 Ce blech yn yr eich gael gwellwns yn siwr y maen nhw i ysgafelid 32 pwyllgor gweithio mewn cael eu gyd- Cyhoeddiau i Gwyrdd Cymru yng Nghymru yma, na hefyd yn arnyntio y pwyllgor Gwyrdd Cymru yma i gael gyrdd gweithio mewn cysyllt elfen nesaf i ddweud o 80 gwbeithio ag nôr gyda gwnnyllu Llywodraeth ac mae gyda gwych i gael gwyllgor gweithio eich gael gynrydd i ledin wedi'i gweld, a ddechrau i eisiau eich gweld. Felly, fel dim yw David Phillips, barai cyfnodau dewsgron ar gyfer Fiscal Studies ac ben Zamanco, gympraeit o gyfnod hefyd y gwaith o fynddujos ar gyfer Fiscal Studies. Rydw i ddim gadran gweithio. Fe oeddwn i wrthmysg wahanol cael fynd i ffysgol yn eu cyfnodau. Mae ffaith cyfnodau i'r ffaith wael y cyfnod pwysigol beset in the last six months by a series of dramatic swings in the direction of fiscal policy. The five major fiscal statements delivered by three successive Governments, and at the net impact of this series of announcements and reversals, has been to add over £40 billion of boring by 2027-2028. Can you advise us to what the impact of that would be, not just on the UK economy but specifically on Scotland's economy? The key thing that we need to emphasise in all of this is that the UK is undergone an adverse in terms of trade shock that makes us poor as a country. The things that we import have become more expensive, gas and food in particular and the things that we export have not gone up in price to the same extent and that makes us a poorer nation. There have been various swings in fiscal policy of course over the course of this year, some quite dramatic ones. The fundamental thing is that whatever fiscal policy costs have been taken, we would have suffered the shock and we would have become poorer. In looking into the medium term, the two key things that come from the OBR forecast are one, a deterioration in the outlook for growth, a weak outlook for the economy. They are more optimistic than the bank, they are sort of middle of the pack when it comes to other independent forecasters and that weak outlook for economic growth is then the fiscal challenge that is compounded by a large increase in how much we can expect to spend on debt interest as a consequence of higher inflation and in particular higher interest rates. What that combines to do is to make the Government's public finance position worse on aggregates by a substantial £80 billion by the end of the forecast period. The Government has chosen to offset part of that through tax rises and cutting back on its spending plans but we have also absorbed some of that and the Government loosened its fiscal rules. It is set to meet them by hair's breadth and things are highly uncertain but, as it stands, we are only just on the cost to meet those. For Scotland, what that means is probably several years of squeezed funding as inflation eats away the real value of the public service budgets that have been set out in the grant funding that has been provided to the Scottish Government. Combined with various tax rises, the Government freezes essentially every tax threshold in sight in terms of trying to raise revenue and I think that that will exacerbate challenges facing the Scottish Government and, in particular, Scottish public services. I will stop there. I wonder if there is anything to add. Yes. I think that Ben has said it perfectly there. In terms of the impacts on Scotland, I am sure that we will come to this in a little bit, there was a slight loosening in terms of the spending envelopes for the next two years. That will mean a bit more funding for the Scottish Government next year than previously expected. Although, in 2024, my back of the envelope calculation suggests that, whilst more money is coming through the Barnett formula than the Scottish Government had built into its medium-term plans, the fact that the UK Government is no longer cutting the basic rate of income tax in the rest of the UK means a higher block grant adjustment might more than offset that. From 2024 onwards, less funding for the Scottish Government because of the higher block grant adjustment potentially and beyond that, the type of spending envelopes. Of course, the people of Scotland will be affected by the economic downturn as much as in the rest of the UK, one would imagine. In the short term, at least, the higher energy costs will probably impact people in Scotland somewhat more, given the colder weather and higher needs for heating, especially during winter. On the point that you were making around, to what extent was the flip-flopping on policy that exacerbated the economic outlook? I think that, to some extent, that is a bit unclear. It was clear earlier on that the UK had seen a bigger rise in interest rates than the other countries during the aftermath of the mini-budget. That seems to have largely disappeared with the reversal of those and the fiscal tightening. The open question is whether the fiscal tightening had to be a bit more significant than otherwise would have had to be the case in the absence of that flip-flopping and the potential loss of credibility. Although, as Ben Macintosh says, a substantial chunk of the extra borrowing planned is being allowed to go ahead. The UK Government is only planning to offset parts, not all of the weakening in the public finance position, which might stop some problems for the longer term with a higher level of debt. As it stands, debt will be very, very fractionally falling in the medium term. Obviously, it has set up plans for it to be falling sooner and faster. We can all see that the plan is for the real impact of the budget to fall after the next UK general election. However, do you disagree with the OBR when it says that those continual policy changes cost some £40 billion in additional borrowing? Does that seem to be the implication of your response? I will hand over to Ben Macintosh, but I was not aware that the OBR said that the actual changes in fiscal policy had led to that £40 billion of weakening in the public finances. As Ben Macintosh said, my understanding was that, while there was potentially some element, and certainly at the time they were doing their forecasts, higher interest costs potentially related to the reduction in credibility of the UK's fiscal policy. However, the main factor that was underlying it was the deterioration in the underlying economic environment. Ben, I do not want to add anything on that. My understanding is that that comes from indeed Richard Hughes, the chair of the OBR, but we will move on, because he talked about growth now. I was looking at the Economist review of 2023 when, as you will know every year, it provides a number of forecasts—not the kind of forecasts that we generally discuss, but predictions are perhaps probably a better word—for economic growth, etc. What it says is that the United Kingdom believes will grow at minus 0.8 per cent next year, with a per capita income of $55,000 at purchasing power parity, whereas a Republic of Ireland will grow at 5.4 per cent with a purchasing power parity per capita income of $135,000. Why is the UK in such a different position from countries like Ireland just next door? In terms of Ireland, there is a particular factor with Ireland's GDP, whereby the activities of multinational companies such as Apple, Google and others, airline companies, that either base their assets or root their profits via Ireland lead to an overstatement of Ireland's GDP relative to other countries. The Irish statistical agency has produced another magical GNI star, which tries to strip us out. That still shows Ireland being better off than the UK, but it is not more than two times better off on that measure. It is definitely the case that relative to other northern and western European countries, the UK has poor productivity, and that has been a long-standing problem. We saw some reduction in that gap during the late 80s to the late 2000s, and that gap has widened since the late 2000s. The precise reasons for that gap are somewhat uncertain, but there is a range of factors such as low investment, especially business investment in fixed capital, relatively poor skills, especially poor intermediate-level skills, and issues about, potentially, property market and supply of property have been raised. It is undoubtedly the case that the UK is a bit of a laggard about its neighbours in terms of productivity. That is true. In terms of the outlook going forwards, the UK is also one of the economies projected to do least well during the 22-24 period. To some extent, that will be linked to our alliance on gas as an energy source, where the price increases have been particularly large, but there could be other factors that play as well. For example, the kind of on-going fall-out from Brexit could have impacts of, you know, historical low investment, so there could be several factors underlying that. I do not know if Ben wants to add any more. Ben, do you want to ask a question? If I could quickly. If I could also offer a very brief response to your previous question on the £40 billion number. I think that I understood you correctly that the OBR's estimate of the fiscal tightening that the Government has done in 2026-2027 is relative to a deterioration in the forecast of around £80 billion, so they are offsetting about half of it and the fiscal tightening is going through about 40 per cent tax, 60 per cent spending cuts. The big question for us, I think, is that state-of-government policy, and that's fine, but there are questions about one, whether you can really freeze income tax thresholds for that long, or whether the threshold will build for that policy to fall apart as well, so with those tax rises actually go ahead. Will the Government actually be able to keep a lid on spending to that extent? Will it be able to get away with offering 1 per cent average real terms increases in the face of substantial pressures on public services? If you think that maybe spending plans will get topped up and some future government will backtrack on some of the planned tax rises, that number could change. One thing just to add to David's answer about why the UK's growth outlook looks worse than other countries, of course trade has to be part of that. There is player signs in the data now that impacts of us leaving the European Union is starting to affect our exports, particularly of services of things like finance and professional services, that's having a clear impact. I think that there's increasing evidence that the health of the UK population