 Welcome to the 34th meeting in 2023 of the Finance and Public Administration Committee. The first item on our agenda today is an evidence session with the Scottish Fiscal Commission to discuss the Scottish budget 24-25 and the commission's December 2023 economic and fiscal forecasts, which we both published yesterday. We are joined today by Professor Graham Roy, chair, Professor David Ulf commissioner and online Claire Murdoch, head of Fiscal Sustainability and Public Funding, Scottish Fiscal Commission. The reason she's joining us remotely is sadly due to Covid, but I'm glad that Claire is able to participate today. So welcome everyone to the meeting and I invite Professor Roy to make a brief opening statement. Good morning Professor Roy. Good morning and thank you convener. Our report yesterday said that economic growth will remain fragile in the near term and as indicated last year we believe that living standards are set to fall between 2021-22 and 2023-2024 and won't return to pre-cost or living crisis levels until 2026-2027 and inflation is expected to remain above target for longer than we previously forecast last December. Against this backdrop, the Scottish Government's budget is set to increase next year by £1.3 billion from the latest figure for 2023-2024 as an increase of 2.6 per cent in cash terms or 0.9 per cent after inflation. Most of the increase comes from income tax. An element of that follows from the new tax ban for those earning over £75,000 and additional penny on the top rate, but a larger part comes from the relatively strong earnings growth that we're seeing at the moment and the fiscal drag that that's leading to from the fixed-key cash thresholds. We predict continued significant growth in the number of higher-rate taxpayers in Scotland, many of whom will be seeing an increase in the proportion of their income subject to higher rates. However, despite those funding increases, there is little space for new spending once we take account of pressures such as the on-going consequences of changes to devolve social security payments and the linking of payment rates to inflation. Other policies such as the council tax freeze and public sector pay have further added to existing spending commitments. I understand that a lot of the attention is focused as I've done so far on next financial year, so I'd just like quickly to extend that discussion to take in the remaining four years. Between 2023-2024 and 2028-2029, total funding for both resource and capital is expected to increase by 14 per cent in nominal terms and 4 per cent in real terms. However, within that, capital funding is expected to fall by 20 per cent in real terms over the same period. I think it's useful to look at what's to term in the outlook for growth and resource funding and some of the risks that are associated with that. Beyond 2024-2025, the resource block grant from the UK government is expected to grow by just 1 per cent a year in real terms on average, and the capital block grant is expected to fall in real terms, all in line with the UK government medium term spending plans. Crucially, the UK government has not set departmental spending plans for 2025-2026 onwards, despite those overall totals. There are risks in there for the Scottish Government in terms of how those spending patterns might evolve. The OBR and others have highlighted the risks associated with those totals. The income tax net position is currently projected to contribute to real terms growth in the Scottish budget. As we set out last year, the scale of the government policies to raise revenues since 2018 through the creation of higher rates and new bans, but crucially freezing the higher rate threshold below that in the UK, should lead to a positive net tax position in the years ahead, given the effects of fiscal drag. That net tax position will rise. From 2025-2026 onwards, however, the exact scale of that positive net tax position becomes more uncertain. Part of the on-going growth is due to our slightly higher forecast for earnings growth in Scotland compared to the equivalent forecast by the OBR for the UK. We therefore flag a downside risk that earnings growth in Scotland turn out to be more similar to the UK than that income tax net position from 2025-2026 onwards could be lower than currently projected. Finally, the only part of the Scottish Government's budget spending plans that we forecast is social security. We are expecting spending to rise from £6.3 billion next year to £8 billion in 2028-2029. This is largely a result of payment rates being operated by inflation and higher spending on disability payments, which reflect both a UK-wide increase in a number of people receiving disability payments and the effect of the Scottish Government's policies and operational changes to disability payments. Thank you, thank you very much for that very helpful opening statement. I'm just going to turn straight to your report so the questions I'll be asking will be more mostly based on that report. So, for example, in question 6 of your report, the summary introduction, in the very first sentence you talk about the Scottish Government's budget for next year set to increase by 1.3 billion from the latest position for 2023-2024. We want to see a rise of 2.6 per cent in cash terms or a 0.9 per cent rise after accounting for inflation. Now, this is always a bit of a bugbear in the rate of inflation because it assumes a GDPR deflator inflation on the right of 1.7 per cent, but that doesn't really bear any relationship to real inflation in terms of its impact on the Scottish budget because more than half of the Scottish budget is salaries and they are increasing by significantly higher than 1.7 per cent. Why does the assumption continue to be 1.7 per cent given how the differential between GDPR deflator and CPI inflation? A few things on that. It's a very good point. Usually, in normal times, the GDP deflator and CPI inflation rate are very similar to one another, so this issue about the differential doesn't always come up as being a particular issue. In most cases, the standard way of assessing the impact of inflation on Government spending is to use the GDP deflator because it essentially measures how much is being spent. Again, that's standard practice, but you're right, particularly when you have pay awards being a significant driver of spending profiles, then it's much more appropriate to use the CPI inflation rate to think about how this is impacting on people's living standards so you get this differential between the GDP deflator and the CPI inflation rate. The reason we use the GDP deflator is that standard practice. It's the rate that the Government would use. It's the rate that the UK use, OBR use, so it's largely done for consistency of that, but you're right to highlight at particular points in time, there will be differentials, which will mean that choices made on pay awards, for example, will look different to the overall inflation rate that is capturing total Government's spend. We're talking about real terms increase in resource, but it's not really a real terms increase in actual factor in the real world if you're actually talking about using a deflator, which is so far below what wage settlements are, for example. We had a similar thing, if you recall, last year about the differential between GDP deflator and CPI because of the effects of energy prices and imports, and that was one of the big drivers of inflation, so the GDP deflator was lower than the CPI rate of inflation. As I said, in time these will start to move back into line with one another and there will be a better reflection of the different components of that, because if we were to use CPI, for example, then all the stuff that Government spends and purchases would be using too high an inflation rate, and that's just one of the trade-offs that you have when you've got this differential, and that's why we use the GDP deflator larger because of standard practice. Yeah, I mean, obviously I know it's standard practice, it just seems to me quite frustrating that it's not a figure that seems to be based as much in reality as one would wish, certainly, not in these difficult times. In terms of fiscal overview, you talk about resource funding rising by 8% to 28, 29, but in the figures that you had, that's on page 3, but when you look at the figures of page 5, unless my arithmetic is wrong, you've got the actual funding increasing from 52.449 to 54.691, so that's actually an increase of 4.2% rather than 8% by that measure in real terms, so it's not 8%. So you said resource funding rises by 8% to 28, 29, but the actual figures on page 5, the second line seems to be a 4.2% rise or an 8% rise, I'm just wondering why that is. Are you looking at figure 2.1? This figure doesn't have a number on it, it's on page 5 of your actual report, so it's right at the very beginning of your report on page 5 of it. I think Claire, what's come in here? Yeah, so one is, sorry, one is the 8% rise to resource, so that's total. So one of the big things that you're seeing is resource going up, but a significant fall in capital spending? So that's right, okay, I assume that was resource only, I didn't realise that was capital and resource going up. Yeah, so that top line is total, so it's the resource that's going up, and that's actually one of the really interesting things that you're seeing in the budget, so resources going up, we might come on to this about what this, in terms of the net tax position, but the significant fall in capital, so you talk about a fall in capital or about 20% in real terms over the time period, and that's what drags what you think is an 8% for resource, what is an 8% for resource, once you go to the total it drags it down. Yeah, it was interesting because the Deputy First Minister talked about a 10% reduction over five years, rather than 20% yesterday in her statement, which I thought was odd, given the figures that you actually used, because I didn't see your figures until after the statement, so otherwise I would have asked why she had actually done that, but that's interesting. In terms of income tax, one of the issues, of course, which has been very much to the forefront, has been the kind of new additional rate, it starts at £75,000 a year. Now you've assumed that that will produce £82 million in net, but gross, it's £200 million, would that be right? So basically what you're saying is that of the £200 million, which on paper is being levied by that change, will actually bring in only £41.82 million, would that be right? The figures we're talking about there are the impact of both reintroduction of this new tax rate and the increase in the top rate from 47% to 48%. So it's the combined impact of both of those changes before casting there, so we're saying the gross impact is around £200 million and the net impact is about £82 million once you net off behavioural effects. And how accurate do you feel that your predictions are likely to be with regard to that? What's the kind of margins of error in terms of that? I mean, I thought they could be quite wide, really. So a couple of things I would say on this, so one is we've had this discussion before about taxialisticities and the challenges about estimating taxialisticities, so we've not changed our approach this time around, so these numbers are what you'd expect to see from all our work in the past around what the behavioural effects might be, and the Government use these sorts of things when they do their illustrative tax calcul to show what the effects of these policies are, so in many ways they're not surprising in the sense that these are exactly what you should be seeing with our assumptions. So your recall back in, I think it was March 2018 we published a report into how we estimate behavioural change and taxialisticities, and then we walked through the fact that in order to come up with these taxialisticities what we've done is looked at a lot of the academic evidence, a lot of the studies that look at what happens particularly within countries when you start changing tax rates, but also what happens in the UK. Of course the question and why there's an element of uncertainty isn't none of them are Scotland, and you're having to rely on looking at evidence from elsewhere, and we then make judgment calls about what ones might be approximate and accurate to the Scottish context, so we do highlight there's a level of uncertainty in that, and we are then ex-ante estimating what the behavioural effects might be. Clearly over time what we would want to do, and it started with a report that HMRC did, I think a couple of years ago, is to start to try and work out ex-post whether or not these taxialisticities are in the margin that they should be in, so they published a report I think in December 2021 where they looked at 18, 19 and looked to see whether or not from their evidence they saw any, you could look at the taxialisticities, and they also highlight how difficult it is, because trying to estimate what people's behaviour was and would have been, you have to think about what the counterfactual would be and that gets very complex and very difficult, and there are statistical methods you could use. Long story short was that the estimated taxialisticities are not too dissimilar to what we use at