 Felly, dweud i ddweud y ddangosion gyda'r pethau yng Nghymru o'r 2016 o'r Ffranans Cymru. Mae gennymau ei fod o'r ffordd yn ddiwedd, ac yn rhan o'n gweld i ddweud eich ddweud i ddweud i ddweud eich ddweud. Mae'r iddiad i ddweud eich ddweud, oedd yna ddechrau i ddweud a'r prif, ac mae'n ddweud. Echydig i ddweud eich ddweud eich ddweud i ddweud i ddweud i ddweud i ddweud i ddweud Fraser of Allander Institute Scotland's budget 2016 report from Professor Graham Roy. Members have received copies of the report, which considers the outlook for the Scottish economy. Having read the report cover to cover, I can see that it is a significant challenge that we have ahead of us, not just the Scottish Government but obviously the Scottish Parliament. I welcome Professor Graham Roy to our meeting and I invite Professor Roy to make an opening statement. I can do. I thank you for the invitation to come along today and talk about our report that we published last week. Perhaps if I just give you some context about what we are doing in the Fraser of Allander, because I think that that might be quite useful for your thinking going forward, but we have done quite a lot of investment over the summer to expand our capacity in fiscal analysis and economic analysis and we have actually been able to get some really talented young people in to look at this. I think that that is really exciting for Scotland. We are able to now have a much better analysis of issues like this, the economic challenges and the fiscal challenges for Scotland going forward. I think that that is really encouraging. This report is essentially our first foray into that landscape. What we do in it is essentially look at what type of scenarios might the Scottish budget face over the course of the next Parliament, given what we know at the moment about the plans that the previous chancellor had for departmental spending, what we might think might happen in the autumn statement if the new chancellor chooses to reset fiscal policy and what that might look like, but we also know that, as of next year in particular, substantial new tax powers start to kick in and the outlook for Scotland's economy and its revenues start to have an increasing impact on the Scottish budget. We try to pull all that together to give some scenarios and a flavour of what the Scottish budget might look like up to the end of the Parliament, the challenges and the opportunities that come in there. In the second part, we look at what are the big commitments that the Scottish Government has already committed to, trace them through, look at how much that will commit the Scottish budget over the next few years and then essentially ask the question what does that mean for everything else and therefore what are the opportunities and what are the challenges and what are the risks in that as well. Finally, at the end, we indulge in what we think should be the key priorities and issues that should focus the debate in what we believe to be quite a challenging environment over the next few years. We talk about issues around transparency, scrutiny and the focus on outcomes. That is essentially us setting out what we think should be the key themes for the discussion over the next few months as the Government and Parliament look to set its budget. Obviously, your report outlines a number of scenarios for Scotland's budget over the coming years and many of which are challenging to say the least. I would like to ask you a couple of questions myself today, one concerning the short term and the other with the longer term issues about structural challenges. First, in regard to the financial year 2017-18, I would be grateful if you could lay out for us the potential budget reduction scenarios for the Scottish budget that are likely to result from the Chancellor's autumn statement. If you could let us have your views on how challenging those reductions will be for the Scottish Government and the Scottish Parliament, I would be most grateful. For 2016-17, using that as a baseline in 2017-18, prior to Brexit, before the talk about fiscal reset, the Scottish budget was forecast to fall around 100 million between those two years on the fiscal resource dell. I guess that is quite a useful starting point. The budget was going to fall from this year into next year anyway. What we then do is say, what could fiscal reset look like? One scenario is where the Chancellor decides to stimulate public spending and boost departmental public expenditure. We think that as an approximation is a rough outline, that could add an extra 100 million on to the Scottish budget into next year. On balance, our feeling is that if the Chancellor is going to stimulate fiscal policy in the autumn statement, it is more likely to focus on things such as tax cuts or capital investment, because they are more likely to have an immediate positive impact on the economy. If you are worried about economic uncertainty, boosting consumer spending and household incomes tends to have a more immediate impact than increasing departmental expenditure. That is one scenario. The bleakest outlook for the Scottish budget would be a situation in which, if the Chancellor believes that he is going to miss his fiscal targets or at least the intention to try to get the deficit down over the next few years, he may decide to take further money out of departmental spending in the short term. We have a scenario in there in which we assume that if he wants to take an extra £9 billion out over the next four years, what would that look like for the Scottish budget? That would mean that next year that there would be an additional £200 million reduction in Scotland's budget over and on top of the £100 million reduction that we have at the moment. You are talking about an additional reduction of £200 million or £300 million over the course of the next year. In that regard, how challenging—if it was out at that margin at £300 million from your own scenarios—how challenging would that be for the Scottish Government? I guess that there are two things. One is to put that into context. One view of that would be to look at the budget in the entirety and to say that, if you look at the entire £26 billion worth of expenditure, the magnitude of £200 million, £300 million coming out, is not that significant. That is one view. The other alternative view in that is to look at what is the discretionary element that you have within the budget. We know that a large proportion of the budget is largely already determined by wages, by spending