seems to have worsened by more than in other parts of Europe, and I think that there's a bit of a puzzle as to why that's the case, but you can see it in, for example, disability claimants data or you can see it in a number of people dropping out of the labour force to become inactive. There are clear signs that the health of the population seems to have taken a hit, and that is feeding through to our productivity as a country and to our economic fortune. That's a good point. I understand that there's a 600,000 increase in the number of people economically inactive relative to before the pandemic, so I do appreciate that that's an issue. One of the things that's been predicted is a 7 per cent fall in living standards over the next two years, but obviously the impact of that will vary considerably in, can you advise us to where you feel which groups in society will be most and least impacted? The Government's support package is broadly a progressive one. There's a clear focus being made to try and target support on lower-income households. I think that this winter, given the broad sweeping energy price guarantee, households will be insulated to the worst of the shock. I think that the big question is what happens after April and the design of that new scheme. The two groups that might worry about, in particular, are those that have very high energy needs—if you've got a large family in a drafty house in a cold bit of the country, for example—or we might worry that if the Government provides support, let's say, just to people who are on means-tested benefits, if you either adjust on the wrong side of a sharp cut-off day, or perhaps you haven't applied for benefits that are eligible, some people who have high needs might not qualify for very much support at all, and those are the groups that we might be concerned about. Our general point here is that we know that inflation is higher for poorer households. They spend a much bigger fraction of their budgets on things like food and gas, where inflation is highest. Even though benefits will be upgraded in line with EPI come April or September, EPI has just gone. That probably isn't keeping pace with the inflation rates that are faced by poorer households, which will probably exceed 10 per cent or so average across the economy. We should be very concerned about those groups in the coming years. However, as you say, 7 per cent for an average living standard is really horrific. It will hurt right the way across the income distribution. That's why it's very important that the Government spends time and effort trying to make sure that support systems are well designed and well executed. Okay, thank you. If the prediction is that there will be a 1 per cent increase in real incomes by 20, 7, 28 per cent, how can you possibly predict that kind of level of growth at this point, given all the potential shocks that we might see? I mean, if someone had predicted that five years ago, everyone would have been astonished. Everyone would have expected that five years ago a five-year prediction had to be much more positive. How much of a pension salt do we need to treat that with? Those forecasts are subject to enormous uncertainty that cannot be exaggerated enough. Public finance forecasts and economic forecasts are uncertain at the best of times, if there is much in art, not science. Those forecasts are extremely uncertain. Clearly, nobody knows how the next few months are going to pan out, never mind the next few years. However, it is possible, of course, that we will see gas prices fall back. It is possible that we will see some sort of upside benefits. For the public finances, for example, it is possible that interest rates will not rise by anywhere near as much as what the market uses, which is what underpins the OBR's forecasts. That might mean that borrowing turns out 10 to 15 billion better, and that is money that can be reallocated towards other priorities and public services or tax cuts. There are potential upside benefits and risks, but, of course, as you say, there are many potential shops on the horizon and things can always turn out worse. That is what we should have learnt if nothing else started from the past 12 months. The key determinant here is that it is outside of our hands. It is really what happens to global energy prices and when. That is going to be the key determinant of what happens to growth and what happens to household incomes. We can plan on the basis of a central scenario, but we have to recognise the uncertainty around it. I would echo what Ben said. There are two further points that I would make. The first is that, as Ben said, the OBR has made what it thinks is a central forecast, and its forecast is in the middle of the pack. It is not one of the more optimistic ones or pessimistic ones. The Bank of England is much more pessimistic than the OBR. There are two main reasons why it is more pessimistic. It is not to do with oil and gas and other things like that. Both tend to use similar information on that. The main factors are an assumption about how consumers respond to the recession. The OBR assumes that, unlike in motor sessions where people cut back their spending, they engage in what is called precautionary saving, because the nature of the session where it is sort of oil and gas prices, things that you cannot cut back on so much, but even more importantly, many higher-income households in particular still have some pandemic savings that they can draw down on. They will be things that consumer spending will hold better than it usually does in the sessions. Secondly, the bank does not think that that will be the case, and secondly, the OBR assumes that productivity growth, although it is not returning to its pre-2008 levels, will start to pick up a little bit again, because the Bank of England in its projections assumes that that will not be the case. I think that the Bank of England shows what might happen if the recession, if people do cut back, if people escape and cut back their spending and if productivity does not return. The growth forecast would mean that much weaker outlook for the public finance is much bigger cuts, but, as Ben Scott said, if things survive in the upside, such as oil and gas, or whether there are other factors such as productivity growth, it turns out to resume at a faster rate, that could be an upside thing. The last point that I would make on that is that, relative to where we were previously with the fiscal rules, the fiscal rules were more stringent, but Rishi Sunak had planned to meet them with a bigger headroom, so that if they had been a little bit of a surprise on the downside but it wasn't too big, he wouldn't have to revisit his plans. If Jeremy Hunt wanted to meet his rules, at the moment, as Ben Scott said, he was meeting with a his breath, so if things turned out even to slightly worse, that would mean either tearing up those rules or engaging in further tax rises or spending cuts. We are basically walking a tightrope. What is the UK spend in the last month for which you get figures in paying interest on its debt? I haven't got those figures to had her. I don't know if Ben does. I know in the medium term that the forecast adds about £100 billion a year, so that would average about £8 billion a month. I'm not sure what it is in the most recent month. £120 billion this year is in the OBR forecast. The OBR forecast is for £120 billion this year, so it varies month to month, depending on the profile, but about £10 billion per month. Paul Johnson, director of fiscal studies, said that, what we are really doing is reaping the costs of a long-time failure to grow the economy, the effects of population ageing and high levels of past borrowing, and he concludes by saying that we are in for a long, hard and pleasant journey. A journey that has made more arduce than might have been by a series of economic own goals. What could the UK Government do differently, and what should the Scottish Government do differently in the view of the Institute of Fiscal Studies? Perhaps I'll go first. The biggest own goal this year is clearly a self-imposed fiscal crisis in the autumn. It's very difficult to know precisely what namely impacts that we'll have, but the clear risk is that we've had to do more painful tax rises and spending cuts than we otherwise would have done in a bid to try and repair our reputation. The one clear lesson from that is that the messages that Governments and chancellers send to the markets and to global investors matter. Doing a large package of unfunded tax cuts and then going out and briefing the papers that there's more to come and hinting about restricting independence of the Bank of England have consequences. We've learned that it's part of adapting to a new world where interest rates are starting to rise again and money is no longer as cheap as it was. The one clear lesson is that a bit of policy stability and fiscal credibility and commitment to clear policies and principles are important. As Paul, our director, said, this is partly the consequence of more than a decade, 15 years of abysmal growth and abysmal record on productivity. We don't understand well enough what's been driving that. It's very easy to say that the Government should have done this, I should have done that, so that's hard to say with certainty. What is clear in hindsight is that the cuts to things such as capital investment after 2010 were very sharp and very deep. That probably contributed to a weakening longer-term outlook for the economy and for public services, as well as investment in hospitals, schools and the public sector of state. The flip-flopping and constant changing of policy and lack of overall strategy on things such as taxes does not help. I think that there has been a bit of a neglect of further education and adult education and skills. There are all sorts of things that are easy to say with hindsight, but I think that the big one is policy stability and commitment to more of sensible fiscal policy. It has been a clear lesson of the past few months and a recommitment to that is important, whether that is in the UK Government or indeed for the Scottish Government. Of course, the Scottish Government hasn't got the same number of levers, that's why I'm specifically saying what the Scottish Government could do. Maybe David, you could say what the Scottish Government could do, perhaps, given the situation that we're in. As it stands in the current constitutional settlement, you're right that