the moment, so at this moment in time, based on looking at academic evidence and also what we've got in terms of the studies so far, that we think these taxialisticities are the best ones to use, but it's clearly something where we are very open about and happy to consult on, and as new evidence emitters, we'll amend them as we go. We haven't seen any evidence in past behaviour that says, oh, we missed something really important there, so we've had significant changes in tax over the last few years, and we haven't seen anything in the data that says, oh, there's a big surprise here, we've seen a change in tax or change in tax revenue that lies way outside what we thought it would have been, so there's nothing there standing out in the data that tells us what was significantly offline here with this, but I do take your point that there are uncertainties about this, but we think our judgments have been borne out. That's really what we're looking at, I think, is the issue of how accurate this is by looking at how behavioural change has impacted in previous years in terms of your forecasts. I mean, some of the forecasts actually seem to have been quite pessimistic compared to others. I mean, for example, it now seems that we're going to have a positive reconciliation in 2526 of some £732 million. I mean, that seems to be quite very optimistic compared to what was predicted before, so what kind of explanation do you have for that? So, just to come back to it on the behavioural point, there's an interesting box on, there's an interesting box in 4.2 where we walk through the effects of behavioural stuff, and in there we talk about the assumptions and the uncertainties in there, so one final part I'd make about just the tax policy that's been introduced just now, it's important to put, we're estimating £80 million rather than £200 million, but £200 million in the context of nearly £20 billion worth of total revenues, these are relatively small, you could change these assumptions significantly, but they wouldn't actually have much of an impact on overall income tax revenues, so there's a point about expectations and assumptions about using different tax elasticity's, when you're talking about these particular tax policies, it won't dramatically change income tax revenues given the scales that other magnitudes are involved, so we're just picking up then, therefore, on your point about £700 million. Yes, sorry, you're talking about 0.4% of income tax revenues, that's £82 million. Exactly, and we'll maybe come on to this, what is driving the big growth in income tax? Isn't these tax individual tax policies earnings, growth and fiscal drag, that's what is generating the significant amount. So on your specific point about the £700 million revision, and there's a few things I would say, so the easiest way probably to think about this is that so we've revised up our income tax forecast based on last year about £2.2 billion, but £1.5 billion of that is essentially similar trends across the UK, and so they will be raised significantly up income tax because earnings have been growing much more quickly than expected in part because of inflation, all this feeds through to that. Once you add in fiscal drag, you get really significant growth in income tax revenues, so that's the first point. That then leaves the £700 million, which then relates to that improvement in our forecast and therefore the improvement in net position. There's a couple of things that I would say that help understand that. The first thing is that, as you will remember, back in July, we had better than expected outturn data for Scotland for 2020-21. That then was when HMRC came and said, this is the final outturn data of income tax receipts in Scotland and that was up by about £390 million. We explain a bit about where that, digging into that, where that variation has come from. Part of it was an error in the way that HMRC were presenting statistics for the previous year, which was about over £100 million. That explains one of the reasons why we were puzzled when we met in September about why there was such a gap between what we were thinking RTI data would give us and what actually happened. Some of that was because the statistics were miscalculated for the previous year and HMRC have now corrected that, so we now have more accurate statistics in that context. That was part of it, but then part of it was then also emerging evidence that we were getting of Scottish earnings growth outperforming the rest of the UK. That's continued into this year and we have a discussion of earnings growth in Scotland in our economy session. There's a really interesting chart on figure 3.22 where you see the differential in earnings growth being Scotland in the UK and Scotland moving ahead of the UK. When we come on to why we think that that is potential of the case, we started to identify that in May. Once we then calculated that in, that explains the remaining £300 million, which gives you your £700 million. Some of it is the outturn data that we now have, which is lifted up the level. The second part is a judgment by us that the data that we're seeing on earnings in Scotland is real, and that leads to us being able to be more optimistic about the earnings growth coming through. 3.47, for example, you talk about pay in the finance sector in Scotland going 3.5% faster than the rest of the UK. You also talk about, for example, North Sea Oil, where there was a kind of drag in terms of earnings for a while going back up to the kind of average. I just wonder if you can talk to us a little bit about that and the circumstances around that, what's happening, and if it's later to continue. A couple of things that I think are worth bringing David as well for his reflections, but there's some really interesting data. If you look at RTI data for average earnings growth for 2022-23, for Scotland it's 6.3%, for the UK it's 5.9%. If you look at ASH, which is the annual survey of hourly earnings, which is the main ONS publication on weekly earnings, for last year they showed growth in Scotland at 9.7% and 6.2% in the UK, and Scotland was actually the highest of any region or nation within the UK. We started to see this in May, which is one of the reasons why we uplifted our forecast, but all the evidence that we've had since then backs up our assessment that earnings growth in Scotland in the last year and the current year is running ahead of the UK, and we then speculate about some of the reasons. One of the reasons why we were more pessimistic before was because we're saying all the evidence is pointed to the north-east of Scotland lagging behind. Again, if you look at the charts that I was talking about there, actually north-east is now back online again, so it's come back on stream. Secondly, in financial services as well, again the differences in the financial services industry, you see Scotland slightly different financial services to the UK, so when interest rates are rising in the UK, you don't have that same huge growth in financial services there. One final point that we could just bring in David for his thoughts on this. I think one interesting thing that this leads to is that the power of earnings growth to drive income tax revenues is really significant. Maybe David will talk a bit about some of the rules of thumb that we have, but very small relative changes in earnings growth when you're fixing thresholds and relative performance to the UK has a dramatic effect on income tax revenues relative to changes in policy in that regard. One final thing I would just say as well is that the number of 700 million sounds a lot and it's a big number, but we are thinking that income tax is going to be essentially double in terms of revenues by the end of this forecast type period than where they were in 2016-2017, so we all have to lift our number because of the effects of inflation. Something that was maybe 300 million last time is now going to be 600 million simply because of the effects of inflation here. We actually spent a lot of time digging into other evidence, not just some data sources, but some surveys that were being done, and there was a huge amount of evidence we saw that suggested that labour markets in Scotland were tighter than labour markets in the UK as a whole. That's what supported our view that there was this relative earnings growth in Scotland because of these tighter labour markets. Another factor that we took into account here was that there was a difference between the financial sector in Scotland compared to the financial sector in the rest of the UK. In Scotland, the financial sector is more heavily dominated by work in pensions and insurance where returns are fairly steady and earnings are very steady. In London and the southeast, the financial sector is more heavily represented in areas of investment where returns are more volatile, so earnings are more volatile through, for example, being related to bonus pay. You could see consistent growth, steady growth in Scotland, and just a bad year for bonuses in the rest of the UK. These are some of the factors we were looking at in trying to think through wise earnings growth in Scotland, so strong relative to the rest of the UK. I want to put in front of the committee two stylised facts which may help you to think both about why we've seen this growth in tax revenue but also policies that you might want to think about to continue that growth in earnings in tax revenue. One stylised fact is this because Scotland has a really quite progressive tax system now, where every one percent by which earnings grow faster in Scotland than in the rest of the UK, net tax revenue will go up by 250 million. So that's a figure we've calculated, just doing some calculations of supposing earnings growth was this in Scotland, earnings growth was that in the rest of the UK. What does that do to net tax revenue? So for every one percentage point higher in Scotland you get 250 million pounds additional net tax revenue from that because of the Scottish tax system is already a very progressive tax system, but also because it's a more progressive tax system than the rest of the UK, every one percentage point growth in earnings in Scotland generates 25 million pounds more net tax revenue than in the rest of the UK just because it's a more progressive tax system. So because it's absolutely very progressive and because it's relatively more progressive you get to all these strong effects of both any earnings growth and any differential earnings growth in Scotland compared to the rest of the UK. So promoting earnings growth is a very powerful way of driving up tax revenue in Scotland. The more we can get earnings to grow faster in Scotland, the more we can get tax revenues to grow. Yeah, fiscal drag and rising earnings. Yes, I thought fiscal drag, this is just the effects. But fiscal drag is the reason, to a large extent, why also the forecast is 2,211 million pound higher now than it was a year ago. I want to go back to capital a minute. I mean, I only want to ask questions in three or four minutes because I've got colleagues keen to come in. What's the impact on growth medium to long term of this reduction in capital? Because 20% real terms reduction, even if we accept a GDP deflator, in reality it's completely different. But assuming we accept that as a real figure, that's still a 20% reduction in capital in five years. What's going to be the impact on growth and productivity over that kind of hit to capital? Yeah, so you're right. So we we talk a bit about this in terms of our capital assessment. So when we look at the overall assessment about what this might mean for the economy, and we highlight that. So the key thing that's driving the falling capital is the block grant. The government can do some borrowing around the edges around that, but the big money is the block grant. So you can borrow more, but actually at the end of the day it comes to the block grant. So this actually reflects a trend across the following UK. It's quite interesting that at the UK level the plans for capital spending will see capital spending as a share of UK GDP fall from 3.5% to 3% over the next five years. And the OBR noted that should this be delivered that around half of the rise in investment was a share of the British economy since 2019-20 would be reversed. So it's quite a significant shift in the amount of capital investment that's going into the UK economy if these projections hold true. And that's essentially because the government are essentially flatlining cash terms, the UK government flatlining cash terms, capital borrowing. So, you know, as economists, capital investment has a huge, spent wisely, has a huge impact on the economy, it has connected communities, it means that business can become more productive, it means that connectivity both from within the UK and outside the UK can be better. So it has all the evidence points of capital investment being a really important part of economic growth in the long run. Clearly ministers at the UK level are balancing out that they're working on between how they balance the books and how they can bring the deficit down and what effects that might have on the economy over the long run if you don't do that versus then where do you put the balance of that adjustment and they've put