commitments already. Cuts of £200 million or £300 million between this year and next year is quite significant, and it would be quite a challenge to take out. What measures do you think the Scottish Government might be able to take to deal with that sort of challenge? I guess that there are a number of different things that the Government could do in response. There is obviously a question that will probably be revealed at the autumn statement in that, is this a temporary reaction? Is it just the chance that we are going to change the profile of spending? Will public spending increase towards the end of the Parliament? There may be opportunities for the Government to reprofile spending depending on what happens in the autumn statement. There are obviously tough choices that will have to be made around prioritisation of expenditure programmes. There is obviously now the new tax powers that the Scottish Government has. The Government may choose to utilise those to try and make up some of the difference, or it may choose to prioritise expenditures in other areas, but it would be a challenging situation. That explores well, in the general sense, the conditions for next financial year. Neil Bibby, you just talked about prioritisation of spending. We have heard from the Scottish Government in your report about their commitment to increase health spending, maintain police expenditure, expand childcare and a commitment to other policies such as free tuition. As things stand at the moment, can these be delivered without having cuts in other areas of spending? What is the largest budget outside the priority areas where we could see cuts? When you have a tight fiscal settlement and what we show in the report is that that is likely to be the case, it necessarily follows that if you choose to prioritise some areas of expenditure and increase them, that has consequences. That means that other areas in the budget will have to take up the slack and have to be cut to compensate for that. Even if the budget was to be flat in real terms over the next few years, if you choose to prioritise spending and increase it in some areas, that necessarily means that other areas have to fall back. I guess the point that I would just make to be clear about that and what we say in our report is to also be clear that if you are going to criticise or have concerns about cuts in other areas, then it necessarily follows that you cannot make those commitments to increase. It is essentially a zero-sum game that if you are going to take away from one hand, then you obviously have to add back in any other. What we do is look at that. Obviously, health, childcare and police are really quite big commitments, so essentially what we do in the report is to look at what is left and we have those unprotected areas. By far the largest area that is in that unprotected area is the local government settlement, so around about £6.8 billion. We are rough approximation. You are looking at a resource budget of, say, £26 billion, £14 billion of that will largely be protected, so the remaining £8 billion that is left there out of that, the largest element, is the local government settlement. You mentioned unprotected areas, local government being the biggest. Are there any other services? You have talked about the cuts that have been to local government and could continue to be. Are there any other areas that have under the direct responsibility of the Scottish Parliament seen the same level of cuts as the local government budget? We have not looked at individual spending lines going back and that is one of the challenges, I think, with the way that the budget document and the way that the budget material is presented. To do time series profiles over a large number of years is quite challenging to do. Even within the local government figure, you have monies coming in and coming out, so police and fire coming out of the local government budget. In the past, there is obviously the debate about the £250 million of health and social care money in local government or outside it. What we have done here is to look at local government on a like-for-like basis over the next few years and look at the challenges that they have had. We also document and talk about some areas that have been cut. In other areas, whether the local government has been cut by more or less, I have not looked at it explicitly, but it is something that could be done. You have talked about opportunity costs and, in the report, about the need for greater recognition of the opportunity costs of spending decisions. That would indicate that there is already a degree of recognition of opportunity costs within the budget process. Could you give us an example of where the Scottish Government weighs up the opportunity costs of spending decisions? I guess that the principle of opportunity costs is back to the original point that I was making. Particularly when you have a tight budget settlement, if you choose to spend money in one particular area or increase expenditure in one particular area, the implication of that is that you have to cut back in somewhere else. A commitment to substantially increase and invest in health. We would argue that you need to look at that and recognise that. If that is a positive commitment and that is something that is seen as being beneficial, then that is fine. However, the opportunity cost of that is that, in a tight fiscal settlement, other budgets have to take up the slack. We would say that, when we are looking at spending commitments and when we are making them, we need to think about what the consequences are on the other side. That could either be through increased taxation for it, which is an opportunity cost, or it could be savings in other budgets to pay for that. Professor Roy, you say in your report on page 30 that the previous chancellor's plans to achieve a surplus by 2019-20 has been abandoned. Take it from that then that what we are expecting is a lengthening of the austerity programme, pushing it further into the future. Your figures just below that, if I could just get this correct in my head, between 2016-17 and 2021, the Scottish budget could fall between anything between 2.8 and 6.2 per cent. The equivalent figures for that are something between £700 million and £1.6 billion. You can just clarify that every year in that five-year term, the worst-case scenario could be a £300 million cut to the Scottish budget. I mean, just picking up on the first point about what we mean about reset and the fact that he's