Ministers in the same way I would hope that members of the Parliament at Westminster would try and put greater pressure on UK Government Ministers to tell us what is going on, because at the moment all we get is the annual report from the Ministerial Committee, which is pretty terse and not very helpful. Mr Phillips, do you take a view on that at all? I have nothing to add on that point. I agree with most of what he said there. Thank you, Gavin, to be followed by Richard. Mr Phillips, you have explained in your paper and verbally here today quite a lot about how a block grant adjustment mechanism might work in relation to devolved taxes. Can you say a little bit, because you touch on it in your paper, about how a block grant adjustment mechanism might work in relation to any welfare elements that are devolved? Yes. At least in principle, it could work in exactly the same, well, not exactly, but a comparable way. The simplest way to do it might be to say, let's take spending on the comparable benefits in the rest of the UK and index the block grant addition to what happens to spending on those benefits in the rest of the UK. That is the analog of what might happen on the tax side. I guess why that could be more complicated. There are a couple of reasons. Firstly, there is the fact that structural changes to the benefit system seem to happen more frequently than they do to the tax system, at least to the income tax system. Whilst in principle, you actually want these changes, these block grant additions, to reflect actually what's changed in the UK system, because fundamentally, there's this point that Alan was making. It's got almost to pay for a higher welfare from its own tax revenues fair enough, but if it's going to be funding higher welfare, should that come from the block grant? In principle, you'd want to have the system reflecting any big reforms to the UK system. For instance, if they were to delay the PIP, cut the amount spent on disability benefits, you'd want to give the Scottish Government less money, and if they want to continue to pay more, pay for it themselves. It's likely to lead to more political difficulties along that line. Secondly, many people have discussed the need to give them the more rapid ageing of the Scottish population. If you'd have full devolution of welfare, including pensions, would you want something that took into account the known differences in demographics that will affect Scotland? You index it to the population age over the state pension age, or make some adjustments there. In principle, you can use the same methods as you do for the tax side, but because of the more frequent and large structural changes that you see—universal credit, PIPs and things that you've seen recently—and there are some known demographic factors affecting these things, there may be more scope for debate about whether you should take into account those additional things, so there could be more difficulties involved. I'm not sure that makes sense. I know what you're driving at. I wonder if Professor Trench has any additional points on that subject. I'm afraid, when we did the devolution on welfare work, this was one of the lurking problems that was in our minds. It's a test that's something that we had ideas about, but nothing very clear. I'm afraid that it's one of those cases where I think the Scotland in the United Kingdom command paper badly flunks a test. It doesn't answer the problem. I think that the solution is going to be something like this, that you will identify appropriate proxies to identify a level of funding in relation to the devolved welfare benefits. There would be an element of funding that would necessarily, I think, need to be in the AME element of the budget, rather than the Dell element of the budget, but would flow into the block grant and be equally funiable with the rest of the block grant, so you could spend it—it would be able to be spent as the Scottish Government saw fit. Your proxy might simply be, as crude as to say, in 2016-2018, whatever year we're talking about. Scotland accounted for x per cent of the UK recipients of benefit y, and we will assume that Scotland continues to have x proportion of people who would be entitled to that benefit, subject to changes in the demography of Scotland, and add an amount to the block grant on that basis. I was disappointed that there was no serious analysis in the command paper of those problems, and it's skated over those difficulties, because that's what a white paper should be doing. Professor Trench, you talked about an independent body being required for the purposes of trying to predict what the block grant ought to be, a kind of post-event audit, and also for resolving disputes. If I may, not quite. I think that we need two bodies, a different one, to deal with disputes and disagreements. That was going to be my question. There are three functions. Your view is that the first two functions would be operated by one body and then the dispute? Yes. I think that these are two things that are entirely different in nature. We're talking about a specialist expert advisory body that's essentially carrying out a technical job, and then a mechanism to resolve disagreements and disputes that I suspect is more in the nature of mediation than arbitration, but needs to be able to do an element of both. You certainly could not have your UK finance commission, let's give it that notional name, as the body that might well be the subject of the dispute also involved in resolving them. That would simply offend every principle of justice. So you would need some different mechanism, and as indeed we need for addressing intergovernmental disputes more generally. That's what I think we're driving at there. So the first body then, you basically said that we could learn lessons from the commonwealth grants commissions and give some helpful evidence on that. In terms of the dispute resolution body, is there an equivalent, I mean I think you said there isn't an equivalent body in Australia, is there an equivalent body elsewhere that we can draw lessons from? Well there isn't, but I think the reason why there isn't is interesting and a comment on the difference between the UK and the nature of devolved government in the UK. And that is, it comes back to a point that Mr McDonald raised earlier, which is the unwritten nature of the constitution. And in most federal systems all have written constitutions. These terms to be rigid formal frameworks, they're difficult to amend if they can be amended at all, in reality in many cases they can't be. And when there is a sufficiently entrenched disagreement that cannot be resolved by political means, by, well I suppose now they're seldom smoke filled rooms, but what used to be the proverbial smoke filled rooms, then the matter will end up in the hands of the court and the courts will end up playing that role. And one example of this is Germany, where the principles, not the detail, but the principles of the German equalisation mechanism periodically get out of kilter and on roughly a 12 to 15 year cycle, they get referred once again by the states that pay, the lender that pay most into this system, to the federal constitutional court. And the federal constitutional court says the system has got out of work, it doesn't ceases to work and applies principles properly and it needs to be reconstructed and the states go away and they do a political deal having been told to you by the court. And this happens, this has now happened three times, so I'm fairly confident that it will in due course happen a fourth. I would like to see us not using the courts in that way, I think that reflects both the failure of political government and it probably puts the courts in a very difficult position themselves because these are not issues that British courts are well equipped to resolve, they don't have the expertise, they're not accustomed to having that role, maybe they'll become more accustomed to the role but they certainly wouldn't have that level of financial and