the Scottish Government doesn't have the same levers. In effect, it can't do the same things on borrowing and it certainly can't do unfunded tax cuts in the same way that the UK Government can. In terms of lessons that one can learn from this, there are some for the current constitutional settlement. One of those is about a strategy in prioritisation. The Scottish Government has an ambitious set of reforms on welfare coming down the track at the same time that it has pressures on the NHS and many other public services, which, in the spending review, wearing those two circles proved incredibly difficult in a Scottish context. One of the lessons here is that when one has to live in a more constrained fiscal environment and if one needs to really think what one's priorities are, I hope that, whether we see that in the upcoming Scottish Government's budget or in a future reassessment of the spending review, we see a bit of grip on whether we can't potentially deliver all that we want given that fiscal environment. We need to have a strategy for that. Is it that we prioritise certain elements of our policy package? Is it the anti-child poverty element? What does that mean for pre-existing areas where provision is greater in Scotland than the rest of the UK-like higher education, for example? Or do we look to taxes, Scottish taxes, to change the funding envelope? There are also implications for not just within the current constitutional settlement, but if there are changes in the constitutional settlement. I think that the Scottish Government made all the right noises around how it would approach public finances with fiscal rules, credibility, independent forecasters and so on, not trashing institutions that the UK Government did to some extent. However, although it made the right noises with a bit of a disconnect from that and some of the suggestions on the policy side, which were potentially not consistent with that idea of fiscal sustainability, I think that one of the things that I've noticed by looking at the Scottish Government is that it's quite a broad coalition that pulls together and therefore it needs to have a lot of different policies to satisfy that coalition, but that can sometimes mean a lack of focus on priorities among even a tight fiscal environment, whether it's part of the UK or an independent country. You would need to have a very strong prioritisation to really make sure that you're delivering your key aims within a sort of sustainable public finances. Okay, just one more question from me, and it's about the block grant adjustments. It will be a tax forecast. I've already heard that we don't expect there to be much growth if any over the next few years, and indeed we've heard about how living standards are going to fall, but the OBR has predicted that Scotland's income tax, for example, will grow from under 14.7 billion to just over 18.1 billion from the current financial year to 27.28 billion. That's quite a huge increase. That's almost £3.4 billion of an increase. Do you see that coming through fiscal drag or other measures? In terms of the forecast for income tax, there's two developments to the Scottish budget. One is the OBR's forecast for revenues in the rest of the UK, and the other is the SFC's forecast for Scottish revenues. Both of those will be increased over the next few years because of fiscal drag, as you say. We're in a context where real earnings are falling, but nominal earnings are growing at a reasonably strong rate. In the combination of freezes in the personal allowance and the higher rate threshold and the subsequent reduction in the top rate threshold down to just over 125,000 in the rest of the UK, that leads to substantial growth in revenues. Compared to the last set of forecasts, the big change has been that previously the OBR's forecast was that the UK Government had been planning to cut the basic rate to 19 per cent in 2024-25. Liz Truss had planned to bring that forward, and then it's been abolished completely. That will then mean that revenues are higher. You're not cutting tax rates in the rest of the UK. Revenues will be higher than previously forecast for that reason. That offsets part at least in the short term. Maybe even all—I haven't got the figures in front of me—of the impact of the weak economic outlook on revenues. What that means is that, compared to when the Scottish Government had a spending review, at that point the Scottish Government hadn't planned to cut its basic rate to 19 per cent. Part of the funding available in 2024-25 onwards was due to the fact that at that point it was assumed that the UK Government would cut income tax, but Scottish Government wouldn't. That would mean that the block grant adjustment wouldn't grow as fast as Scottish revenues. That's no longer the case. That means that, even if the SFC projects forward, it doesn't project a deterioration in Scottish underlying revenues relative to the rest of the UK, that policy effect, which will mean that around £400 million needs to be found in subsequent years from the Scottish Government's budget, because that funding is no longer going to come through a smaller block grant adjustment. Okay, thank you very much. Ben, do you want to make any further comment on that before I move on? Nope, okay. No, no further comment, thanks. Right, thank you very much. I'm going to open out the session to colleagues around the table. First person to ask a question will be Deputy convener Daniel Johnson to be followed by Liz Smith. Thank you very much, convener. I actually want to just follow on that tax revenue point and block grant adjustments. It has been a bit of a recurring theme at this committee, looking at why we consistently have negative block grant adjustments, which is largely about the fiscal framework and our per capita income tax receipt growth. Just given that there will be our projecting further negative block grant adjustments, I wonder if there is any further insight to be drawn as to why our income tax receipt growth is slower in Scotland, or if there is any further detail, given that it's just so critical to our understanding of the public finances in Scotland. Yes, I'll address that question. The SFC has looked into this and the Scottish Government has looked into it to some extent in its previous reports. Historically, one of the factors underlying the slower growth in the Scottish tax base than the RUK tax base—hence Scottish revenue is not keeping up with the BGA—has been that a lot of the growth in the UK tax base has come from higher earners, especially those based in the south-east of England and London. The Scottish Government did some analysis where, if you strip out London and the south-east, Scottish trends look much more similar to the rest of England and Northern Ireland, so the Midlands, the North and Northern Ireland. Historically, the end of the performance of tax revenues in the north-east of Scotland related to the oil industry is the end of the performance of tax revenues in the north-east of Scotland. Again, if you strip that out, that seems to reduce it. Historically, that was what was going on. Looking ahead, I'm not sure that that would necessarily be such a big explanation, but, because of the freezes in the thresholds and so on, that tends to raise more, relatively speaking, from the lower part of the income distribution, which there is more in Scotland, because a freeze in the threshold matters more to the relative amount of tax that you pay, the lower down the income distribution you are. I don't think that what's happening at the top of the distribution could be quite as important looking ahead as it has been historically. The SFC suggested that there are two factors at play. It is less optimistic about what's going to happen to Scottish employment rates than in the rest of the UK, and it links part of that to ageing, but it's not all ageing. Some of it is to do with lower employment rates amongst younger adults as well. I've not looked at the figures more recently, since the last SFC report, to see if that's been borne out or whether that was just a difference in judgment between the SFC and the OBR. Thank you. I just think that this is an issue that's important to keep a bit of a watching brief on. I've got a couple of questions about measures and potentially a bit of economic structure. First of all, on measures, we are seeing very sharp inflation, but it's also being driven by very specific things—a combination of increase in wholesale gas prices, which is being experienced across the world. Likewise, the war on Ukraine is an event, but it is critically given the importance of Ukraine in terms of some basic agricultural goods, such as sunflower oil, as having very particular impacts. We are seeing very sharp inflation, but it is also lopsided. We are seeing particular goods such as, I think, skin milk is one of the highest—the goods that have experienced the highest inflation around 30 per cent. Do we need some better measures, because not all people will buy the same basket of goods, and particularly Governments don't buy the same basket of goods as people do? Therefore, to get a true grasp of how much the Government's spending power and people's spending power have been reduced, do we need to have some better measures for these sorts of things so that we can understand how much money we have to spend? If I might come in first on the point around inflation measures—I'm sure Ben will add a lot here—the GDP deflator is one of his interests. In terms of measures across the impacts on households, the first point I would add is that, although initially at least the increases in prices were very highly concentrated, one of the worrying signs we've seen is that inflation has now been leaking out across broader categories of goods. It's not as concentrated in just food and energy as it once was. You're seeing it increase across a wider range of goods and services. Core inflation is starting to rise, and that could lead to worries about how much higher inflation will be more difficult to address than the OBR and the Bank of England hope it would once it starts affecting inflation expectations and things beyond energy and food. The second board of inflation is that the ONS has started to produce a wider basket of inflation measures that try to look at whether or not price increases are particularly high for the basic products as opposed to the testable value as opposed to the testable finance and so on. We are having more measures