the balance of adjustment on capital spending but that will have significant, that will have an impact on the long-term infrastructure and potential long-term growth in Scotland. Okay, and just lastly for me at the moment, in terms of the autumn statement, I mean basically the UK government really didn't go beyond 24-25 and what impact has that had in terms of your own forecasting for Scotland? So it adds in an additional layer of uncertainty. We have broad high-level totals for what they have said about resource spending but we don't have the departmental spending elements within that. We do have indications of the current UK government about things like defence and overseas development which then lets you do some calculation of what this might mean for individual spending portfolios but it does mean that it looks exceptionally tight over the five-year period about what the block grant might look like. Again, we highlight in our report that OBR have said that if you look at what happens in the past then you too get to the sense that such spending plans would be exceptionally tight and on the balance of probability it's more likely that the UK government would, future UK governments, would spend more than what are these in the plan so we highlight that as a potential positive risk to the Scottish budget coming down the line but clearly it's a risk and clearly the UK government could choose not to change their plans and then that would lead to more challenging settlements further for the Scottish government. Okay, thank you. I'm now going to open up. Michelle, to be followed by Ross. Thank you, convener. Good morning. I'm just going to focus on one point because there's a lot of areas to get round and I know everyone wants to come in. It's going back to the behavioural change and I fully accept what you're saying and the figures that the conveners already brought out but the point you're making about it is relatively small to the overall income tax base but of course I mean as I understand that your modelling is based on just those people who might be impacted but I'm interested in exploring the kind of second round effects if you like against the challenge of counterfactuals and it was actually I picked up on something that professor David Bell had commented this morning he said my concern is that it will be difficult to attract the workers investment to Scotland that are needed to generate sufficient growth and I suppose that's that's a sentiment that's being expressed elsewhere rather than imagining that people are going to leave in fact it might be that people just don't come and that's one possible scenario of which there's a multitude in them so I'd like to hear a bit more of your thinking about how you've reflected on that at the kind of big picture level. Do you want to go first, David? Yes, we have thought about both of those dimensions here both the impact of the differential tax between Scotland and the rest of the UK on people's decisions to move away from Scotland or to move their tax position away from Scotland but also to tell people who might otherwise have chosen to come to Scotland to come to Scotland. Again I go back to the point I made earlier on if we were seriously wrong on this we would have seen I think something in the data already that we would have seen some impacts on tax revenue that we just haven't seen because of the previous changes that have been made. Sorry to interrupt but I mean I suppose I mean you're looking at the data that's coming through and I heard Professor Roy saying that earlier looking at past evidence but I suppose what I'm trying to explore is and I don't mean in terms of a laugh or curve tipping point but a perception around Scotland as a place to invest does this change things at all? That's certainly something we have thought about quite a bit that it could be there's a cumulative effect of lots and lots of changes and at some point people say okay I now see what it's going to be like if I was to move to Scotland I see what it's going to be like if I stay down south in England I now is to see the picture more clearly and I'll make a decision not to move so it's the kind of straw that breaks the camel's back kind of effect that it keeps in after a period of time and it definitely changes people's minds about coming here but again we haven't seen a lot of that in the data when we look at net migration there is quite a lot of inward migration into Scotland and a lot of that comes from relatively high income people so these might be people who are retiring to Scotland so there would be an issue there in terms of their contribution to GDP there might be an impact there but the impact on tax revenue might not be so great if they have significant pension income that is going to be taxed at these high rates is that something we thought about yeah and you can bring out something else that I mean people will say that net migration from the rest of the UK into Scotland is higher than the other way around but I suppose the question is well if that is true but what is the nature of that inward migration in terms of the implications on tax and investment I appreciate we don't have the answers here it's just trying to get more reflections on the table because the problem is we don't know what will be true until after the event yeah and I think that's one of the real that's one of the real challenges this is really interesting kind of research question about how you do this so what is the counterfactual so who are the people who may have come who don't come or who are the people who could come because actually they want to come to a country where you have additional investment in public services there are all these things which that what that counterfactual is you can't experiment we can't we can't test it and see how people respond but you can do I mean I think as we as we're now into number of years now of having collecting data to see that you can actually start to look at particular aspects of that question so you're seeing people moving more money into pensions in Scotland relative to the rest of the UK you're seeing you know higher earners changing their hours worked relative to elsewhere in the rest of the UK can you start to pick up evidence about levels of investment etc flowing in and that that lies that it's quite difficult for us to do within our remit and resources because we're very much focused on what is that what is happening next year and everything else that's happened before is baked in to our baseline and we look at the change there but we do say in the report that this is something we think government and others should look at and it is a really important question and it's the sort of thing that would really help us in it then we can then make for pretty far longer term work is we could then say like this is the effects of these policy decisions over not just what's happening next year when someone's behaviour might not be able to change that much but actually where investment decisions location decisions take place but there happen to be five ten years over time. The way we analyse this and we think about it in terms of doing our calculations is we look at what's called taxable income so we don't try to go down to the minutiae of does this affect people's hours of work or does it affect the decisions how many weeks they work in the year does it affect the amount they put into pensions does it affect the amount of tax avoidance or other types of tax behaviour the engagement all we look at is what's the effect on taxable income which pulls together all those different ways in which people might respond to differential tax positions between Scotland and the rest of the UK and we use illicities for taxable income which are towards the high end of those that are out there in the data because we do recognise it for some high income people in Scotland they may have properties both in Edinburgh and in London so they can change their tax residents relatively easily so we tend to use higher illicities to reflect that possibility but that's just a judgment it's not based on a detailed minute analysis that will support that yeah we all agree it's a problem we don't know yep okay thank you can be okay Ross before my list thanks thank you can be there i'd like to stick with the question and behavioural effect from it but from a different perspective because i'm somewhat struggling to square the circle between the amount of time airspace political debate spent on the risk of negative behavioural effect from income tax changes compared to the data we now have from five years of increasingly significant divergence you know despite that increasing divergence in that more progressive system we've seen growth in earnings thus growth direct growth in income tax receipts David as you point out we still have net positive migration into Scotland from the rest of the UK we do very well for foreign direct investment compared to everywhere other than the London i believe are we overestimated are we spending too much time are we being disproportionate in the amount of time that we spend discussing the potential negative behavioural effects of income tax divergence compared to other factors that affect the budget in a much greater way because as you point out Graham we're talking about relatively small numbers in the grand scheme of a 60 billion pound budget yeah so from so i guess first of all i don't control the political discourse about where people are and i was actually i was making that a very similar to point to you on one of the phone in programs this morning making the point that you have to look at both sides of the balance sheet that's what determines behaviour so if you're raising so our net tax position we're projecting 1.4 billion next year clearly what do you spend that money on matters for people's decisions it matters for the economy it matters for it matters for the perception of Scotland and it's which effect balances itself out and what we do is do our best to come up with a behavioural estimate about what we think the tax policy will raise as people respond to that individual tax decision so whether you choose to put if you're you know for example if you're fortunate to be in that 100,000 to the 125,000 bracket where you're losing the personal allowance and you're facing a marginal tax rate of nearly 70% do you put more money into your pension or not that's the type of things that we are trying to capture what the effect is in the long-term structural growth rate of Scotland's economy is is is is not what we're looking at in that context and you're right you know we for the first few years of tax devolution we saw the net tax position in quite a precarious state relative to what it was and that was because earnings growth in Scotland was lagging the UK and but that had much more to do what's happening in the northeast and the performance of Scotland's economy than any evidence we've seen at the time and since then about what's happening in terms of relative tax differential and I guess that comes back to the point that David was making which I think is really important in all of this is that you're right there is a debate about these marginal changes in taxation which I get they're important but the big thing that drives us at earnings and if you grow your earnings either at higher level as the UK does Scotland will get more revenues because of the progressive system and fiscal drag and if you grow more quickly than the rest of the UK you'll generate much more revenues than you would do from introducing a new additional rate at 75,000 so earnings in the economy is key. That's the stylised fact I gave you of every 1% by which your earnings grow faster in Scotland than the rest of the UK increases net tax revenue by 250 billion just keep that fact in your mind when you're thinking about a lot a lot of these issues it's a really important number. Yeah that then draws us into the the debate around the fiscal framework and whether relative tax growth was was the best measurement from Scotland's perspective that's something we discussed before and I'm sure we will continue discussing for for some time on there's an interesting reference in I think it's box 4.2 of your paper around the behaviour effects and how you measure them, mitigate for them, estimate and it references the HMRC report from I think 2021 on behavioural effect in Scotland. I remember that report but I can't remember why HMRC did it essentially is that something that they do on a cyclical basis and we should we expect another one or was that one off? So it was an occasional paper that they did I think for 2018-19 but I know that as we're I know that they're collecting longitudinal data which will let us do well let people do this sort of work much more into the future and so it's the sort of thing that you know government working with HMRC can actually do these sorts of assessments and projects to look at what these behavioural effects will be and I think the thing is we'll for us that's brilliant so if we can update our behavioural estimates with estimates that are based upon Scottish data and you can see the unique effects of Scotland then then then we'll update our forecast but nothing in that study suggested that what we're doing was was wrong. Yeah I think if