technical expertise. And some alternative framework that puts an impartial body in place, I mean when I say a body I suspect one's sort of talking about say a group of three individuals would be the sort of mechanism that I have in mind. Last issue, a question for both of you but it was a comment that you said Professor Trenge, in terms of borrowing your view I think theoretically was that there ought to be some sort of ceiling below which the UK Government would indemnify, the Scottish Government could go higher but anything above that threshold would not be indemnified. In terms of actual numbers though, if we're talking about Smith powers and nothing else just for the sake of the question, in terms of the Smith powers, do you have any sort of sense of view on what those limits or what those powers ought to be in actual monetary terms or is that, have you not thought that quite deeply? I said that this was not a particularly careful research answer and I'm afraid that's a question I have to duck. Sure, okay. And Mr Phillips, do you have, does the IFS have any kind of fusion of the sort of level of borrowing that might be appropriate for the Smith powers? We haven't looked into the numerical issue here. All I would say is that on the current side I think there would need to be a higher borrowing, I think it's 500 million at the moment on the current side, I think that would need to be higher and I think there would need to be a lot more flexibility about how that's used, that much for sure. How much higher, that would depend on looking about just some kind of quantitative analysis about what kind of risks the Scottish Government will be bearing with the package of powers that are either under the Smith or, and then reassessed if additional powers are devolved, to make sure that the amount of borrowing powers that are there give enough flexibility, give enough room for nuva, given the amount of risk that the Scottish Government would be bearing. So it's an exercise which involves not just picking numbers from thin air but actually looking at the kind of risks that the Scottish Government would face. In terms of principle, do you take the view that the limits should be comfortably higher than you would anticipate to actually need, because presumably the last thing you want is to set a limit and then it turns out that the limit was just off and you then have a situation where you need to in fairly short-order extend, or do you take the view that you should go slightly higher than you think you're likely to need, or do you kind of take a mid-level? I haven't really had a chance to think about it in depth yet. I don't know if Alan has any. I would be inclined to think that there would be every reason for a limit to be a generous one, and therefore it would be rather higher than one would hope or expect a Scottish Government would need. It would necessarily need to be flexible, because this is something that would evolve. As we've been discussing in the context of no detriment, the tax situation can change after a few years. We have a very high deficit at the moment. We have a high deficit because we maintain a constant or a somewhat increased level of public spending when tax receipts dropped very significantly. One's got to deal with the fact that if one's evolving tax powers, then those tax receipts are going to be missing from the Scottish Exchequer, not from the UK Exchequer. It's got to have the borrowing power able to cope with that adjustment. Professor Trench, I'm going to ask you about the issue of Barnett conversions, because when we're debating introducing a needs-based formula, we'll eventually say that this might not be too particularly detriment to Scotland because ultimately Barnett conversions will be a complete lobby parity of spend, but you said that that would take quite a long time. Do you have any more details on how long that period might be? I think that my slightly glib answer might be asked me again in July, once we've seen the new technology. That seems very short, and that's the time to have more information. What drives Barnett conversions is normal increases in public spending, and of course those increases were both nominal and real, and they were huge during the noughties. That is why it is so remarkable that convergence did not happen during that time. If ever there were circumstances where convergence should have been happening, those are the circumstances. I would suspect that we're very unlikely to see a similar increase in public spending for a very substantial period of time, or a Government able to engage in such an increase in public spending. I would be fairly cautious in saying that it will happen in five years anyway, because I'd be fairly sure that it won't, but it will happen over time, assuming that Scotland remains as attractive a place to live as it seems to be, and therefore the population as it were stops declining or even grows. I was going to say that I have no predictions about when the convergence is actually in place, but it's unusual for me to actually be in agreement, but the work that Jim Cuthbert did in his submission, showing how the interactions of expenditure to growth, population growth, and the lags between how often population is updated, I think that's a really good piece of work to show actually how these three things interact, and what that implies for the point at which they converge, is it 100% or is it 105%, 110%. I think that's a really good exercise to look at. It doesn't give you the answer, it doesn't tell you what spending growth will be in the next few years or what population growth will be, but you can probably run some scenarios using forecasts for population growth in Scotland and England, and different projections, the OBR projections for what we'll be spending over the next 50 years to see what kind of convergence you're looking at. By introducing a needs-based formula, whatever new formula it is as part of this process, presumably it wouldn't be to the benefit of Scotland financially at all in terms of that timescale. So, looking at the next five, 10 years, it's unlikely that you'd have convergence down to a level below 105%, which is, I think, what the Hawthorne Commission said the needs-based level would be. However, as I said, we haven't done a needs-based assessment at the IFS. It's not clear what the needs-based level would be at the moment. I agree that, in the short to medium term, it's difficult to see a needs assessment that would lead to higher funding that Scotland currently gets. Thank you, Ms Forbes. Finally, in the absence at the moment of a group of individuals, I point to both the Scottish UK Governments to help to mediate over disputes between Governments. The point that you've made, Professor Trench, is that it's very important that, in terms of scrutiny of how the Joint Extrector Committee works or doesn't work or doesn't meet, it's very important that this committee, and select committees, presumably also Westminster, play a cross scrutiny to that. Presumably, it should be standing items, in fact, for committees both here and in Westminster. I think that part of the issue at Westminster is, of course, that responsibility for these matters is fragmented between a number of departmental select committees, in particular between the Treasury Select Committee and the Scottish Affairs Committee, and ensuring that it's high enough profile, particularly for the Treasury Select Committee, is, I think, something of a challenge. They've not shown much interest in devolution issues until very recently toward the fag end of the last Parliament. They started to do some work on this. Presumably, it's also the Scottish Affairs Select Committee to take that up from. One would expect, particularly given its likely composition in the new Parliament, one would expect that they'd be particularly vigorous. Richard, that's a concluded question from the committee, but just one point. You talked about Scotland's population declining 0.3 per cent a year in the 1990s and 0.1 per cent