there. In terms of government inflation, the cost for government, traditionally the way that this is measured is using the GDP deflator. That has been moving in some rather odd ways in the last couple of years. I think that there probably is the case that when considering what the real terms change in government spending power is, if we think about the inputs that government can purchase from those funding, we potentially need a new inflation measure. I will pass over to Ben, who can say a lot more about that issue. Thanks, David. On the first part of your question, as David said, core inflation is now running well above target. If you look at what is happening to average earnings, 6 per cent across the UK is a whole average cash earnings growth. It is hard to reconcile that with inflation at 2 per cent targets. Inflation is through the economy now, probably running at more than 2 per cent across all sorts of goods and services. That is probably what the Bank of England is most focused on when it is thinking about interest rate decisions. You are absolutely right that we do not have a great measure of what is happening to the cost of running public services, for example. We have traditionally relied on the GDP deflator, which is a measure of domestic economy-wide inflation. The reason why that matters at the moment is that a domestic measure of inflation will not include rising prices of imports. We import lots of food and lots of gas, so those things do not enter the GDP deflator. That has been running much lower than CPI, for example. CPI being a measure of the rate of inflation facing households. The tricky thing is that CPI is also not a good measure of the inflation rate facing, for example, hospitals and schools. The gas, food and fuel represent a much bigger fraction of a household's budget than they do of a hospital or a GP practice or of nursery. Staffing costs clearly enter much more prominently into the running costs of public services. To some extent, that is determined by Government pay decisions. I do think that it would be a really valuable thing for the ONS to try and construct a public sector inflation measure. It used to be a health sector-specific one. That was discontinued in around 2015. I think that the evidence base here is lacking a little bit. When you are making assessments of what is happening to the real-terms value of grant funding or of budgets, it really matters which inflation measure you use. I think that the quote-unquote true rate of inflation faced by public services probably lies somewhere between CPI and the GDP deflator but precisely where it is a matter of judgment. I think that it is lacking and that it could be usedfully worked on by some of the Government's statistical agencies. Just a final question. I am going to slightly conflate two slightly different issues but I think it all comes down to the same point about how do we gain a better understanding of inflation and our lack of growth? I think that there are some things that we don't have an accurate insight or measure of. The first is that we still have relatively higher energy price, especially electricity generation, compared with the rest of Europe. That doesn't entirely make sense to me, especially if you compare directly with other countries with similar energy production compositions such as the Netherlands. The electricity price in the Netherlands is about 20 per cent lower than they are in the UK. Given how expensive the energy intervention is, do we need to look more carefully at comparing what we have done in this country in terms of the price cap with other countries? I can understand why different countries might be different if they have different compositions in terms of their energy production or consumption. However, the Netherlands is very comparable to the UK in terms of its economic mix and production. Do we need to look more carefully at that and indeed try to measure that, given that it is becoming so critical? Likewise, Ben, you said that we don't quite know why we have had a lack of growth in the last ten years. Broadly stated, we do know that the fundamental problem that we have in the UK is a lack of investment, both Government and private sector investment. Do we need to measure that more carefully and more precisely? You hinted at your previous answer that the cuts in capital investments have been one of the things that has been... Do we need to measure our energy market more closely? Do we need to measure investment? Would they help our fiscal position if we understood those things better? I think that's right. The famous management consultant, Max, said that what you can measure is what you can manage. I do think that there is definitely some truth to that. I mean that I should say that we're not neither David nor I or energy market experts. Given the huge sums being spent, there is clearly a need that even small changes that might help increase energy efficiency, for example, might improve the functioning of the electricity market, those things have the potential to save large sums. I gather that the Government is doing work on market reform of the electricity sector, but I'm not an expert and I don't have much to offer. On the latter point, in measuring investment, we know that we have the data to measure and see that UK business investment has lagged other developed countries for quite some time. Government investment has lagged other countries for quite some time. We can measure that and observe that. Getting granular data can perhaps sometimes be difficult. It's very difficult to identify the effects of things like that that are very slow-moving and the effects don't come for a long time and there's lots of other things going on in the background. It's very difficult to precisely identify the impacts of those things, but there's definitely a consensus that high-level investment might have been good for growth, particularly in certain sectors. I think that better measurement is part of the answer, but it just has to be a question of priorities and policy stability. When it comes to things such as corporate taxation and trying to encourage business investment, there's a lack of a clear overall strategy, and that would be just as beneficial as better management and measurement. I think that abolishing the transmission charges imposed on Scotland by the last Labour Government would also help. David, you want to come in? Yes, I want to come in just very briefly. On the point about energy, as Ben said, the UK Government is planning reforms to the energy market. Now, one of these reforms would affect the glitting the market, if you like. Rather than being one marginal price that determines the price of all electricity, which is usually the most expensive one at any one point, so currently gas, there would be, for example, long-term contracts for renewables at a lower price, and then there would still be a marginal one to make sure that you didn't run out of supply. Again, that could be gas as it is now, but it would have set-foot prices in the market. That could end up reducing the overall average price, and you wouldn't have a situation where when the gas price is very high, you've got windfall profits for renewables producers. The reason I just throw that in a little bit of detail is that that will actually have an implication for public sector and other organisations that currently say that they want to use renewable energy. In a world where you have two set of prices, consumers will not be able to choose to use renewable energy, because otherwise they'd all choose to use the low price one, so in future there'll be no such thing if we have this split market of having the new energy-only contracts. You'll have to have some bundle of energy that everyone buys from, so whilst splitting up the energy market to have different prices, you're actually bundling it together when it comes to consumers and businesses buying that energy so that they can't undermine that splitting of the price by all piling into the low-cost one. Energy market reform is potentially useful, but it does mean some changes to how people have got used to it, particularly people who think that they're buying green energy. If you try to change the prices, you can't do that in the future. I want to say very finely to Ben that you can't manage what you don't measure as one of my absolute favourite sayings, so thank you very much for repeating it. I wonder if I could ask a technical question on the back of commentary from some economists that following the end of lockdown and the very severe restrictions that we all faced when it came to not being able to do other things, is there any evidence that you can put your finger on that the service industries are beginning to be rebooted a bit more successfully than other areas of the economy because we are now out and about wanting to take advantage of services that we couldn't before? Do you have any data that suggests that that is accurate or is it too early to tell? There's a really interesting story here, contrasting the UK and Europe with the US. In the UK, during lockdown, there was a swing away from services, restaurants and so on, which was good. What's interesting is that, in the UK and Europe, that has normalized back to both goods and services and back towards the pre-pandemic trajectory and that the mix hasn't permanently shifted. In the US, that shift has lasted, and that lasting increase in demand for goods and less demand for services there is part of what was driving US inflation higher earlier than it was here, and that reconfiguration in the States has been more difficult, exacerbated and worsened by global supply chain disruptions. In the UK, the evidence is that the mix of goods and services is more back to where it was. The more lasting impact has been where people spend their money, so there's some great data on using credit card transactions and things like that. You can see less spending in city centres and more spending in the commuter towns around and around where people live and now spend more time if they're working remotely, so that geographical shift is potentially the more lasting one than the mix of goods and services. Oh, sorry, it's coming to me yet. The only point that I would add is that there was just some BBC research published today, I noticed, that looked at the changes in the high street across the UK, and it suggests that, within services, there has been a little bit of a shift, at least in the high street, on who's occupying