HMRC are at some point in the short to medium term producing more longitudinal data it might it should be worth the committee getting in touch with them to ask about what the timescale for that is because it would inform quite a lot of our work. That box also mentions the extent to which the USA and Switzerland are relied upon because there's such a rich evidence base in both of those countries. What kind of evidence gathering work what kind of studies are not taking place have not taken place in Scotland that obviously have in other jurisdictions that we could be either government could commission or independent organisations could be encouraged to undertake? So in our paper back in 2018 we reviewed the entire literature which looked at not just you know places like USA and Switzerland for within country changes and behaviour but actually at a national level so there was a study the IFS and others have done looking at the introduction of the 50p rate in the UK and and things like that so we can we can draw on that so there's a question about how comparable the USA and Switzerland to Scotland so that's a challenge how comparable is a UK wide system to Scotland so that's why we're having to use judgment in there. I think the key is that as we now have you now have taxpayer data for for Scottish taxpayers and taxpayer data for UK taxpayers you can use sophisticated techniques to identify similar taxpayers in Scotland in the rest of the UK and control for everything else and then see other differences in behaviours in people living in Scotland relative to living in the rest of the UK that you can then attribute to the changes in tax policy up or down and that I think that that's the bit which I think is the really as we get more data is a really positive bit and we will be able to do it but government needs you know it's kind of difficult for us to do it it really needs government and others to to work on that and do you just say that go back to Michelle's point that you need data on two different aspects here how people respond to differences in taxes conditional on where they actually choose to live so people living in a particular area might respond to the tax they face in that area through savings decisions work decisions tax avoidance decisions and by looking at people in different parts of the country but are facing different rates because there are local powers on taxes you can pick up some of those effects the more complicated issues how do you pick up the migration effects and decisions for people to move between one area another because of these tax differences and there you need data on movements of populations you have to study the people who happen to be in that particular region at that particular time so you need a combination of quite rich data sources to do this absolutely thanks very much that's all for making there okay thank you list to follow by michael thank you can i start on what i think it's very technical point looking i just ask a question you have the forecast for median earnings in scotland for 24 25 at 28 200 when the ons data said the same thing for this current year they had the median salary at 29 6 7 5 i just wondering what the difference would be there is that is the ons figure for scotland and for the same year yeah i need to get back to you on that just to get it it's just it seemed a bit strange that because i would have thought that was relatively easy to work that out yeah but if you could give that that would be extremely helpful can i just ask about this business about the nominal the gap between private and public sector earnings because it seems to be widening as far as i can work out could you give us a bit of a background on that in terms of the differences between public and private more generally around that to be moving apart quite a bit is that correct yeah so it tends to have been flow over time and this is a UK effect as well it tends to to have been flow at particular points in time so and part of that is into levels of unionisation et cetera and things like that which have an impact so you see particularly during downturns public sector wages tend to stick higher than private sector wages during a downturn or in terms of high inflation environments public sector wages tend to be better but that gap then typically tends to close over time so on average and this is where it depends whether you're using median and mean and the distribution of that on average so the median public sector wages tend to be higher than the median wages in the private sector because the private sector has a larger number of very low paid jobs but it also has a very small number but much greater number of very very very high paid jobs so if you look at median the public sector wages typically average salary is higher than in the private sector but it does as you see it does widen and close over time depending on on how the economy is doing and does that also reflect how different sectors in the economy are doing then yes exactly yes so and part of it is how quickly they respond to it so public sector wages tend to be negotiated and set for the the period ahead and so if the government are thinking now they're thinking now about a wage policy for 24 25 if you're in the private sector then you're probably thinking about what your wage policy is for the next few months and or what might be happening to your employment because it's much more volatile so again one of the things that you typically see is that when you're in a downturn public sector wages take much longer to adjust and and then lag any recovery whereas private sector wages are much more volatile over the over the time period it obviously one of the things we're trying to drill down on as a committee is where we think the the greatest potential for economic improvement in productivity and economic growth is and therefore these these gaps are quite important i think yeah i mean another thing as well just to broaden out the conversation i think is really important is that the we've got a line there about the report that says about half of the resource budget of devolved of the devolved resource budget is pay so clearly if the if that resource budget is going up by just over three percent then any pay awards above three percent mean that the remaining half of the budget has to go up by less than three percent and we also have a table in there where we show what happens if you strip out ndr income and social security and actually the resource budget is actually going down next year and that's a really difficult decision for the public sector because if inflation is three percent then anything lower than three percent is potentially a real terms cut in salary but anything but if you have if you have half your budget is wages and everything else is is under pressure then where do you find where do you find additional funding and that you've just answered very helpfully my next question about that because that leads on to you know the potential for public sector reform etc which is obviously anyway you can't comics it's a political decision but nonetheless it it will be predicated upon the trends within and some of the the data that you've just been highlighting exactly yeah so i think the so back in a bank back in may in the in the mtfs the government were had a central scenario of pay awards for this year being three and a half percent and it's turned out to be six and a half percent yeah and uh in you know in total this year the estimate has about 800 million pounds more of spending pressure relative to what they had they had thought and that's because inflation is higher so and this is a really difficult thing to balance between if you've got high inflation how do you continue to reward public servants and and pay them a wage that is not being eroded by inflation but if if pay is half your budget and your budget is not going up that much then where where do you make the adjustment and that either has to be in reprioritising spending or it has to be in in terms of headcount in the public sector okay thank you it's very helpful okay thank you michael to be followed by joan thanks camila yeah just to stick with the public sector workforce for a little while the i suppose it's the status or the policy of government that i'm interested in and how that's informed what you've done in terms of the numbers that you've produced so we had the resource spending review which was a major piece of work back in may 2022 that said that it would reduce into return the total size of the devolved public sector workforce to around pre-covid levels by 26-27 we promised more detail on that in the budget last year john swenney then didn't provide that said that that was up to bodies to provide i asked 116th of may the permanent secretary the status of that policy but he said do you think it's been publicly stated so he didn't know what the status of it was shona robson told this committee on 13th of june that it's a bit of a blunt tool she was abandoning rsr but then in recent days we've had much more of the language about a big decrease in public sector workforce so what's your understanding of the policy situation that the scottish government are putting in place and how's that informed the predictions and assumptions you've made so just to learn our forecast so we we take a sense of the current kind of estimates of public sector employment and then we use that and an assessment about public sector pay in our tax and economy forecasts so and the protocol that we have with the government is that they should give us essentially a final pay policy and public sector employment policy and that doesn't mean a specific you know exact detail that can be relatively broad broad brush in that context we didn't we didn't have a final pay policy from government we we've developed our own which i can explain about what we've done for that but we don't have a specific final policy from the government so was there a reason for them not providing that that i mean they'll be in negotiations and thinking about their plans etc it doesn't really matter too much for us in terms of our forecast but we don't have a final pay policy for example in our forecast from the government and that's ultimately for them to finalise over the over the coming months what we've done and again we've been quite open with government as we've been doing this so that they know what we're doing we essentially have in our modelling a three percent average pay award and that's based on the fact that we think inflation is three percent next year adding in pay progression takes us about four and a half percent so that's what's in our modelling is in our assumptions a four and a half percent pay for the pay award for the the public sector as i was just saying to miss Smith there that is greater than the overall resource budget projection for next year so that leads to essentially i guess three implications for that one is that that pay that we have in there is is is too big relative to what will ultimately transpire secondly that requires that other areas of the budget so the other half of the budget will have to take up more of the slack in order to pay for that above the total resource increase in the budget or public sector employment would would need to fall so what percentage of the overall budget is pay it's just over in terms of the resource budget and i think it's just over half clear as if clear can move we come in i mean that's my understanding yes so it's yep sorry clear on you go the scottish government have estimated that pay accounts for 25 billion pounds of the resource budget and the current financial year so that's just over half and they've and you requested a pay policy for them you said that that's one of your requirements and they didn't provide you with a policy on indication as to what they were doing on pay well so the protocol requires that they give us a final pay policy by when well it's in the um it's part of the round forecast so by the final forecast our final round three forecast we would normally expect to have a final pay policy and public said employment policy from the government um when would that be Graham sorry the the look at the timelines um the timeline is set out in our document um sorry is that a roundabout if she wants to go so it was part of the protocol we have a deadline for economy moving measures and that is um just over two weeks before we um the budget so the government needs to provide us with that information by that deadline and that that process is agreed with the government um when we get notification of the budget it just didn't do it the government just didn't support there any other documents it didn't supply by by the deadline that they'd previously agreed to supply so there's so the a couple of things so one is the the point about pay and public sector employment is that um in the absence of a definitive position from from the government then essential we come up with a judgment which we share with the government and they have an opportunity to object to it and say that that's completely wildly different from where we are so in many ways that i'm relatively relaxed do we have something which we think is broadly in line with a good assessment about what public sector pay and what public sector employment would