now, but Scotland's population is at record level. It's actually grown in recent years. The decline went into reverse for a couple of years, as I recall, around 2007. This is a question of a relative decline, rather than an absolute decline. Thank you for that. Thank you very much for once again answering your questions so directly. That concludes this session. I'm now going to call a recess until 11.30 to allow members a natural break and to change their witnesses. We shall reconvene this session. Our next item of business is to take evidence from Scottish Government officials in relation to the Education and Scotland Bill's financial memorandum. I therefore like to welcome to the meeting Douglas Anstall, Laura Mikle and Scott Wood. Members have received copies of a briefing paper, along with all written evidence received, so we'll go straight to questions from the committee. As normally happens, I'll ask the initial questions and then we'll move on to questions from the committee. First, in terms of the evidence, Coslaw said, and I quote, that the bill proposes new duties on local authorities, and that is required to be fully funded by the Scottish Government. Given that the additional burdens on local authorities, why is the Scottish Government not agreed to fund them? Question in relation to a specific set of provisions in the bill, because there are different arrangements for each of the parts? New duties that the bill is imposing. If there are new duties being imposed—I remember well over a decade ago, about 15 years ago, in the first session of the Parliament, there was a general view that if the Scottish Government or the Scottish Executive Agency was imposing new burdens and new duties on local government, it should fund those new duties rather than miraculously expect local government to find them from their own resources. However, here we are in the fourth Parliament, and we are still having the same situation whereby the Government puts forward a bill. There is going to be an impact on local government and what they have said is that we will partially fund it, but somehow you are going to have to find it from your existing resources. It is a wider issue, but rather than looking at a specific area in the bill, we could talk about the Gaelic provision, if you like, where there is a 75-25 per cent expectation in terms of Scottish Government local government funding in terms of capital. Generally, why is the bill proposing new duties on local authorities but not actually funding them? That is from the Gaelic point of view. In particular, it has been a line that COSL has taken with us. That is a new duty, so it needs to be fully funded. I think that I bat that straight back. We do not recognise that. The duty on local authorities has been in legislation since 1918. In the 1980 education act, there was a provision that children should be educated in line with the wishes of their parents. Many parents wishing Gaelic medium education have used that provision in the 1980 education act that children should be educated in line with the wishes of the parents. There are Gaelic provisions in the 2000 education act, Gaelic provisions in the 2005 Gaelic act, where Gaelic plans can be prepared with commitments in them. What we are doing here is putting in place a process that will hopefully as going ahead be a transparent, a consistent and a timed process that will enable parents to put forward their request to local authorities for Gaelic medium education. I would not see that as a new duty. It is putting a new structure, a new shape in there, but the duty is already there on local authorities to provide education and indeed to provide Gaelic education if that should be the wishes of the parents. The capital costs to local authorities expected in paragraph 38 to cover 25 per cent of the cost of that. The questioner means why they are expected to pay additional funding for that. We have two grant schemes in principle to support Gaelic education in local authorities. Before mentioning the grant schemes, it is reasonable and legitimate that Gaelic education should be funded from the local government settlement because, after all, it is just education of young people in schools and that is legitimate. The two grant schemes we have, one for revenue and one for capital funding, and we are open and indeed we welcome bids from local authorities for both capital or for revenue to help with the expansion of Gaelic medium education. The question of what support a local authority needs if they want to advance or expand Gaelic education varies greatly. Sometimes the request will simply be that we could benefit from some capital help in order to buy some porta-cadabins and renovate some rooms for the Gaelic medium classes. Sometimes the request is capital and we look towards our resources to assist with that. Sometimes it might be revenue. Could we help with the provision of some support for a salary for a teacher or various things like that? Sometimes the request does not come and a local authority is quite content to proceed to establish Gaelic medium education in its area and from the resources that it has already received. In paragraph 41, the financial memorandum says that the process for local authority to respond to parental requests could be managed by two local authority officers as part of their workload over a period of about 14 weeks. That cost has been estimated at £25,000 per annum per request. Why is it such a huge amount of money? That seems an awful lot of money to spend on. That was a tricky one. It is us stepping into someone else's working life and trying to guess how much time that would take in their working life. We thought, well, here we are. The provisions are putting in place a process. The process will need to be managed within the local authority and the process will involve the local authority working with the parents that have put in the request. We just thought what percentage of their working day would that take and what salaries would those officials be likely to be in receipt of? In talking to local authority colleagues, we tried to establish the burden that this would involve, the time that it would involve, the amount of work that is following through the process and tried to base our estimate on those and came with that figure as best we could from those elements. It just seems a colossal amount of money to process a request for someone who is a Gaelic medium educationalist. I am missing something here. Well, what we are costing there is the salary, the percentage of the salary of the individuals doing the jobs. If we... What is the colossal bureaucratic nature of this that it takes £25,000 worth of salary? How many countless hours are they spending on this? I do not understand why it is taking so many hours to process such something. Someone applies for their child to get Gaelic medium education, and you are saying that it is going to take two officers 14 weeks to do this. I would not have thought that processing a request of any nature would take that amount of time and that amount of money. Obviously, that has caused a nervous because they are saying that the estimate is only going to be one of those requests a year, but there could be half a dozen, a dozen who knows, but they just seem to be... Why is it so? What have they got to do with those people? I do not know. There are reports that need to be written, and that will take official time. There is information that needs to be brought in from education bodies such as Education Scotland and from Gaelic bodies such as Board and Gaelic. There will be working with elected members in local authorities putting advice forward preparing papers. This will all take a percentage of the officer's time, and for that we try to calculate a percentage of their salary that this would amount to. However, in addition to that, I think that it is worth mentioning that if we put in place a process that will be over in say, for example, 10, 14 or 15 weeks, that will be a much shorter and less burdensome