abandoned his target of getting a surplus by 2020, there's quite a lot in that about what that means. If you believe that the economy is now going to grow more slowly over the next few years, then that means that borrowing will be higher than it otherwise would have been. Fiscal reset and abandoning the fiscal surplus target could actually happen, and it probably has actually happened without any discretion and choice by the chancellor, because he's likely to now miss the target of having a fiscal surplus by 2020, just because tax revenues are going to be lower or welfare expenditure is going to be higher because of a slowing economy post the EU referendum. The plan to abandon the target can mean a lot of things. It could just mean that, so then there's no other changes in tax policy, welfare policy or departmental spending policy from that. What could that mean on a more interventionist approach? Could that mean that it could be abandoned because, in addition to that, he's going to cut taxation or increase public expenditure, then that could be one scenario? It could also be entirely conceivable that they might still choose to abandon the fiscal surplus target by 2020 but still make up some of the difference. If borrowing is now going to be slightly higher than they thought it was, then they could still actually make additional cuts to try and get down. That's why we get this range of scenarios that we have there. The numbers that you're talking about are between 2016-17 and 2021, the falls in the 2.8 and 6.2. That's essentially the full fall from 2016-17 to 2021, so that's the entire fall, so the 6.2 per cent fall over the periods. That works in about a 1.6 per cent fall year on year in the worst-case scenario, and in the best-case scenario it's a fall of just under 1 per cent. Again, as an approximation, you're looking at, the budget was due to fall next year, about 100 million. The scenario we do where they do an additional consolidation adds an extra 200 million on top of that. The one thing that I would say about those things is that they are really scenarios to illustrate the scale of the challenge. We don't yet know exactly what will happen until the autumn statement kicks in. There's a whole piece of different things happening in Outlook for the Economy, inflation as well. That's one of the things that we know as a risk, but we don't include it explicitly in the forecast. It's entirely conceivable that, if the Bank of England continued to set an expansionary monetary policy, which is generally perceived to be a good thing given the uncertainty at the moment, one of the consequences of that is slightly higher inflation, at least in the short term. That then means that the real terms pressure on the Scottish budget has increased. It also means that some of the commitments that are made in real terms have become more costly. If you're protecting the police budget in real terms and inflation is higher, then it necessarily means that you have to put more cash into the police budget, and that will have consequences elsewhere. Thank you for that explanation. The budget has been under pressure in suffering cuts since about 2010 in order to look to another period of this austerity. I'm picking up on the point that my colleague Neil Bibby mentioned earlier about the pressure on services. There's a feeling, of course, that services are already under pressure and cut to the bone and can suffer no more. Do you get the sense that there's a real risk to existing policies that the Scottish Government has in place? That there's a risk that some of those might not be able to be funded and afforded in the past five-year period that we're in? That starts us straight into political choices and commitments. I don't think that our report really aims to do that other than what we're trying to do is just set out the numbers and set out the scale of the challenge. Ultimately, what we would say is that it always comes down to choices. Essentially, what's the pot of money that you have to spend? What are the priorities that you want to spend that money on? Increasingly, now, with the new fiscal powers for Scotland, do you want to try to raise additional money to help pay for them? Again, Neil Bibby was talking about opportunity costs. That comes with an opportunity cost. If you want to try to invest in public services and potentially counter the fact that the block grant is being cut, one option is to increase taxation. That's clearly one thing that you can do, so you can add a penny on to income tax and raise £400 million as a simple illustration, but that has consequences. It has consequences for economic activity, potentially. It has consequences for how services are delivered. I think that there's a whole variety of different things in there. I don't think that whether or not those commitments are under pressure is something that we don't necessarily touch on in this report. All we're really doing here is just setting out the scenarios and the facts of the numbers. Is it possible to say whether, even with the fiscal powers that are coming to us, in exercising them, are they sufficient to even address the scale of the cuts that we could be facing? Is it possible to do that? Did you have a look at that? No, I guess that, again, that essentially comes back to a political choice about what your priorities are of taxation versus expenditure. If you're talking about, say, for example, a cut of £300 million within one year or £200 million within one year, the Scottish Parliament now has the powers to address that. As I said, as an approximation, a penny in income tax would raise £300 million or £400 million. You could do that, but that has consequences and there are opportunity costs within all that. The Parliament now has powers to do things. Whether it's the best use of those powers, I guess, again, is a political question—a choice to be made. Patrick Harvie and Murdo Fraser have said that they want to have supplementaries in this area. Good morning. It was really on some of the issues that came up in the last minute or two about tax flexibility. It was just to ask whether the report here places too much emphasis on the rigid nature of current tax policy commitments. They're taken from the SNP manifesto and it seems to me that a reading in the report suggests that there's an assumption that they are now government policy. Regardless of which party is in power, don't we need to move away from that kind of assumption that manifesto commitments on tax policy are assumptions for the