look like clearly it's then up to because what we're really interested in is the macro effects of that the intricacies of the exact numbers are ultimately up to the government and there's i understand to be careful negotiations with trade unions and the like but you've worked sorry you've worked back on the basis of that in terms of the you've made an assumption and you have calculated so how many what would the size what assumption have you made about the size of the public sector workforce as a result of the the budget constraints and using that number of three percent so we have clear do you have that to hand or is that maybe something we can write i think we have to do it at four by one point five percent in twenty four twenty five we'll get the exact number for you about about seven thousand three percent yeah if we can get you i'd rather give you a jack number rather than give you one nine it feels like a pretty major but within any of that you have not taken any account of a policy objective so previously the scots government had a policy objective that they'd set out in the resource spending review is your understanding that's been abandoned but and essentially what you've had is some media reports so you've just gone on the numbers well i think so so to be clear what we don't have is we don't have the government have not given us here is our pay policy and public sector employment policy for next year and this is the exact numbers please use them and so what we've done is make a judgment which we think is reasonable around the what what we think is a reasonable macro forecast for next year and that's where we look at inflation we see three percent add on progression that comes to four and a half percent and use that use that through but we haven't we haven't had it um we we don't have an exact particular policy on that regard okay thank you and my question there i'm not sure i've got a specific answer about is there anything else in the agreement with government that they agreed to provide and then did not provide by the deadline so we got everything so we so we we've got everything we needed to do to make our forecasts so we and i'm entirely confident in our forecasts that we have everything that we need in order to make the forecast you'll see just under there's a discussion about the process behind the forecasts i think on it's my document page 23 just right at the start of chapter one um and there's this there's there's a table underneath there about headline dates and you'll see there that um the government missed the deadline for providing final policy recommendations to us and so our final deadline for policy recommendations was the 5th of december we agreed to extend that deadline to the 8th of december because we didn't have final final decisions from the government and then there's a second extension for a small element of policy that took us through to the 13th of december and we do highlight in there again we're really transparent about that because i think it's really important that we are transparent about that that the we have a protocol and these deadlines are there to be adhered to to be met and they weren't and i understand how difficult setting budgets are there's a condensed timeline really difficult decisions around that and that's why we were happy as the independent fiscal authority to be accommodating to the government on that that has an impact on us in terms of the amount of time we've been able to spend on writing the documents etc but ultimately at the end of the day i'm comfortable with the forecast yes but being honest and transparent we have the deadlines have been missed in the protocol okay thank you i've got a couple of other small issues to move on if that's okay around the social security spend and we are looking at fairly large increases which you've already set out i wondered if you could talk about what your the relative amount of the uplift that's a result of behaviour changes result of policy in scotland so that we've got to talk about a kinder policy a more generous policy how much of that is based on assumptions about the intent of that and how much of it is based on experience so have you been provided by figures by social security scotland and are you basing this on modelling about the increase or is it just your broad assumptions about the policy intent so there are a few things so just to respond to your question at the moment for things like ADP there were so many changes made and it's only relatively recently been introduced we haven't been able to track through in any detail all the impacts of that on as you call it behaviour all we can say is that at the moment we haven't seen anything in the data for the number of awards being granted that goes against our initial judgments that we made when we produce the forecast so although i can't say all our judgments have been fully borne out equally we haven't seen anything that contradicts in any significant way those initial judgments we made and i think it will be quite a while before we have enough data to be able to fully understand all the implications of the reforms that were made to ADP by the Scottish Government so the data is a couple of interesting bits so if there's a figure 5.9 we will look at ADP and you look at the relative applications between Scotland and the rest of the in Scotland of England and Wales and you do see a spike in the pilot and the national launch taking us ahead of the gap between ourselves and England and Wales and again that's the first that's the type of data we're tracking so we assumed that this would happen and it has happened the question is whether that's on one wind or whether it will continue to be there so that's the type of information that Social Security Scotland gives us and I have to say that the support that we get from them in terms of providing this data really has meant that we've been able to make tweaks to our forecast so we've changed for example on child disability payment for example we've seen a big spike in applications on that so we've uplifted our forecast on that but they've given us evidence about average payment which is slightly lower so we can change that around at the margins and to answer your very first question about what's the difference between it around roughly speaking around about half of the gap that you see in the between spend and the block grant adjustment by the end of the period is from new payments so things which are things like Scottish child payment care of supplement these things and the other half is from what we think is the changes in behaviours the different type of system which is running ahead of the equivalent system that exists in England and Wales okay and where a lot of the casework that I'm getting in this area is about people who are just not getting decisions on adult disability payment and it's huge delays and doing some work on this it would look like longer delays than the DWP and actually the processing of some of this is it is it do you feel like you're getting sufficient data as a result of that and these get large delays yeah so we again what we're seeing I think is we're seeing delays and then we're seeing the acceleration of that so there's certain points and dying the data that we track you see backlog and social services Scotland are very good with us and saying look there is there is high caseload coming in there's a backlog here so you might see a spike and that's due to us processing applications that have been delayed rather than there is some other reason for this for this spike and so we we do track it and it's the sort of thing that yeah that we we then use to help inform the modelling that we do but one interesting fact we got from discussions but Social Security Scotland was that when people were told they could provide a lot of information in support of their claim they tended to assume that Social Security Scotland already had that information or you're part of the government you must have all these figures so their assumption was that Social Security already had a lot of that information so they had to then go away and get that information themselves from other sources so that was part of the reasons why the days it delays us a lot longer there was a misunderstanding about who actually held the evidence and an assumption was made by a lot of people that the government already knew these numbers. My final question on a different area again going back to previous questions was really about I suppose this I agree with colleagues in terms of that this is such a tiny amount of money 8 million pounds from the very top rate being realised by this increase is it worth the risk is it worth all the risks that you've set out in terms of the reputation of the country about attraction you know is it worth doing? I think that's for politicians and policy makers. Okay, I thought I'd give it a try. It's always worth buying these kites but you know Graham switched on. Okay John, to be followed by Jamie. Thanks so much convener yeah probably to touch mainly on points that have been raised to some extent already going forward it looks like I mean you've explained why Scotland's earnings have been ahead of the UK's last couple of years current year but going forward are you you're assuming am I right in saying that that will continue to be the case and if so it is there a danger that that's being a little bit optimistic? Yeah so that to be clear what we're looking at is the forecast we are making of our needs in Scotland compared to the forecast that there will be our making for earnings in the rest of the UK now we have a table in our report we'll be sure that the forecast that other people be making for earnings in the rest of the UK are somewhat closer to our estimates of the forecast for earnings growth in Scotland so we have highlighted in the report that there is a risk that this will be our might revise the estimates for growth of earnings in the rest of the UK and that could come a lot closer to our estimates for the growth in Scotland so the gap is not between our forecasts of earnings in Scotland and our forecast of earnings in the rest of the UK it's the gap between our forecast of earnings in Scotland and OBR's forecast of our needs in the rest of the UK so it's two different forecasts in that sense okay but there certainly is a risk that we don't continue as we have been in the last couple of years yeah yeah one bit about that though is again just to get the magnitudes in line I think again we've been playing around with numbers if if the if the earnings growth toward the end of the forecast arising was to align between Scotland and the UK that would reduce the net tax position by about 500 million but the net tax position would still be positive and it comes back to the point about because of the successive changes and the progressive system the net tax position is moving become more and more positive so even if there's alignment earnings there will still be a net a positive net tax position because of the higher because of the higher earnings that are now taking place across Scotland in the UK yes because in the past it's almost the opposite that happened I mean the forecasts were quite large negative tax reconciliation which then became thankfully a bit smaller yeah so are we kind of going into the opposite situation where you're thinking at the moment there's going to be quite big positive reconciliation and that might well reduce yeah so I think there's there's a couple of things so if you recall the reason why the net tax positions was negative was because Scotland was lagging the UK economically that was you talked about that oil and gas etc and that happened and the the positive the net tax positions by a negative are very small positive relative to what they should have been what we're saying is that if you look at if you look at last year and this year the earnings potential in Scotland's relative economic performance but crucial in earnings is now is better than the UK so that is then you that's why we're now saying yes there's a positive reconciliation kicking in because earnings are so growing so much across scotland in the UK picking up davids kind of rules of thumb there that is that's making those numbers much bigger than we were saying they would likely be in may so if you recall back in may and even december last year we were saying that the net tax positions would shift up but what's happening is because earnings are so much they're going even they're going higher there so that's where we are this year and we think that will continue into next year where the divergence that david is talking about or the the risk is toward the end of the forecast horizon where there's that difference between ourselves and the OBR and a difference between the OBR and other forecasts is in the UK and if that narrows then then the net tax position that we're projecting will be lower so the uplift in the revenue budget will be lower than what we've got in the report just now and and that's that's a that's a risk that we highlight to the budget in terms of when they're planning okay um the the figure of 688 million has been sorry 668 million i think it is has been mentioned already it's just three and a half percent of scotish income tax revenues which is you say a