process than what is happening at the moment, because in some areas of the country there have been examples, and that is referred to in the spice paper on the bill. There have been examples where parents have been knocking at local authority doors for six, seven, eight, nine and ten years for Gaelic medium education. That would also take up a long time in local authority business, and if we added that up, I think that that might add to a much higher cost of officials' time. I think that there is an argument here that that is leading to a timed, transparent process that will be much cheaper on local authority time. Okay. I want to explore that further, colleagues. Table 4—I know that we have had corrections on the figures, but in terms of table 4, what I notice about it is that the funding for children's rights will be £187,000 in financial year 2016-17 and stabilise it £330,000 for 17-18 up until 2021. In terms of Gaelic medium education, you are expecting a year-on-year increase in that. Why is that? Is that going to continue to increase at the infinitum, or do you believe that 2021 is going to be the last year in which the sums continue to increase? The increase that we have down there is in the Gaelic medium side. I think that we would suggest that the increase is there because if a local authority opens up Gaelic medium support, it will be looking for support with things such as the salary of a teacher or, for example, the transport of children to school. If they look for that support in, for example, 1819, the same authority might look for the same support the following year, 1920, but there might be another local authority looking for similar support for the salary of a teacher or for transport to school. We see the figure going up in terms of new or other authorities coming forward opening Gaelic medium provision. There are other things going on in the background as well. Very often, a local authority might look to the Scottish Government for support, for example, with a Gaelic teacher's salary, but a few years down the road, the local authority might say, we will mainstream the salary now. There is movement in the support that is given from Scottish Government to local authorities. Sometimes something that might be considered a burden or a little bit additional support for one, two or three years might be mainstreamed by the local authority after a few years. Thank you for that. One final point before opening the session to colleagues, which is that they are concerned and it is mentioned in the financial reports about the availability of teachers. What kind of level of constraint do you think there is in terms of implementing this policy vis-à-vis availability of teachers? I think that the availability of Gaelic teachers has always been a serious concern and it affects some areas more than others. There are a number of new measures that are being put in place to increase the number of teachers that Gaelic teachers have been attracted into the profession and are being placed in Gaelic classes. The numbers over the last three years have been higher than they have ever been in terms of teachers going through the system and we have more roots into Gaelic medium teaching than we have ever had before. We are making good progress. Numbers are better yet it remains a serious concern that we continue that work. All parties, local authorities, Scottish Government, Scottish Funding Council, universities, board and Gaelic, are all working together as positively as possible to try and address the issue. However, it is a concern. Say, for example, on that point, if someone says that Scottish Borders wanted Gaelic medium education of their child, it is not anywhere where one would anticipate that there would be a surplus of Gaelic teachers or any Gaelic teachers. What kind of process would we have to do through? The council would then have to recruit a specific teacher to that local authority. What kind of timescales are we talking about for effectively the roll-out of this policy in such a case? I know that it is difficult to be precise because you would obviously have to recruit an individual and persuade them to move to that part of Scotland, but what kind of concerns do you have about that and how would that be addressed? I think that we would approach it as we would approach a need in any other area of the country, even in some areas that you might think would be more familiar with Gaelic language, still have needs to recruit Gaelic teachers. The ways that the local authority could approach it just in the standard way of putting an advert in the press or putting the advert to board and Gaelic that keep a register of teacher needs. They could look for a probationer coming through the system to step in and support Gaelic teaching. Or else they could try to grow their own. There might be teachers living and working in Borders Council areas that are Gaelic speakers and they might consider transferring over to teaching in Gaelic. There is a course available, a one-year course called Gift Gaelic Immersion for Teachers, whereby local authorities can put forward teachers that are able to speak Gaelic but are currently teaching in English, so it is possible for local authorities to retrain and place somebody who might be one of their own teachers in a Gaelic medium classroom. The standard route of adverts is to re-training and selecting a probationer. There are different routes that the local authority could follow, and either ourselves in Scottish Government or colleagues at Borden and Gaelic would be very happy to advise and support in any way we could in this. I say that teachers remain a concern for us. I just used Borders as an example. I do not know what the current situation is in that area. I just picked it randomly. You are saying that it could be a year or two, even if it is a duty on local authority to provide Gaelic medium education. It could still be a year or two before a child is able to be taught in a Gaelic unit because of those issues. First of all, capital has to be found to build a unit. Secondly, a teacher has to be recruited, et cetera, and we have to go through this process. That might be the case if there was a parental request in Scottish Borders for Gaelic medium education. If parents wanted their children educated in Scottish Borders, it is possible that there might be a school that was suitable that had adequate accommodation for Gaelic medium classrooms. It is also possible that an advert could go in the press and a teacher could be recruited. There is not necessarily a delay in this process, but the way that we have constructed the provisions in the bill, there is an initial assessment and a full assessment, and we would hope that in the full assessment that the local authority would have the opportunity to explore those issues in depth and come to a judgment as to whether it was reasonable to establish Gaelic education in that area. Thank you very much for that. I am now going to open out the session to the first person who asked the question. It will be a date. We take convener to be forward by Malcolm. Thanks, convener. Just to follow on what we have been talking about so far with the Gaelic, I did get the impression from some of the responses that the Government is hopeful that there will be quite a serious expansion of interest in Gaelic through this. Is it that Gordon Gaelic talks about, in all likelihood, giving rise to additional requests beyond normal levels? One or two others, COSLA, talks about expecting the bill to lead to faster growth in GME throughout Scotland. The statement does not seem consistent with the estimate in the financial memorandum, and the other one was Fife, which I picked up, which says that the potential for expansion in the period covered by the FFM is modest and potentially understated. Are we being too cautious and pessimistic about how much interest there might be? All that we can do here is look at the growth that we have had in the last little while and the interest that we believe is out there. I