properties. Maybe somewhat surprisingly, there's been an increase in the number of pubs for the first time in a long time, and restaurants and cafes, beauty parlors and tattoo surgeries, shops, banks and other things have changed. That means that, apart from pubs, where that is a little bit of a reversal, what we've seen is a bit of a continuation of the trends that we saw before the pandemic, where the move to online retail or online banking has meant shops and banks are still closing down, but high streets commercial areas are kind of orienting towards experiences and personal services, like restaurants, cafes, beauty parlors and so on. I heard that interview too, and I thought it was interesting, but they were also flagging up that there are regional differences in the way that people are reacting to their local high street, which I think is potentially a bit of a worry as well. On the back of that, there are different factors that affect inflation. It's either demand pool or cost push scenario. Is it your understanding that it is very much the cost push problem that we've had, whether that's from supplies from Ukraine or the huge hike in energy prices? Is it your understanding that the greater component of driving high inflation just now has been more on that cost push side than it has on the demand pool side? That would be my understanding that the big drivers of inflation have been the supply shock to food and energy and, to some extent, previously supply chain issues. However, it is also the case that we have had a really tight labour market. We have seen wage pressures creep up as well, not as fast as they have not been keeping pace with the prices but they have certainly risen substantially and, within certain subsets, we have seen substantial increases in wages. My own view would be that it has been largely a supply side driven inflation shock, but demand has been valhilema bust and that might have meant that it has become more entrenched than it would have otherwise been. I am just asking the question because, obviously, we have suffered pulling in opposite directions between fiscal policy and monetary policy. The UK Government has been desperately trying, perhaps not very successfully at one stage, to get the right balance with fiscal policy, whereas the whole remit for the Bank of England has to control inflation and therefore the monetary policy has been pulling in an opposite direction. Asking the question as to whether, because of that difficulty, it matters what kind of inflation it is in order to determine what kind of policies are put into practice. That is a really interesting question. Let me just think about that for one second. If Ben has got a thought already formed, he can come in, but let me have a think on that for a second. I think that clearly the disconnect between fiscal and monetary policy was greatest in September on the time of the so-called mini-budget. What is really difficult here is that, for the most of the past decades, you could have made quite a strong argument that a slightly looser fiscal policy and a slightly tighter monetary policy might have been a better policy mix, rather than conducting such a sharp period of austerity, you could have had slightly higher interest rates. I think that the argument that has almost flipped this year as interest rates have started to rise and inflation globally has gone up. The Bank of England, to sort of go into your previous question a little bit, clearly this inflation episode has its origins in global energy markets, in a global supply-side, cost-push shock. However, the danger that the Bank of England will worry about is that it is becoming embedded in wedge expectations, particularly looking at an economy without a great amount of spare capacity or slack. That is worsened by the fact that the labour force is shrinking because of rising rates of inactivity and so on, but it is not as though we have got very high levels of unemployment. There is a concern that what starts as a cost-push episode can become embedded in expectations and become much harder to squeeze out. However, I think that you are right. The policy mix does not matter a lot here, and there is a delicate balancing act that is struck. The group co-ordination between the two, if one of the motivations behind the Sunach and Hund policy response when they came into government was the more tightening we do, the less interest rate rises that the Bank of England will have to do, but the Bank of England will know that and take that into account in its policy-making process. It gets complicated, and without that explicit co-ordination, you can risk a disconnect between the two. I think that your question frame is exactly the right one. I am interested in the level of interest rates, because the feeling is that they are high at the moment at 4 per cent, but they are considerably lower than inflation. If that was to continue long-term, would everybody not just borrow and make a profit? Are we just in an unusual situation at the moment, or could it continue long-term that inflation is higher than the interest rates? You are right. There is a concept of economics called the real interest rate, which is the normal interest rate minus inflation. Clearly, inflation at the moment is higher than normal interest rates, so we have negative real interest rates. In normal times, you expect that to be a stimulus to economic activity, but the Bank of England expects inflation to fall back over the next few years as hopefully gas prices start to fall and as its monetary policy tightening feeds through. In a few years' time, we expect interest rates to hold markets, so interest rates to be a little bit higher, but the Bank of England has been signalling that interest rates of about 3 per cent might be what we would expect. As inflation falls back, under the OBR forecast, CPI set to turn negative. In a few years' time, we will no longer be in a situation of negative real interest rates. If you look at the period of the past, the period of low interest rates that we have just lived through, we have consistently had the Bank of England base rate at a fraction of a per cent and inflation much higher. We have had negative real interest rates for the past 10 years, and it has not necessarily been the case that we have had a borrowing-fuelled boom. That was not enough to stimulate a massive period of economic expansion, so it is clearly not the only thing that matters. I hope that that addresses your question. It still puzzles me slightly, but I accept that there is not a clear cut answer to it. Liz Smith was asking about the prices and that the gas and the food were driving inflation and so on. I was just wondering, can we compare that to other countries? Are other countries in western countries especially in much the same position, or is it differing? Is there much difference in either the inflation level or the reasons for inflation in neighbouring countries? I might come back to some of your previous questions, John. On that kind of latest question, there is a range of inflation rates across developed countries. The UK's rate is reasonably high by north-west European standards, although Germany's has been creeping up as well. It is somewhat lower than those in central and eastern Europe. The fact is that driving them in Europe has been energy prices to a large extent, with differences in their energy mix and policy response to the energy crisis. In the United States, energy has not been such a big issue in their inflation increase, hence their inflation peaked earlier, and it seems to be coming down now. More important for them was supply constraints, as Ben said, the excess demand for goods developed as services, and oil prices, hence petrol, and second-hand cars, which is a bit of a factor in the UK at one stage, but it has moved out the system. The UK is seeing quite similar factors to the rest of Europe, but the impacts are varying to some extent based on the policy response to the energy mix, and there will be other factors such as currency movements and other things there. I think that many parts of eastern Europe where they do not use the euro depreciation of their currency has also pushed up inflation. That probably was pushing up inflation in the UK as well, although the pound has regained a lot of the ground that it lost previously, so that might actually have got to pull down a bit on inflation going forward. On the previous questions about the nature of the current shock and the policy response to it, the only point of add to what Ben made earlier is that, if there was a supply shock hitting a time when we had significant spare capacity in the economy, you might not need such a large monetary policy or even fiscal policy response to that, because you would expect with a lot of slack that the higher inflation would be less likely to translate into higher wage growth and then hence a wage price spiral. When you have a tight labour market and a supply shock, that means that you need to be a bit more aggressive on your policy response to bring inflation down. The other area that I just wanted to touch on was my understanding is that the OBR forecasts assume quite a big increase in fuel duty next April. The suggestion was that, if that does not go ahead, there could be a £6 billion hole in the finances. Can you say anything about that? I can start. The OBR is required by law to take a Government policy as stated. It is a Government policy for fuel duty to go up next year. Clearly, the sensible bet would be that it will not, given the experience of the past decade and the state that UK household finances are in. We should expect that not to go ahead. That would create a hole in their plans. It could only go about £10 billion of headroom against their fiscal targets, but it would not by itself be enough to put them on track to miss those, but it would clearly matter. That is what we call policy risk, that the OBR is not allowed or able to take into account things like tax rises that you have promised that do not go ahead or spending cuts that you have promised that do not go ahead. Those things are built into the public finance projections produced by the OBR. However, if you look at how tight the spending plans look after the next general election and what that might imply for areas such as local government in England, it is very difficult to see how they might be implemented in their current state, so you might think that plans will change. Fuel duty is very much