relatively small shift in terms of income tax forecasts and i accept that three and a half percent is you know if most we could forecast most things within three and a half percent that would be fine the however that is a very big figure when it comes to what we are allowed to have in reserves or borrow um and so i think i mean while you seem to be quite relaxed about it i mean do you understand that for us and the government that is quite a worrying figure yeah and and uh yeah and this is one of the quirks of the framework in that the you're dealing with movements in two very large numbers so movements in very large numbers can lead to to differences that seem small but actually turn out to be really quite significant when you're managing the budget and all the risk to manage that there is on the scotish government in in in terms of of managing that that in some ways i think is informed the fiscal framework review so lifting up the borrowing requirements on on resource given greater flexibility in the scotland reserve about what it can it can be used for etc and so these numbers have been increased i guess that the point that i think is i think is really important and that will be really important for both governments to to continue to keep an eye on these these limits will be increased by inflation so that will help as inflation continues to go up but you'll want to look at whether you know whether these whether you've got the management tools to manage the risk that exists here and i come back to that point that in 2017 2018 income tax revenues were 10.9 billion we project by the end of the period there'll be 23 billion so these numbers are going to get bigger in the future simply because we're now dealing with with bigger levels of income tax. Can you hear me now? I just wanted to add that we're currently in a period where we're seeing a positive improvement in the income tax net position and at the same time we're seeing these forecasts of positive income tax reconciliations but those two things aren't a given that they will happen at the same time because the reconciliation is about the relative forecast error so we may still see even when we've got a period of time with a more positive income tax net position we could still have negative income tax reconciliations in the future it's just that these the current two income tax reconciliations that we're forecasting are basically picking up a period of time where we didn't quite capture the improvement in Scottish income tax revenues so it's almost like the lag in the improvement is why we're then seeing these positive income tax reconciliations and in the future it could be that we're actually better forecasting Scottish revenues and the OBR is for accurately forecasting UK revenues and the error the relative error that happens might mean that we could have a negative income tax reconciliation while we have a period of time with a large positive income tax net position. Okay that's helpful thanks. Now again another point that's been raised is the whole question of multi-year forecasting and am I right in understanding then it's because really the UK government linked to the OBR has not really been very specific in their forecasting like with departments that you've really not been able to and neither you nor the Scottish government can make accurate forecasts multi-year. Well so we can make the forecast for multi-year in terms of the revenues and we can take what the UK government have said broad brush about the block grant and we can use that so we can make multi-year forecasts and I guess the government's argument is that while there's uncertainty about net tax position or uncertainty about what the UK government might do so we're only doing one year of budget. We do say in the report and as the independent fiscal institution we think that that's disappointing and that the government should set out multi-year spending plans and they should you know because there's uncertainty that in many ways means that they should do more to set out how you will manage potential variability in these elements going forward so I think I would always be an advocate for government doing multi-year plan. We could then do much more for example so if you look at our table of portfolio spending I think is it figure one we can only do one year because we don't have anything beyond that. So is it almost inevitable or do you think the Scottish government could have done more forecasting despite the lack of information? Yeah I mean there's nothing yeah I mean they can they can yeah they could do much more and then obviously clearly put the uncertainties and the caveats around it but there's nothing to stop people doing multi-year forecast. The similar thing for the UK it's the same thing there's nothing to stop the UK government setting out spending review you know projections beyond what they've done at the moment. But obviously a change of government at UK level could change quite a lot. Yeah and again that's one of the risks again we highlight is that clearly this is based upon projections before a UK general election and a future UK government may have a different opinion about how to manage the UK public finances and in turn impact upon the block grant. Thank you I was just going to add we have published five year forecast of the Scottish government's funding position for resource and capital so they're set out in real nominal terms as growth rates in our report and in supplementary tables we have the cash figures as well so we have published those alongside the budget and I'd also just add that the UK government not publishing detailed departmental spending plans is not unusual within a they publish for a spending review and beyond that they don't publish that it's not an unusual position it's not an ideal position and it does make it more difficult for the Scottish government but it's also normal that you get to the until you get to the next spending review you've only got the current spending review period of spending plans so just to give that context okay thanks again for that and then on social security I mean we've talked to Michael Maran yourselves talked a little about the demand and the Scottish system being different from the UK system your assumptions going forward I mean this year I think we're increasing 6.7% which is in line with inflation is that your assumption going forward that that will continue to be the case in terms of upgrading yes yes our assumption is that we upgrade most of the benefits by cpi inflation based in September of the preceding year and then the main thing we've not really changed and government hasn't really changed the policies within the social security so the numbers are broadly similar to the drivers of the numbers are broadly similar to what they were last time what is driving the numbers is changes in inflation so higher inflation but also picking up trends and disability claimed across the UK so that's the main reason why the numbers have been have been increasing so it's a bring you want to come in mr yes i just want to tell us that what we have seen is UK wide increases in applications for disability benefits not just in scotland and our our last report we said those were given by poor health after Covid increasing waiting lists in the NHS and cost of living pressures the OBR and their latest report have said they've looked again at this and they think that cost of living pressures are more dominant in explaining this increase in demand across the whole of the UK so obviously as cost of living pressures ease as inflation falls that factor will tend to fall away so it doesn't affect the immediate forecast for social security but we do say that we think it won't grow so fast in the future because of this diminishing impact of the cost of living and looking at it finally from another angle i mean when i look at the figures quickly in the budget there's a lot of areas are being restricted and the social security is going up by about one billion pounds from any economic point of view does it matter you know where that government where the government spends that million pounds i mean would it have a different impact on the economy and growth and so on if that billion was spent say in housing or education or does it not really matter does that not is that not something you are look at so yeah so we don't get into the detail of like alternative policy options and to be honest i don't think we may have a different view on this you get into questions about different fiscal multipliers and what's the relative spend impact of different spend and to be honest in a short term forecast most of them will wash out to to one another and it's more about the broader objectives that the government might have in the long run you get some really interesting questions about if you tackle poverty what might be the potential benefits to the economy and economic growth over multi years similar to the conversation we're having about tax but for the purposes of forecasting what happens next to you in the economy it's not something we look at and i'd to be honest i don't think it would have too much of an impact on our immediate forecast right the one point to add is that it's all worth bearing in mind that social security spending is essentially demand led so once you've set all the policies for how people can apply for social security once you've set the levels of remuneration they get depending on their conditions once that's set the amount you actually end up spending on social security is not under the government's control that depends on the number of people we choose to go and apply and get social security so you cannot change that number for one year to the next the way you can just decide what cut spending on housing or what cut spending on education once you've set the policies on social security the essentially the spending is out of your out of your hands for quite a number of years until you introduce new reforms here yes i mean i do understand that but the government could change the policy and see it could change the policy but it's just worthwhile remembering yes a lot of this is set in motion yes by decisions that were made a few years ago you don't have the same luxury of tinkering at the market okay okay thanks i understand that right okay thanks thanks john jamie thanks very much i'm very conscious of time so i was just going to go into i'll ask again about some of the tax side of it graham this morning you were talking i think on the radio about the marginal rates and highlighting highlighting them 43 to 54,000 the marginal rate of 54 i understand that's going to come down and obviously we've talked earlier about the 100k to 125k and up to nearly 70 as well if you could kind of give a comment or concerns or thoughts on that yeah so and this is so the issue we're talking about here is is what happens when scottish devolved income tax policies interact with uk reserve tax policies with national insurance and what happens to the personal allowance and you have this quirk where national insurance goes from 12 to 2 when you go above when you move into the equivalent of the uk higher rate clearly because the scottish higher rate starts earlier you've got people who are paying the higher rate of income tax in scotland but also the core rate of national insurance and that's why you get this marginal tax rate of above 50 and then the same thing happens when you get up to 100,000 at the uk level you start to lose the personal allowance so that increases the marginal tax rate for every income pound of income that you earn that's also where because of the interactions with the new 75,000 rates in scotland you're now paying more on top of that and that's where you get up to that nearly 70% marginal tax rate so that and people and i guess the question comes back to the conversation we've had is that if someone is thinking about do you work overtime do you work an extra an extra day do you do you take on an additional role do you put more money into your pensions all those sorts of things are really determined by this marginal this marginal rate and if the marginal rate is higher then people might take different decisions so they might not work that extra day if they're only going to get half the pay that they would you know for the gross pay would would say would be entitled to and in terms of those two those those two rates there i mean we're looking at let's say a very different uh you know very different kind of salary bans as there were or or that side would the lower one have to be like more likely would you expect to see behavioural change because it's a lot perhaps a larger part of income it's yeah it's it's interesting why it would be interesting to get David's reflections i think yes it might be a larger part your income but um the way that the way the nature the way this works acts because it's more progressive you actually end up taking more out as you go up but also what typically happens is it's people at the top end of income distribution that have the greatest flexibility to change their behaviours they have the ability to maybe take some money and become incorporated of opportunity to put more money into their into a private pension they have an opportunity to not to take on an additional role a lot of