can tell you what growth we have had, for example, and it is in the papers relating to the bill. Let me stop myself there and say that there has been growth in Gaelic education generally. The numbers are going up, the numbers going into primary 1 are increasing, and in a number of areas what our Gaelic units are expanding to be Gaelic schools. There is growth generally, but if we address the question of how many new units have been established, I say that there has been three new units established in the past six years. We expect that the provisions of the bill will lead to an increased rate of growth. As you picked up from the papers and responses, a number of other respondents have also said that we expect that that will lead to an increased rate of growth. Gordon Gaelic said that that will probably lead to an increased rate of growth above normal. Our estimate is that not that the lid is going to come off and that it will lead to requests everywhere. We still think that that will be modest growth, so if at the moment we have three new units every six years, which is in effect one unit every two years, an increase in growth would be one new unit every year. For Gaelic medium education, which is a very small sector of Scottish education, it would be a very good result. It would lead to a significant growth in the Gaelic education sector. Our best estimates are looking at what is there or what growth we have had over the past six or seven years. Estimating that the bill will lead to an increase, but our estimate is that it is not going to be anything more than modest growth of perhaps one request per year. To move on to the idea of compulsory registration, GTCS, I see in their response that they are going to question the figures. For example, it is not just a one-off cost at the beginning, there would be on-going costs. The Scottish Council for Independent Schools talks about what kind of training existing teachers might need, and it quotes figures, for example, the University of Buckingham, which I assume is not the cheapest place in the world, at £3,995 per person. I am just wondering if we have enough costs built in there. I think that there are a couple of issues there to respond to. First, in relation to the GTCS evidence and some of the costs that they have highlighted in terms of preparing for the commencement of those provisions, it is important to recognise that the independent sector has a long-standing commitment to work towards registration on a voluntary basis. Certainly some of the activity that is being described in the GTCS submission, we understand, has been on-going and is part of the programme of work to support that transition towards registration. However, we recognise that the imposition of timescales through the bill could well impact on how and when that money is spent, and we are more than happy to have a conversation with the GTCS about how we can support it in that transition in advance of commencement. In relation to the GTCS costs, that is the position that we are adopting. In relation to the costs associated with training as teachers work towards registration, our view is that we need to take as flexible an approach for the purposes of the transition arrangements as we possibly can. We have discussions scheduled with the GTCS and the Scottish Council for Independent Schools to agree the transitional arrangements. We do not want to pre-empt those discussions, but, as I said, we want to be as flexible as possible, and some options for us include teachers looking to secure additional qualifications. We are also looking at establishing alternative categories of registration, which would allow existing teachers in the independent sector to continue working in their current post or in that sector without the need to secure an additional qualification, and instead focusing on an assessment of the existing skills and knowledge that that individual has. Am I right in saying that some teachers would be closer to what they needed for registration than others? Yes. We anticipate in total that this policy will impact on around 700 teachers. There is a range of qualifications held by those teachers. Ultimately, the best route to registration for each of those teachers will be dependent on the qualifications that they have, the skills, the knowledge, the experience and, of course, their longer-term plans, whether they intend to continue working in their current post in the independent sector or if they have plans for working in the state sector at some point in the future, for example. The third area that I wanted to touch on was the attainment level of pupils from most deprived backgrounds and so on. South Lanarkshire makes an interesting comment that how it all ties together. We have the Scottish attainment challenge fund with £100 million. It is saying a bit of lack of transparency how that money has been allocated and if that money is connected to the bill and they are getting it right for every child agenda, so they have three things there. Are they all related to each other? They are. They form part of a broader package of measures that we are taking forward to narrow the attainment gap. There has been an awful lot of focus placed on this in recent times. In relation to the attainment Scotland fund, my understanding is that the funding has been directed to those education authorities with the highest concentrations of deprivation. However, we are also actively considering how else we can support disadvantaged communities elsewhere in the country and those discussions are on-going. As I say, that provision does form part of a package of measures. You will be aware that we are currently looking to recruit 32 attainment advisers to support local authorities across the country. We are also looking to establish literacy and numeracy hubs. We have an on-going programme of work that is using attainment for all programme, which is designed to really help us to understand what works and develop our evidence base around narrowing the attainment gap. The duty that is included in the bill does form part of a broader package of measures and a universal approach to narrowing the attainment gap. That is the area that I was going to ask about, so you have answered it already, but I suppose that it was a bit of the bill that I was most interested in and thought about without being dismissive of the other sections. I think that it is by far the most important part of the bill, promoting equity of attainment for disadvantaged children and closing the attainment gap. I was very surprised that there was absolutely no sum of money attached to it. It did seem rather odd. Obviously, there has been some money announced for seven local authorities, so I suppose that that will help in those areas. However, it seems odd that you, in a way, almost downgrades the duty if there are no resources consequent upon it. That is probably not something that we would agree with necessarily. I think that it is important to reflect on the increased priority and the increased resource that has been directed towards addressing this particular challenge in recent times. I have touched on some of the developments that have taken place. You mentioned the attainment Scotland fund and the £100 million that is being invested through that fund. However, as I have already mentioned, we are also committed to the appointment of 32 attainment advisers across the country, the establishment of electricity and numeracy hubs, and we have been delivering the raising of attainment for all programme for some time now. Given the level of priority that is now being attached to the issue, it is our view that, if we were placed under a duty of this nature at this point, we would be satisfying it. I suppose that the purpose of the duty is to ensure that the level of priority that is now being placed on this issue is maintained and that the momentum that we are developing is sustained moving forward. It raises interesting general issues about the nature of financial memorandums. If the bill had come