in that camp, but it seems almost certain that that will not go ahead. That is very helpful. Between a few different areas, to follow John John's question on inflation, I would be interested in your thoughts on debt interest. It feels like the era of cheap money is over globally, at least for now, but the UK obviously went through a very particular episode with debt interest rates off the back of the money budget. What is your expectation of the rates over the next couple of years? I will take that one first. The Bank of England has done some internal modelling, and they think that there is a UK-specific element to that. Interest rates are rising globally, but, according to their model, we have had interest rates rise even more because of the UK component of how the market is treating UK Government debt. What happens next? It is really important to think about—the OBR takes market expectations, so what the market as a whole on average is going to happen to the Bank of England base rate. The Bank of England has been signalling quite strongly, basically saying to the market that rates are not going to rise as much as you think they are, so they have been producing scenarios that forecast for the economy, one that is predicated on market expectations for interest rates and one that is predicated on interest rates going to 3 per cent and then staying there. They are quite clearly signalling that they think that they will not have to go as high as markets think. That matters a lot for the UK's public finances. The OBR takes market expectations. If, instead, interest rates do not go up by that much, the public finances will be in a better position. One reason why that matters a lot in the UK is the interaction between quantitative easing and the Government's debt interest bill. To simplify what is a complicated story, increases in the Bank of England interest rate and base rate have been through very quickly to hide the interest bill because of the fact that the bank is holding large amounts of gilts on its balance sheet. What happens to those interest rates matters an enormous amount of how much you have to spend on debt interest and how much you have available for other things. It is a really important question and it will matter a lot for how physically tight things feel over the next few years and whether the market tends to be right or not will be enormously important. I jump into a completely different area and take on board what one of you said a moment ago that neither of your energy policy experts—I am interested if you are aware of any work that has been done around the impact of the loopholes to the windfall tax. I think that Shell was the most recent company to report that they have managed to avoid paying any of the windfall tax as a result of their North Sea exploration activities giving them sufficient relief from it. Are you aware of any work that has been done to identify whether the loophole to the tax is creating incentive for companies to pursue further exploration that they had not planned previous to the introduction of the windfall tax? I might come there briefly and circle back to your previous question if I might as well. I am not aware of any specific work on that. I was aware of Shell being saying that they did not expect to pay it this year, they did expect to pay it in subsequent years, I think that BP do expect to pay it this year and in future years. You are right that that is related to investment. It was a feature of the scheme that they wanted to not only offset the effect of the higher tax on investment but to potentially encourage investment overall. That was not fully stated, but it was seen as a way to increase the supply of domestically provided oil and gas and make it less dependent on international markets. I think that you can debate whether that is a good or bad policy related to either energy security and prices or the need to transition away from oil and gas for net zero. I would not want to say that there is no analysis looking at that, but it is not something that I am aware of. On your previous question, there is an interesting interaction between the OBR and the Bank of England. The OBR's forecasts build in market expectations about what would happen to interest rates. The Bank of England has signalled that it thinks that that might be too high, but that is based on the Bank of England having a pessimistic outlook for the economy. If the economy turns out to be stronger than expected by the Bank of England, then it may not be the case that the market expectations are too high for interest rates. Maybe the Bank of England will have to go higher than it thinks it does, because the economy will hold up more strongly and, hence, it could end up being closer to the market expectations. I am not sure that I have made a very coherent point there, but the point that I am trying to make is that we have forecasts for the fiscal side of the equation being done by one forecaster, forecasts for the monetary side of the equation being done by another forecaster and, where they have different judgments about the state of the economy, that might lead to policy not being optimally aligned between the two sides of the equation. If the Bank of England assumes that the economy will be weaker than it turns out to be and, for example, the OBR assumes that it will be stronger than it turns out to be, that could lead to mismatches in policy. We see that in the Scottish context, where the SFC and the OBR make forecasts on different sides of the revenue equation. I think that there is an interesting issue about how forecasters communicate with each other, because, on the one hand, you do not want them to share too much, because you do not want groupthink, you do want to have different opinions and different insights in the economy, but, if policies and if forecasts are being made fundamentally on different judgments, that can sometimes lead to policies not aligning or forecasts not aligning, and that having knock-on effects to fiscal policy. That was a really interesting point, so I appreciate you circling back to it. I have just got one last question on a different area on the lowering threshold of the top rate of income tax. When that has been considered in the past in Scotland, or proposed, there were two recent tax papers out by the SDUC and the IPPR proposing stuff in this area, the counterargument has been that it would result in significant behaviour change and not actually raise additional revenue. Part of that argument is that any Scotland-specific reduction in the threshold could result in those on higher income simply moving elsewhere in the UK to avoid paying that. If we are to assume that the Scottish Government will follow the UK Government's lead in reducing to £125,000, that element of behaviour change would be eliminated, but there would still be the prospect of people converting their income into other forms to avoid paying it through income tax. Do you have any expectations around behaviour change and tax avoidance in this area? It is not an argument that I have to say that I have ever found massively credible, but I would be interested in your thoughts on it. If I might come on that question first. The Scottish Government has looked at these issues, and it has said that it thinks that there are actually two factors that it is concerned about. One is migration to the rest of the UK, and the second is that Scottish tax rate changes only apply to non-savings, non-dividend income, and hence a change in the Scottish rate opens up a bigger gap, if you like, between the Scottish earned income rate and the dividend income tax rate, and you might get additional avoidance in that. If it happens across the UK as a whole, as you say, migration within the UK is not an issue, although there could still be international migration, the issue about shifting to dividend income would depend on whether or not it is increasing the dividend rate over that range of £125,000 to £150,000. I think that it would, because by reducing the threshold for the additional rate of tax, there is a linked additional rate of dividend tax. That will be coming down as well, so I do not think that that gap would open up. Overall, I would say that what would still be behavioural response, if Scotland were to follow suit now, would be substantially reduced because the migration angle is closed, and what still is that gap between dividend tax and earning income tax. I do not think that the gap would be larger than it is now, because I think that the dividend income tax will be coming up alongside the UK rates of tax on that income range. In terms of the scale of behavioural response, I think that the forecasts by the HMRC and VETA by OBR for this to raise about £800 million across England and Northern Ireland and Wales would build in a substantial amount of behavioural response. I have not looked at what elasticities I have assumed and what the pre-behavioural response revenues would be, but it would not surprise me if they are two to three times larger than that. In a Scottish case, I would expect a similar measure in Scotland, given the taxable capacity of Scotland to raise probably around £30 million to £40 million of the top of my head. An interesting thing is that Scotland could lose from that policy overall, because the blockout adjustment will go up, reflecting the percentage change in the rest of the UK. Because there are more higher income earners in England and Fithle, London and the South East, there will be a bigger percentage change in revenues in England and Northern Ireland and Scotland will get from the same tax change in Scotland. If Scotland is to follow suit with the tax change, I think that Scotland might lose a few million pounds, because the blockout adjustment will go up by more than the tax revenues in Scotland. I have hit on one of the key areas that the review of the fiscal framework needs to consider the perverse incentives that it currently creates. That is all from me, convener. We are starting to see house prices fall. What impact is that going to have on the UK economy and the Scottish budget? Is it just going to be a reduction in LBTT, or could we see a block grant adjustment around that? Where would you see that going? If I might come on the revenue side of things, and if Ben has some points to add on the board of economy. In terms of the impact on the Scottish budget, it will depend on the relative impacts of this on revenues. The fall in house prices and particularly