the people who will be in this brand between forty three and a half thousand and fifty thousand will be people on pay why where you work thirty five hours a week and your additional pay award that you've got at the end of this year is now going to be worth less because because of this increase because you may be more of it more of your income might be being taxed at the higher rate so less of a flexibility David don't know if you wanted to come in on that yeah just to bear up that point that we tend to think about individuals being able to choose lots of things about how they work and where they work but for many people this is actually set by their employer they don't have that choice and when I was on the NHS pay review buddy we talked to nurses who were working phenomenal hours not because of any considerations of tax but because they love the job and that's what will draw them to work they are as they work so you've got to bear in mind that we're really quite complex factors which drive people decisions. Can I just ask as well I mean I say we talked about the behavioural changes that people can or can't make depending on their circumstances but obviously if for example people on that higher that higher rate are choosing to work less or they're choosing to incorporate or whatever choices they're making they're working less or putting more into pensions that's potentially money coming out of local spending in in their local economies is there any way of modelling that or is there any way that that can be identified or forecast? Well you need enormous data sources to be able to do that because the problem is that the way people can respond to tax is so complex there are so many dimensions to it and I've referred before to what we tend to look at is just taxable income but that can be the outcome of many many decisions that people make and for higher earners that could also involve decisions around so complex avoidance schemes as well these people will be very well informed often working in the city they'll be more within schemes themselves so there's lots of dimensions along which people can move so that there is a difference there between the decisions people make which affects the level of GNP because if people are not working so much they're not producing so much people who are using avoidance to avoid tax they're still working hard so there's still a lot of activity taking place in the economy it's just not getting translated into tax in the same way so the implication between the impact of behaviour on the economy and the impact on taxable revenue can be somewhat different. And I suppose my last question I was going to ask this morning Joe Suzer was talking after you actually on the BBC and he recognised that you know we won't know some of the tax implications of this budget in about two and a half years and he said he had sympathy with you having to forecast based on some of the difficulties you know we now have a number of different bands we have some of these marginal tax rates we're not going to know the information for a good time how does that impact on your ability to forecast and what are the kind of dangers of that in terms of accurate forecast? I think the I mean I think when we when we do our forecast we're the key thing for us is essentially the accuracy of the earnings data that we can get and the projections for that going forward that's ultimately key because then we can then put it through our modelling and it captures that relatively well and we've talked about in our forecast evaluation report the increasing weight that we're putting on to this real term there's RTI data and I think when the OBR were up here talking earlier this month or late last month they were also talking about how the RTI data is much improved there have been real concerns about the labour market data across the UK so the RTI data is the key bit for us to look at so that's the bit which I think is the most important there's always going to be uncertainties and I think the concern that we had last year when we talked about our forecast evaluation is the one thing we do not have any information on at all is self-assessment so we do that that we just don't have that that's not something that we get and we can get and you could argue that if you create a more complex tax system and particularly again people as David was saying who can be more flexible we're going to be using things like self-assessment and things much more in a much more significant way than maybe a standard PYA system that might mean that you might see more money and income coming through self-assessment and that's the bit that we that's the that's the that's the dark bit of the forecast that we just can't see into so there's potential risk for this there okay just to add that all forecast is essentially very aggregate macro level forecast so it's the forecast of the economy the forecast of average earnings we don't get down to the kind of micro level to forecast the stuff that we pick up some of the effects that you're talking about so some of these details about precise marginal tax rates don't matter very much in terms of driving our forecast on tax revenue okay thank you thanks a lot Jamie that's a concluded equation for committee but just a couple of points i want to add on i just want to go on and try and pin this behavioural response thing down to you but because in terms of you know paragraph 35 of your report you know you talk about 200 million gross in 82 million net but we know that of the net 74 million comes from a 75 000 pound new band and the 8 million from the 125 140 kind of band but where is the gross in those two so is that 8 million out of 40 million or 8 million out of 60 million or whatever so it's just to try and find to get a better idea where the tipping point is you know i mean because so if you think so i remember being in the bass country many years ago and they said that if you put income tax up two or three percent more than the Spanish average doesn't make much difference but then you get four percent five percent suddenly goes you know that they're kind of reverse laugh of course so to speak so that's what i'm trying to say so so if you're looking at the gross 200 million how much of that 200 million is from the 126 125 140 how much from the 75 000 so i think we're talking about the gross probably the easiest thing to think about is this what we call it the static effect so that's essentially when there's no behavioural effect so indeed if you make it all the way to a page 117 of our report um you'll be doing well but it's there is a there is a line in there where we talk about the static effect so we talk about how the advanced threshold rate would be raised about 150 that's 147 million and that's before the behavioural effect and the change in the top the additional penny is 53 million so that's probably easiest to think of in terms of gross if you can use that term of just no change in behaviour that's essentially what these revenues would raise right so basically you're saying out of the 143 million then you'll get you'll generate 74 million which is slightly over 50 but from the 57 million you're only generating eight million which is probably about 13 percent yeah and that and that's interesting yeah and that's again consistent because if you go to the top end of the distribution that's where you have the greatest ability to change your extensive and intensive margins and that's that's where the the big behavioural bit comes comes through well i did get to page 96 and that's one building transaction tax and the reason i'm asking about that is no one's touched on that and what we're looking at is a quite a significant decline between this year from 813 to 730 million is a prediction so that's an 83 million deficit which incidentally is a million pounds of more than these projected increases in tax from these two rates we've just talked about but then you go on to look at residential tax over the next four years going up by about 56 57 percent just doing the sums in my head so i'm just wondering if you can briefly just talk us through this i know that and i can see from pager 4.88 you suggested that house prices rise you know in 22 23 by six percent transactions 10.8 but in actual fact house prices rose a wee bit more than that and transactions a bit less so i'm just wondering if you can talk us through this land building transaction tax because it's a significant amount of money and it's a significant decrease going forward into the next financial year yeah so you're right so we're still predicting that that the total amount of revenue collected will will will decline and in large part again that's that's we were predicting that last year what we're predicting is slightly less of a fall than what we were saying last year so for 24 25 in part because of these updates that we're doing to prices and transactions broadly speaking it doesn't really change the overall profile so there's a tape with a figure figure 4.24 where you see the path of house prices and we're now higher so we've lifted it up in may slightly and we lifted it up again in in december but the overall trend is that we think that between 2022 2023 when we think that prices will have will have peaked they're going to decline over the next couple of years particularly as the effects of mortgages translate through and one of the interesting things is that even though the bank of England been increasing interest rates quite significantly the full effects of that haven't come through because lots of people are in fixed mortgages so it's only when you come off your fixed mortgage do you face this higher this higher this new higher mortgage cost when you remortgage so again the legacy effect of higher interest rates feeds through and that's why we're still predicting a dip both in prices and transactions yeah and interest rates are predicted to stay higher for longer and finally for me we saw that a six there was a six point seven percent increase in benefits the same as the UK increased the benefits of their portfolio i mean that's obviously good news for people when you see the scottish child payment up to twenty six thousand seventy but if there's a tipping point in tax where's the tipping point in terms of social security and labour market participation has there been any work done on that um no because we haven't done anything on that i think the one thing i would say is that the the social security spending payments that we look at that are devolved in scotland are quite heavily concentrated on people with disability and ill health are or people who are you know of all of all ages and so they're less of the of the social security payments that you might particularly think there will be an immediate labour market effect say such as unemployment benefit job seekers allowance or things like that so these these we don't we don't we're not when we're looking at this we don't then model this as being an academy moving measure so we don't think people's incentives are changing and that's and that's in part because of the nature of the benefits okay well thank you very much for responding to your questions so it's a sink line directly i really appreciate that we're going to have just a a two minute break while a a weird and wonderful collection of individuals known as the scottish fiscal commission we'll be giving evidence very shortly agenda item which is to take evidence from the scottish fiscal commission how it delivers its functions we are joined today by Professor Graham Roy chair in john island to the executive of the scottish fiscal commission so i welcome you again Professor Roy and to yourself john i know you are listening to the first session the background there and invite Professor Roy to make a brief opening statement okay great and thank you uh conveyor so yeah first of all we really welcome the opportunity to speak with you this morning it's a privilege to be chair of the scottish fiscal commission i think we have a great team of commissioners and staff dedicated to public service as demonstrated by their work over the last few weeks under difficult and demanding circumstances and we aim to be a highly transparent organisation both in terms of our forecasts analysis and judgments but also in our governance and operations our annual business plans set out our operations key activities over the previous year and our plans for the year ahead and our annual accounts show how we how we are operating within our financial constraints including operating as a small organisation a few things to highlight we're looking forward to our statutory review next year and we're also looking forward to beginning work on a future round of recruitment for new commissioners who won't be appointed until 2025 but we want to start that work as early as possible and it's a really big and important piece of work as we look to not only improve the diversity within our commissioner team but also develop our skills and experience and finally if i can i just want to thank this committee for your interest in our work we exist to help government and parliament understand the risks and uncertainties in devolved public finances so that budget can be as transparent and well scrutinised as possible as there's more that you think we can do to help you