out a year ago, would you have put some money attached to it? Is the reason that you are not putting money into it because you have already announced money for it? Is there no intrinsic necessity for more money in order to achieve that objective? When it comes to preparing the financial memorandum, we need to make an assessment of the investment that is currently being made at the point at which we are drafting the financial memorandum and the range of initiatives that are taking place. Based on the evidence form of view about whether or not we think that additional investment would be required to satisfy that duty, that is the process that we have gone through for the purposes of this financial memorandum. It is particularly interesting in this case, because although there is a substantial sum of money, it is only going to seven local authorities. From somebody and some other local authority, you might say, how are we supposed to achieve this particular objective? I would go back to the point that the attainment Scotland fund is only one part of a package of measures that we are taking forward to support every local authority across the country in narrowing the attainment gap, but I go back to the 32 attainment advisers, the raising attainment for all programme, which involves 23 of the 32 local authorities and over 180 schools at the moment. We have a universal approach to addressing this issue. However, we have targeted some resources towards those local authorities who have the highest concentration of deprivation. As I say, discussions are on-going about how we can support those other local authorities who face challenges as well. However, even in the narrative of the financial memorandum, you would have expected some of that to have been described. It is just very striking that the most important part of the bill gets five lines on a one-off cost of £50,000. I mean, hopefully, the evidence that I have offered today brings some clarity around the approach that we are adopting to this issue and why we have set out the figures that we have in the financial memorandum. Okay, thanks. I want to pursue a similar issue with some slightly different specifics. In the financial memorandum, you say that the estimated total costs of the bill's provisions are and so for financial year 1670, which is a first year, it is £254,000, goes up to £560,000 and by 2020-21 it is £736,000. Those are amended slightly, I guess, by the addendum that you have sent today, but by about £50,000 or so. Those figures are broadly in the same ballpark. You are saying that the total costs of the provisions are important in the financial memorandum. Obviously, you are not going to narrow any attainment gap by investing £736,000. I mean, that is presumably not going to have any impact. You have brought this £100 million in. Can you tell me, obviously, that £100 million figure? Is that an annual figure or for each of the five years on the financial memorandum, how many millions should we actually really add to those columns so that we see how much is being invested? Well, I think that in relation to the £100 million that has been invested through the attainment Scotland fund, that is over the life of the fund, which I think is five years or perhaps four years, I think it is. Sorry, I can write to the committee and clarify that particular point. I mean, there is a range of activity already going on within local authorities to seek to narrow the attainment gap. I have touched on some of the national activity, but local authorities are delivering services in a way that seeks to address these challenges all the time. I think that what we are focusing on for the purposes of the financial memorandum are the costs directly associated with the new legislative proposals that we are bringing forward. Can you tell us, when you write to us, just how much additional money is going in each of the financial years that is set out by the bill? We can certainly write to you with further information on the attainment Scotland fund, if that would be helpful. That would be very helpful. Secondly, it is really to follow up on what Malcolm Chisholm asked. Initially, you are saying that you do not need to worry about the figures that are low on the bill because we are throwing in the extra £100 million. Initially, at least, through the attainment fund, there will be literally £0 going to anyone other than the seven local authorities. What additional money will go to the other 25 local authorities who will have a legal duty placed upon them under the act, but at least in year 1, they are not getting any of this £100 million? Again, it is important not to focus solely on £100 million attainment Scotland. There are a range of measures that we are taking forward in partnership with all local authorities across the country with a view to narrowing the attainment gap. Now what we have set out in the financial memorandum is the cost associated with the nature of the duty that we are placing on local authorities. Given that we are taking forward this broad package of measures designed to support local authorities in narrowing the gap, we are not of the view that there necessarily will be any costs associated with the legal duty that is included in the financial memorandum, so long as the level of priority that we are currently placing on addressing this issue is maintained moving forward. That is really the purpose of the duty, I suppose, is to ensure that that priority continues to be attached to this issue. Let me phrase it another way then. If this bill is passed in its current form, which I guess many would anticipate, there is a duty under part 1 on the local authorities to reduce inequalities of educational outcomes and narrow the attainment gap. Once the bill is brought into law, which would appear to be 2016, that duty is imposed on local authorities. Some local authorities or seven of them will benefit from this attainment fund, presumably in 2016 initially. My question is that, for the other 25 local authorities, the duty will be placed upon them from 2016. You are saying that there are other measures there, but it is not clear what they are. What additional money is linked to the bill that will be required by the other 25 local authorities in order to fulfil the duty? It is really the question that the convener asked right at the start. I cannot see how the other 25 are getting any extra additional funding to deliver on the duties that we all want them to deliver on. I think that the first thing to touch on is the purpose of the duty that we are looking to bring forward. The purpose of the duty is to ensure that du regard is given to the desirability of addressing this issue. The purpose of the duty is really to ensure that we are resources that have been allocated and decisions are being made that a degree of priority is attached to narrowing the attainment gap, if you like. We recognise that local authorities work in a financial envelope in a context, and they have a limited budget to allocate. Indeed, the duty itself takes account of that. A du regard duty suggests that a degree of priority needs to be attached to an issue, but other factors can also be taken into account when reaching decisions. Obviously, one of those factors is the finances that are available to local government. We recognise that they are working within a budget. It is about how they use that budget that is available to them to place particular emphasis on the need to address the issue. I have already touched on some of the other activities that we are taking forward with local authorities across the country that are designed to support them in progressing their work in this area, so there is not really much more that I could add on the back of that at this point. Okay, not here today, but you are going to let us know about the attainment fund. We will talk about those other things that are happening. You do not need to give them all right now, but could that be given to us as well? At the moment, I can not see how local authorities