the fall in transactions volumes will reduce revenues from LBTT. It will also reduce revenues from stamped duty land tax in the rest of the UK, so there will be lower revenues but also a lower block grant adjustment. Which of those outweighs each other and hence the net impact on the Scottish budget is uncertain? I think that it will depend on a couple of factors. The first is which part of the market is most affected by the slowdown in transactions. If it is the top of the market, on the one hand, that is the biggest share of the market in England and Northern Ireland because of London mainly, but on the other hand, the Scottish Government has a much more progressive structure of the tax system. Conditional upon the distribution of property values more comes from the top part in Scotland because of the higher tax rates. If it is at the bottom of the market, more that is in Scotland, but Scotland has lower rates on the very bottom of the market. The picture of the net impact will be quite complicated to predict. It will depend on which parts of the market are hit most and whether the distribution of Scottish prices being lower outweighs the tax rate being more progressive or vice versa. I do not want to make an accurate prediction, but there will be a change in the block grant adjustment, whether it is partly offset or more than offset if all in revenues in Scotland is difficult to see at this stage without further in-depth analysis. On the second point about how that affects the wider economy, there will be two effects on the wider economy. First of all, there might be a wealth effect so that lower property prices mean that people will feel less wealthy. That could translate into lower consumer spending. There is evidence that the wealth effect of property prices does matter for consumer spending at least to some extent. The other is that property transactions are associated with activity around improvements and new white goods and new furnishes and so on. There could be an impact on the retail sector and on the building sector. The second question that I had was around the energy price cap. Obviously, that is quite an expensive scheme for the Government to run. Are there equivalent schemes in other parts of the world? There are equivalent schemes in other countries. For example, I am not sure what the state is now, but France for a long time was capping its increase in electricity to 4 per cent, one of the reasons why French inflation remains so low. To some extent, it could do that, because lots of the energy is nuclear and is state-owned. Effectively, rather than having a windfall tax—basically, the windfall tax has been captured by the state-owned enterprise anyway—other countries have adopted different schemes. I think that Austria has quite a generous scheme. Germany has a scheme that significantly reduces energy prices. Unlike a cap, it does not completely cap them at the margin so that it still does allow some impact of the higher marginal price to fall through to consumers and businesses, so that they still have a stronger incentive to cut back their energy use. There are different schemes in different countries. If it is of interest, some colleagues of mine produced some figures about how much energy bills might increase for different types of households over the next six months. I can either send those to you afterwards, or I could state some of the records here if that is useful. That would be helpful. Just offline would be great. One of the interesting things that I find about the autumn statement was that the UK Government decided to close the office of tax simplification. What was the reason for that and what the impact would be? Obviously, that is something that has not been reversed by the new chancellor. That was something that I was aware of. It is not something that I have looked into detail about what the state of the reason was. I think that it is a disappointment that it has been abolished. I think that whilst the office perhaps did not have as substantial effect on simplifying taxes and particularly seeing where you could reduce the discrepancies between tax treatments of similar activities than we would have hoped at the IFS, it still did play at least some role in ensuring that the issues of simplicity and interactions were taken account of. I think that it is disappointing that it was abolished and has not been resurrected. I do not know if Ben has anything further to add. An office that tries to make taxes simpler and more understandable seems to be quite a positive thing, I would have thought. One of the things that will be mentioned, and it has been touched on only peripherally, is unemployment. The OBR expects unemployment to rise across the UK by 3.6 to 4.9 per cent by 2024. That will be a significant part of the workforce in excess of £1.5 million. I am just wondering what the regional impacts might be of that and how you anticipate that impact on Scotland. Are you there of you? Ben? I am sure that I can go. I have not looked at the detail. My first instinct would be that a lot of that will depend on the industrial position in which sectors are particularly hard hit over the next few years, whether that is energy-intensive sectors or whether that is manufacturing. Clearly, that will have a different geographical footprint depending on where the expected employment rise is. It interacts with the broad question of having a tight labour market and having a potentially shrinking workforce and the impact that rising unemployment will have on wage demands and on the promise of industrial action. All of that interacts. I am afraid that I do not have any particularly well-informed views on how Scotland's employment might fare relative to the rest of the UK. Even in the broadest sense, if we have 1.6 to 1.7 million unemployed and about 5 million people economically inactive, that is clearly going to have a major impact on growth and productivity, is it not? Absolutely. It is all part of a weakening demand, of course, if you have more people out of work or inactive. The more concerning thing is what that implies for the productive potential of the economy. If we had people who previously might have expected to carry on working for another 10 years or more, or even have seen lots of young people dropping out and claiming disability benefits, for example, those are all people who are not going to be productively contributing to UK production in the same way. That clearly raises concerns. That is why this health is a major input into productivity and economic prospects. That is what is really concerning at the moment, the growing body of evidence suggesting that the health of the UK population and workforce is worsening. What does that imply for growth rates and so on going forward and tax revenues? That absolutely should be an area of focus and policy. Yes. I might make two brief points. The first on Scotland is that, generally, during an economic downturn, you would expect that areas that have a higher alliance than the public sector tend to see less of a fall in employment because the public sector employment is less cyclical than the firewood sector employment. Whether that is the case going forward is less clear, because, with a constrained budget and higher pressures on wages, one of the only ways that you can address that, apart from increasing taxes or cutting social security spending, is to cut the public sector headcount. I am aware that, already, in the spending review, the Scottish Government was penciling in cuts to the public sector headcount in order to make those figures match. If inflation is higher and wage growth is higher than it was previously expected and the budgets are not increased, that could put further downwards pressure on the public sector headcount, which already looks challenging to deliver in the context of the demands being placed on public services. That was Scotland's specific point. The order point comes back to what employment and, clearly, inactivity means for the economy. During the 2010s, increases in economic activity are one of the notable bright spots in the economy. We saw quite a substantial increase in employment during the 2010s. That masked, to some extent, the poor productivity performance. If going forward, we do not see either a pausing of that increase in activity or a reversal and a rise in inactivity, that means that productivity growth would be even more important for economic growth going forward. Nellie talked about the changing public service footprint relative to the pre-pandemic. What do you think the impact will be on the Scottish budget? The reason that I am asking specifically is that, while the number of passengers on buses is still below pre-pandemic, it is perhaps approaching 90 per cent of what it was before, but rail passenger numbers are barely 50 per cent of what they were before the pandemic and the Scottish Government, I believe, spends just over £1.5 billion in subsidising railways in Scotland. So, quite clearly, one would anticipate that there will have to be a significant increase in further public support for that or a reduction in services. That, of course, is not on effects, as does reliability, because of strikes or shortages of staff or whatever, in terms of switching people from cars into the public sector. So, what do you feel impacts likely to be, David, of the impact of the pandemic on public transport as we go forward? If I come on the Scotland-specific points first, it is interesting that one of the savings that the Scottish Government found in this year's budget was a result of lower bus usage. It was less spending on concessionary fares. In the short term, for buses, at least, you might save some money with lower usage, but, of course, if there is lower usage more generally, some services may become unviable and, if you want to maintain them, you might need higher subsidies for bus services. By far a bigger issue is rail services, which saw very substantial increases in state support during the pandemic. The UK Government has been trying to unwind that. That is one of the reasons why the reduction in state support at the same time as the passenger numbers have not fully come back is one of the reasons why we are potentially seeing some issues in the rail industry around industry relations, because there is clearly a potential shortfall of income that operators are trying to make up for. One way to do that is through rationalising expenses, including labour expenses. How significant