with the work then please we're more than happy to help well thank you for that opening step Professor Royal you and i have spoken privately about some of the things you would like to do i mean i've read your report i can't see anything that i would want to criticise you on you've laid out in detail a potential principal risks which don't appear to have arisen so i'm just wondering if there's a what additional areas you would like to focus on if for example the review allowed for additional resources in in terms of for example staff i think that i mean the ultimate function the most important function of ours is delivering the best possible forecast that we can for the budget and i think that protecting that and importing that is obviously really crucial the bits of area of expansion which i think where we can add real value is around doing more around the fiscal sustainability work i think that's a crucial issue for scotland over the long term and beginning to unpick the big structural questions which which will face you know future administrations not just this current one i think is really vital and there's no one else doing that in scotland i think we have a really important role there i also think there's an area where we're moving into which i think is is really important we touched on it in the earlier evidence session around spending and our ability to comment about where spending is moving and what might be the medium term implications of particular choices within spending portfolios and extending our role into there so we started to do more than that and i think that the more that we can do in that i think that we then we can add value at the all the time protecting that independence and not commenting specifically on policy choices yes it's not commenting on policy choices it's showing what policy choices are available and then it moved up to politicians to decide whether or not to take one or other forward okay i can see that okay i'm going to open out the session john to fobby meiko thanks very much and perhaps to yourself mr island to start with you say in the chief executive's introduction we are continuing to work on the public understanding of fiscal policy in scotland so i was wondering is that possible and how's it going um yes it's possible um and i think graham's particularly important is he might want to add something as well but um i think it's really is part of our job to try and help the public understand but i think we have to be realistic about that the fiscal framework is as you very know incredibly complex however there's some some basic things which i think we can be clear about and we try to be clear in that in in our reporting um we try and structure our reports so they're accessible and our graphics so they're accessible to to a wide range of people but again you know we have to think about where to direct our resources here so we spend a lot of time thinking not so much about how can we communicate with the public on mass but how we can communicate with say journalists who then do that communication for us as well so i think there are things to be done and we're thinking about engagement in in in a slightly different way i think graham might want to add something on that now um yeah i mean just so i think i think there are a few things in there i think one is there's a lot of is a really important piece of work for us to do about communicating more broadly but also communicating with the key decision makers that really matter in terms of the big issues we're doing so we're talking you know if you're talking about fiscal sustainability the organisations that really matter in scotland around that like cosla like public health scotland Scottish government we're really keen that we do much more with them to articulate and be able to explain the work that we're doing around fiscal sustainability and like with them and the conversation we just had about public sector wages is a really good example of i think where we can add value and by just articulating how much of the budget is public sector wages so if you make choices in wages that doesn't that doesn't impact on employment but also impacts on broader areas as well so i think there's a lot that we can do with people who are really involved in that process who are really under who are really engaged with that and we've started to try and do some and we will do it over the next year but we started some training of people we explain the budget we explain the fiscal framework and our plan is to create a series of bite-sized videos which people can go along if you're bored on christmas day you can go along and and watch a five minute tutorial on on what reconciliations mean and i think the more we can do on that and work with others to get people to understand not so much about the detail but why why the the numbers matter and what that means for people making these decisions okay thanks i realise we're kind of tight for time in the past data needs you produced quite a long list or i think dame susan rice produced quite a long list of data needs but you're saying now you're only going to publish that every two years because you seem to have cracked that is that right i think the so we're always in the market for data we're always asking for data i think there's a point about how regularly we need to keep doing this and that's why i think we're now into into two years for that and we've we've made good strides and thinking scotland particular on data i think that the big concerns we had when i last spoke about data needs around social security i think we've got a really much better relationship with social security scotland in terms of getting the data that we need we're always needing more so we'll update that and we're also quite happy to see outside of the regular reporting on data needs if we have concerns or we're not getting the data that we need then we'll then we'll communicate that through other channels okay thanks and my final question was in paragraph 196 it says that the sfc is not yet subject to the public sector equality duty can you explain why and what's happening there i think that's in in relation to reporting on the gender pay gaps explicitly but we voluntarily do report right and if you look there we have a negative medium pay gap and the last couple of years which means that women on average within the organisation have paid more than men but you are going to be subject to the public sector we will be i think there's sort of it's one of those things where it depends upon your employment size and it sort of squeezes as time goes on but we took the decision just to voluntarily report that okay that's great thanks give you that's very much make on to me for my list thanks um you also saying you're in the report that you want to make sure the work is clear and accessible i also wonder about replicable um and particularly i think in the run up to this budget we've had a couple of external reports trying to cost different taxation policies that have taken pretty markedly different methodologies other than the very key methodology which is your own so how much is that a black box that people can't see into and how much are you engaging with external organisations to show your working so that they can then essentially plug on plug their own numbers into your formula and we can have a more consistent view of some of those issues around behaviour effects so we so we're very transparent about our about our numbers we're also more than happy to engage with people around that i mean interestingly if you take tax as an example the government publish essentially ready recogners based on our numbers so anyone could go in and say what would happen if you put a penny on the top rate of tax and they would come out with our number broadly speaking so um i think there is uh i think we would encourage people to use that sort of thing because it is there um if people want more information then we're more than happy to to speak with them and to do it um i think you're right there is when people come out with different numbers and it can be quite confusing in that i think if there's any more that we can do to you know promote the fact that our information is available um then then great if you take our relationship with someone like Fraser Valander is a good example of that they have their models we have our models um but our officials communicate so they they know why we've got we might have differences different assumptions that we're using so anything is really down to just the nuts and bolts in there i think it's more potential other ones maybe advocating a policy where you might come out with a different number to us but hopefully they'll use our so would you be proactive in that i mean there's two reports i'm thinking of immediately the IPPR report um STUC report both of which have been produced um both seem to be pretty markedly different methodologies to your own is that something that you would proactively approach them and say you know you've made these assumptions it's a key part of the public debate it's right that they they publish these reports it's very useful i think for all of us but actually having that kind of common methodology or at least an understanding or even displaying the variance against your own methodology and why they've made some assumptions and that is i mean do you do that proactively so i think we would um i think we would we're more than happy to engage and we do engage with organisations like IPPR and others as well on a regular basis um there's always a balance between particularly on a budget cycle as proactively going out and saying you know and how much time we have etc for that to be fair i mean if you read these reports that come out with different numbers they do talk about all the issues around behaviour and they do talk about the work that we've done etc they then may choose to use the static costings or to use a more generous assessment on on the elasticity and i guess ultimately that's their judgment in there and i guess we wouldn't i wouldn't be critical of them doing that but there's a broader question about you how do you communicate how do you communicate all that when you get quite different numbers moving around plus question if that's okay can be out there's the budget for economic and scientific advice published yesterday i think is almost doubled for the scottish government in two years do you get a cut of that for your own we have our own budget line our budget is comes from the finance portfolio and it's in the budget document we have an agreement with the government in our framework document that we get three years worth of you know get the amount the next financial year is in the budget the following two years the cabinet secretary will write to us after the budget bill is passed you know it's an indicative allocation which has been in line with what you've asked for the past so all the time that we've been independent body but we don't we're not funded as part of the government's economic advice now and do you think that that represents an increasing cost for that advice or for the scottish government supposed to get back into a previous conversation about budget scrutiny in some respects but i'm just wondering in terms of your own budget and the flex flex you need to do that work in terms of our budget um the number of people we have working for us has increased over time as we've done more so for example the fiscal sustainability work um with your support we asked the government for more resource to do that so in a sense you know our resources have increased in line with the work that we're doing um we're very careful in how much money we ask for um and i think at the moment our our resources are sufficient to do what we do um one of the issues that we do have though of course is is labor market churn and people come and work for us they tend to be quite young and and they'll move on and that leaves us with vacancies and that is always an issue for us managing vacancies but their overall funding we have from the government i think is fair and adequate okay just a very quick suggestion if you could repeat that wonderful lunchtime seminar that you did for msp's and staff about four months ago i think it was um with all your diagrams which is um far far better than reading through an awful lot of text it was fantastic and much appreciated by the staff in the parliament very kind of yes what happened to you know i say a clash with the smp group mean which is why a lot of us were not there but what i would say is that the the kind of early morning breakfast kind of half a bacon roll types and others are also very useful not only for msp's but also for members of staff i think they've been very helpful and i'm certainly keen to see them continue so any like i know john you've got to rush to the chamber you've got to be there for for two o'clock and of course we can't meet after two o'clock and it's five to two now so unless anyone's got anything else to ask i'm going to call this session to a halt i want to thank you again professor roi and also john island for your evidence today it's been very helpful in our deliberations and apart from that i just want to close the meeting i wish everyone a very merry christmas and a happy and peaceful new year