that are not getting attainment fund money can actually make progress in their duty, which will be a statutory duty from 2016. On the face of it, they are getting between them, aside from their attainment money, £67,000 between 32 local authorities in year 1 and £104,000 in year 2. I am sure that there must be more work being done in the yard given the more through other measures, but it is not clear to me what those other measures are. I mean, the local government settlement provides funding to support a range of public services, and those include obviously education services, so there is money going out to local authorities. What we are saying is that in delivering education provision in your area, you need to attach a degree of priority to addressing this issue moving forward. At the national level, we are taking forward a sort of package of measures designed to support them in achieving that. As I said, I will not run through the range of activity that we are undertaking again today, but I am happy to write to the committee to set some of that out in more detail and to talk about our plans for the attainment Scotland fund. That is what I am going to ask for. You talked about these 32 attainment advisers, but is raising attainment no already the job of teachers, heads of department, head teachers and directors of education? Surely, if there is a real issue in terms of attainment, they should already be focusing on that on a classroom, department, school and local authority level. Yes, absolutely. What we are trying to do through the appointment of attainment advisers is to support local authorities in identifying what works best to address the particular challenges that some children will face in relation to their attainment. It is providing that additional capacity, that knowledge and expertise to support their considerations. We get a clear sense that local authorities are currently attaching a greater degree of priority to addressing the issue. We get that sense through the discussions that we are having around the Scottish attainment challenge, for example, through the participation of a significant number of local authorities in raising attainment for all programme. We get a sense that there is a degree of urgency being attached to addressing the issue now. I suppose that the challenge for us is to ensure that this priority is maintained and perhaps that we get a better sense of or put in place more robust measures to allow us to measure the progress that we are making around all of this. Is there no sharing of best practice at the moment within schools, local authorities and across local authorities? Is that part of the work of those attainment advisers? No, we expect that there is. One of the key purposes of raising attainment for all programme is to share that best practice, to test models for changing improvement and to share that practice across local authorities and across schools. We have 23 local authorities currently involved in that programme and 180 schools. We are really looking to build on that activity and provide dedicated support and resource to every local authority across the country so that they can implement what works when it comes to narrowing the attainment gap. I have a point of information to go back to, Mr Ansel. You mentioned at one point that local authorities could mainstream what we have referred to in the past as the Gaelic medium education unit. What are the financial implications for that? Is there a tipping point? I know that there are a couple of schools now where the majority of children registering are going to be taught in the medium of Gaelic. Does that mean that the school is a Gaelic school with an English-speaking medium unit? I think that there are a couple of things in that. The mainstreaming of Gaelic costs is something that sits with local authority officers. I am aware of conversations, for example that local authority officers might say that, in a Gaelic school, we have five, six or seven teachers. Three or four of them are paid for by local authority money, so their costs are mainstreamed and we look to the Government's specific grant to support the other two, three or four. As local authority officers work with Gaelic costs, for example, sometimes they might think about opening up new provision, so within a local authority discussions will go ahead about the mainstreaming of another teacher's salary and perhaps diverting a bit of specific grant from the Government to some new provision. The question of mainstreaming of costs and where a local authority might look to the Scottish Government for support is largely a discussion that takes place within local authorities. As requests for support come to us, we get involved in those discussions just to an extent. The other thing that you were mentioning is that, very often when Gaelic starts, it is seen as something additional, so there is a request for support. In some areas of the country, the Gaelic side of a primary has increased to the extent that it is the majority. There is recognition given for this now. There is a phrase being used at Gaelic status schools. We currently have nine primaries that are recognised as Gaelic status schools whereby there is a significant majority of the pupils who are receiving their lessons through the medium of Gaelic. That significant majority could be 60, 70, 80 and even 90 per cent of the pupils are Gaelic medium pupils. Of course, there is an argument there that when 90 per cent or 80 per cent of the pupils are receiving their education through the medium of Gaelic, it does not seem like it is something that needs additional support. It sounds like it is the mainstream activity in that school. It is a feature of our education system. It is part of the discussion that we are having with local authorities. As some of them are moving towards recognising schools as Gaelic status schools, we are discussing that and what support is needed in that context with them. To say, I went to Bellewsh's Academy in Glasgow and everyone in first year or second year did Gaelic. I was one of 19 of 350 pupils over French from there on in. It was part of the mainstream at the time for anybody who lived in that area. It was a special school for people who were interested. It was just an ordinary school in South Glasgow. We took it because the education authority at that time decided that it was part of our culture. Apparently, it was the only school in Glasgow that did that. It was a traditional thing. Unfortunately, that no longer happens. Mark Ruskell, I have a personal and political interest in additional support needs. I note the extension of rights to cover children with additional support needs. You state that, at Para 48 of the financial memorandum, some costs are unknown. At Para 47, it has not been possible to assess the cost of extending rights and an estimated amount has not been included in the memorandum. Evidence that we have received from East Lothian Council states that, as a result of increasing ASN rights, that will increase ASN referrals as a whole. They also refer to an 88 per cent increase in ASN referrals over the last five school sessions. While I understand that, I should point out that Fife and South Lanarkshire Council have estimated minimal costs, that is based simply on the process of the tribunal element and not maybe the decisions in terms of placings that may have to flow as a result of that. Is the cost that you estimated purely based on the tribunal element or the costs that you would be looking at purely based on the tribunal element and that process, or does it also consider the knock-on effect from that of potentially having to allocate additional ASN places within the school? The costs that we went through to try to establish the costs were based across all the rights, not on the tribunal alone. I am aware of, obviously, of East Lothian Council's position. I think that there is a premise possibly within that, which is the belief that children and their parents will use their rights, whereas it will