that will be for Scotland going forwards will depend on whether we see a further increase in—do we see it come back a bit more in terms of passenger numbers? Secondly, does the Scottish Government shift the mix a bit in terms of the funding for Scottish rail? Scottish rail has the highest ratio of subsidy to passenger fee income, largely because it is serving a large network of the sparse population, but there may need to be a look at that as well. I do not know if Ben has any comments on the border UK-wide figures on the coming wore down. One quick picture point here is that it is true of railways, the NHS and the education system. Early on, there was clearly a hope that Covid represented a one-off time-limited shock that we had to provide support to get through and things would return back to normal. However, what has become clearer in some settings is that Covid is more of a persistent, permanent shock to whether that would be to passenger numbers or to health service productivity. It might mean that we have to provide more funding persistently and indefinitely just to get the same level of service. That might mean more public subsidies for buses off of railways. It might mean that we have to spend more on the health service to get the same volume of care because of the hit to productivity that infection control measures take, for example. That long-lasting impact of Covid is going to have an impact on public services, and it is something that all levels of government are going to have to grapple with. It is really difficult. I am just going to let Michelle in, but in terms of the young person's concessionary fare, a lot of that, the money that was unspent, was switched to bus services in the summer to ensure that services did not actually fold. That was a case indeed in my own constituency with regard to some local services. I just want to go back to the point that the convener raised about the office of tax simplification. There have been some big numbers bandied around today about the kind of black coal, six-bill and black coal, and the fuel duty escalator, £10 billion per month on debt interest. However, the combined figure of loss due to money laundering plus fraud, the National Crime Agency estimates, is about £100 billion each and every year that is lost to the UK. The figures vary roughly about £190 billion each and every year because of fraud. On a scale, those figures are utterly staggering. I suppose that my question to you in terms of the IFS might consider looking much more actively at that given that there is almost a shadow economy running here. If there is no appetite from the UK Government in getting rid of the office of tax simplification, because this complexity in the tax system is what provides the wriggle room for those quite startling losses to UK GDP. I am surprised to hear both of you not really having followed up why the plan is to get rid of the office of tax simplification. If I might come in there first and then hand over to Ben. On the last point there, I should add that we have a tax sector at the IFS. Colleagues might be a little bit more on top of the issues and, fortunately, they are on leave at this moment. In terms of what we can play going forward, we do a lot of research on tax, including looking at tax avoidance and tax evasion and the impact of audits on tax receipts and so on. We will continue to do that work. The IFS also has what is called the Tax Law Review Committee, which is co-ordinated by the IFS, but it involves tax lawyers and tax accountants, as well as an economist or two, who look at particular areas of tax where the law could work better and some of that is about implementation and ease of use and so on. Is it having the impact that it should have? Some of that is about looking at areas to do with avoidance and evasion, so we are looking at that. The main organisation that looks at the overall scope of whether it is error, whether it is avoidance or whether it is evasion or so on is HMRC. It has its tax gap analysis, which it publishes every year, which I think is a useful publication. One of my other areas of work is developing countries. We have been trying to get developing countries to do more of this work. There is work that we have done in this area, but I do agree with you that the removal of the office of tax amplification was a step backwards, but I do not think that there was a main actor in that particular area. The main role was around simplifying tax as opposed to designing and enforcing rules related to evasion and forward. Ben, I do not know if you had any— Yes, just a few quick things. One is that it is right to focus on enforcement agencies and the resources that are available to them, such as areas such as HMRC, the national crime agency. Those are sorts of budgets that have been squeezed over the past decade or more. You can see something similar with the environment agency. You cannot slash the budget and expect them to be able to enforce just as they would previously. That has to be focused on those budgets. If there were lots of money that could be easily accessed through—if tackling ford was simple and easy, I do not doubt that the Government would do it as a way of raising more funding. Those are long-term challenges. The scrapping of the office of tax amplification is unfortunate. We have had aims that align well with our own, but I do not see that necessary through the lens of the battle against fraud and tax evasion. I shall also say one final thing. We have got some IFS research fellows or academics who are affiliated with IFS who have done lots of work looking at the activities of non-domiciled individuals, for example in a tax system, and how could we raise more money from the richest, for instance? We are doing lots of research in this area, but perhaps not directly on the question of money loss through fraud. David, I totally appreciate that your expertise cannot cover everything, and perhaps going forward it can be something that we can fold into these sessions. I suppose that the point that I am making is that we are talking relatively speaking, although they feel like quite big numbers and they pale into insignificance when we look across the whole gamut. You are correct, Ben, about what you say about cuts in HMRC, which would suggest to me that this could only get worse rather than get better. Although you are right that this is an issue globally, the UK is well up there in terms of the league tables being the second most corrupt after the US, although people might argue about that. That is why it is important, because we are tending to look at what we can see rather than guess at what we can when that is growing at a rate of knots. Thank you. I do not think that it helps to have tax havens within the British Isles itself, if you include the Channel Islands and the Isle of Man. One thing to finish off with me is to say that we have talked about the GDPR inflator, but what really matters to people who are putting in pay complaints is the public perception. It is all about the headline rather than things like the GDPR deflator, I would suggest. I think that how that impacts in terms of the public sector is very significant. We are in a situation whereby the UK Government might say, well, I treasure the costs of this, blah, blah, blah, so that is the GDPR inflator, deflator, but that is not really how the public really see it, they just see what is on the news and what is in the papers. Ben? I will check your response on that. Yes. The challenge is that if your public sector worker clearly cares about the rate of inflation that you are facing, the drops and the things that you purchase, and that is best captured by something like CPI, which is running in the region of 10 per cent, that is clearly a pay offer of 5 per cent for you who is going to represent the real terms hit to your pay and living standards. The challenge that the public services generally is that all of those budgets were set when inflation was not expected to be so high, and that is the challenge of trying to, if you have budgets that are predicated on pay awards of 2 or 3 per cent, even offering 5 per cent, it is going to feel really painful and you have to make savings from somewhere else, but that still feels like a real terms cut and it is a real terms cut for those workers. On both sides of the people trying to manage the budgets of public services and the workers, both can legitimately feel agreed and in a difficult situation. The public sector pays one of the real tricky areas of policy at the moment. It is not saying at all that your nurses, your teachers, your train drivers should not be focused on CPI or the rate of inflation that they are facing, but they should. That has to be taken in the round of overall fiscal policy. The point that I was making is that setting a GDPR, Treasury deflater, which clearly does not really take any account that what pay demands are going to be realistically is not very helpful. A measure of inflation that has been used for a long time is a measure of domestic inflation use for all sorts of things. In particular, if you hear about forecasts for real GDP versus nominal GDP, how much more actual economic activity we have versus just inflation is used for that. I think that there are good reasons for the Treasury to use one economy-wide measure to try and treat all public services equally. In normal times, CPI and the GDP deflater track each other fairly closely. That is an exceptional period. I do not think that the conclusion from that should be that we should toss that measure of inflation out and just find it entirely. I think that what is required is some flexibility and some recognition from the Treasury that the cost pressures on public services might be greater than is suggested by the headline figures. In particular, when you are taking into account the potential pay awards, that flexibility is what is needed rather than the baby out at the back of Watson? Exactly. That is the second point that I was trying to get at, but you have done it in a much more articulate way than I was doing. I want to thank our witnesses for their excellent contributions today for answering all their questions and also to thank colleagues around the table for their contributions. That concludes the public part of today's meeting. The next item on our agenda, which we have discussed in private, is consideration of our work programme. We now move into private session, a call of five minute break until noon.