be one or the other, it will not be both people using their rights. The reason that we have come to the position that we have in the financial memorandum, where we indicate that we do not expect that there will be a significant amount of costs is based on the experiences of the Welsh tribunal, where children have had rights in Wales only for the tribunal for a pilot period and they were not used at all. The experience of our own tribunal, where disability discrimination claims have been able to be made by children with capacity, which would generally be about the age of 12, and they have not been used at all either. While we recognise that there may be some additional costs, we are not expecting the level of requests or use of those rights to be in the order at which perhaps East Lothian Council has suggested. I think that the estimates that we have given are possibly on the high side within our calculations, because we have not been able to accurately tie down exactly how many children may use their rights going forward, partly because we were not able to establish the cost of rights, but also because of the experience of other jurisdictions. We have not been able to build that model, and therefore we have erd on the side of caution in that, but you will see it at paragraph 48 because of that. We have had to indicate that we will review, as you would expect. I recognise that that that is not a brilliant position to be in, but it genuinely is not for the lack of trying to nail those costs down. We did try quite significantly to do that. I see that, at paragraph 44, you talk about parents currently having the rights to make those requests on behalf of their children. You could put forward the suggestion of how many parents are aware of the rights that they have in that respect, and I would suggest that there is the potential that introducing that right might sharpen focus from people into that area, and that you might perhaps underestimate what might come forward. Any legislation that creates a right or extends a right by definition draws attention to that right, and parents who may not previously have been aware that they had those rights or could access those rights may now choose to take that opportunity, or it may be pursued by... The follow-up question really would be, how early in the process are you going to have a look at what is happening and judge whether the behavioural change that you anticipate has actually played out? In our discussions around those calculations, we also anticipated the exact point that you have made, that the fact that there is a bill will draw attention. It may cause increases to the system in terms of parents currently, and it may allow... There may be children who would use the rights who would not otherwise have done so, or they couldn't up until now, but they may wish to instead of their parents using the rights, and we factored that in. In terms of the review, we will review immediately... We currently are under a duty to... The Scottish Minister, sorry, are under a duty to report to Parliament each year on a number of elements, including the cost of provision. We are in discussions that formal duty will conclude next year, but we will continue to report and to record information about this type of information right the way through so that we've got a current picture, and we'll also have a future picture from the moment that we commence these... We'll review from the moment one year on from the commencement of those bill provisions once they're commenced, if they are passed as they are. Okay, thank you Mark. I'm pleased to say that that has concluded our deliberations on this particular issue. I'd like to thank you very much for your contributions here this morning. I'll just have a 30 second break while our witnesses depart, and then we'll move on straight on to agenda item 4, which is to consider the following negative instrument, the Scottish Tax Tribunals, Time Limits and Rules of Procedure Regulations 2015, SSI 2015-184. Public session. Before we go any further, you will all have received a letter from Nigel Dolan, MSP, Convener of the Delegated Powers and Law Reform Committee, in which she draws our attention to concerns of the committee. For example, the last that one paragraph says, and I quote, the setting of a limit for requesting permission to appeal to the upper tax tribunal, the court of session is a matter of considerable importance. It goes on to say that the committee was particularly concerned about the implications of shortening time limits for permission to appeal and how they should impact on the rights of those wishing to make an appeal. So I'm happy to take comments from members of the committee. I know that the deputy convener, who's a member of that committee, certainly wishes to say something. John Swinney. I think that the committee did feel quite strongly about this because, as the Government has accepted, this is a matter of some importance about people's right to appeal. I think that there is a broad acceptance, as it says in the letter, that relaxing timescales, generally speaking, would give a person more rights, and that's not really a problem, and nobody's going to object to that. However, I think that the concern was more around allowing the tribunals to shorten the time limits that people could have to appeal. In fact, the suggestion was made that, if there's no restriction on that, they could shorten it to five minutes. From 30 days, and obviously that's an extreme example, but that would seriously infringe on the rights of the person who could be making the appeal. That's why the convener has written to you, convener, because, as the whole of the committee, we did feel quite strongly that this was really pushing things too much. Any other comments from Gavin? I thought that it was quite a good letter from Nigel Dona. It certainly led me to look at it seriously. My own view is that there's probably a drafting error in this document. The Government is right to allow the court or the tribunal to relax rules a bit, but there is a discretion that they have. However, it's pretty unusual for them to allow them to shorten the statutory timescales that are laid out to protect those who are involved in the case. I just want to, in the regulation itself, to extend or shorten the time for complying with rules, practice directions or so on, or the time limit for permission to appeal. I just seriously wonder whether they didn't mean to shorten the time limit for appeal. It would strike me as odd. Five minutes, as the deputy convener described, would be an extreme example. Even if it were cut by a couple of weeks, that could put pressure on someone who wants to appeal and wants to take advice before doing so. It's a negative instrument, so, as I understand it, there are two options. One is that individual members can lodge a motion to annul with the chamber desk and Parliament to look at that. One other option, or one suggestion, might be that we, as a committee, invite the convener to write to the minister outlining this point. We've not specifically taken evidence on this point, so there's not that much we can add to what the Delegated Powers and Law Reform Committee can say, but given that they don't write those letters to us fairly regularly, given that there does seem to be a reasonable issue, my preference would be that we write to them as a committee saying that we've had this representation. There does appear to be a case to answer, and we seek the Government's view on this. To be honest, that's exactly what my thoughts were when Jim and I discussed this issue before, and that was the line that we thought was appropriate to take in this. It's surprising that we tend not to get early as at all from Nigel Donnell. We've had them in successive weeks, so I do think that a letter to the minister would be appropriate if colleagues aren't happy with that approach. Okay, that now ends the public session, and we'll just have another 30-second break to allow the public and the first report to leave.