rest of the Parliament and move toward all of us an acceptance that whichever parties in government will be making those decisions on an annual basis given current circumstances? That's a very good point. I would be clear about what we're doing in this report. What we're doing in this report is saying what Scottish Government has said, either in the programme for government or in the SNP manifesto, and we make it quite clear that we're being transparent in saying that we take SNP manifesto commitments as being commitments that will now be at least presented by the Scottish Government to the Parliament to do it. Therefore, that means that there's a consistency between what we're saying on the spending side, so a commitment to double childcare or to increase health expenditure, but then also the same commitments on air passenger duty to half the revenue of that, or to half what they would call the burden of air passenger duty going forward, or commitments on council tax, et cetera. The point that you make is entirely right. You need to think about the flexibility of taxation policy more generally, not just on the spending side of things or not just about things like opportunity cost, but what is your overall approach to taxation and what's your strategic approach to raising revenue and balancing revenue? In the final chapter of the report, we tease out some of those issues. We talk about how you might want to look at setting tax systems that are slightly more efficient. You might want to think about individual tax policies that might raise different amounts of revenue. Fundamentally, that comes back to a question about what is your overall approach to tax and spending within Scotland. That now is something that the Scottish Government and the Scottish Parliament now have much greater flexibility over. It's not just about one pence or two pence on income tax. It's about what is our overall approach to land and property tax. What do we want to do around that? How can we make a system more efficient? That is a challenge in our report back to the policy makers to say, well, now you can look at that in a completely different way. I take your point. If we are coming on to the preventive issues— I will come back to that. I will not begin that discussion when we get to that section. It was a follow-up to the questions that Mr Coffey was asking about the overall size of the budget. There is a comment in the report about how the Scottish Government has unprecedented autonomy in relation to the size of its budget and its budget choices. There is a theme that runs through the report about how, in future, increasingly it will be the performance of the Scottish economy and the tax revenues generated from the Scottish economy that will determine the overall size of the budget. There is quite a striking table that has 2.4 on page 43 that shows the potential differential in the size of the budget, depending on growth in Scottish tax revenues. Have you looked at what level of economic growth would be required in Scotland to avoid the need for tax budget cuts in the future? I guess that there are two points to that. First, you are entirely right that it is now crucially going forward, like it or not, the way that the fiscal framework is set up in that what really matters is Scotland's relative tax per head performance compared to the rest of the UK. It means that how well Scotland does on that measure becomes crucial for the overall outlook for the Scottish budget. What will be growing the block grant adjustment, so the bit that will be taken out of the block grant every year will be the equivalent UK tax receipt growth. That is almost like a burden that will always be there going forward in the Scottish budget, so crucially is how much can you add back in by growing more quickly. You can see that, with the tax powers coming down the line, nearly half of the budget will be determined by revenues raised in Scotland. Very small changes in that relationship can feed through to significant changes in the Scottish budget over a very short period of time. The example that you are in is where we have a differential of about 0.2 per cent between Scotland and the rest of the UK. You see that, after four years, you are up to about £130 million on either side of additional revenues, so it becomes really crucial. As you go forward over an even longer time period, the growth performance of the Scottish economy becomes really fundamental to the overall outlook for the Scottish budget. I would caution that to say that, in the short term, what really matters is what happens to the block grant, because those effects take time to materialise and compounding every year. In the immediate term, whether Scotland's budget goes up or down is not likely to be determined on a year basis simply by how our growth performance is. It is not likely to be the dominant factor in any one year, but, over a number of years, it will become absolutely crucial. In terms of your forecast, you seem to suggest that your forecast of the Scottish economy is not particularly optimistic in relation to the UK as a whole. Is that fair? What we say in the short term—the key conclusions are that the Scottish economy has been fragile over the past 18 months. If you look at our growth performance relative to the UK, we are growing at around about 0.6 per cent over the last year. The UK is growing closer to 2 per cent, so that is largely driven by what has been happening in the North Sea. Our assessment is that, over the immediate term, we see a dramatic change in that, given that the headwinds are still there and the North Sea is adjusting to its new normal. That is quite a challenging situation to have. If you look at the labour market as well, you would have quite a sharp fall in unemployment over the last quarter, but if you look over the last year, employment has essentially been flat in Scotland, but it is growing in the UK. Taking that all together, we would say that, when you add in Brexit, which will be a challenge for the UK as a whole, Scotland has that additional element in there as well of what has been happening over the last year. That, in our view, means that it will be quite a challenging economic environment as those powers gradually kick in. However, you will get back to a new normal, a new sustainability, and in the long run the key is how Scotland does relative to the UK. There are a couple of themes going on here, both in terms of the overall impact of what the UK Government does in terms of the budget level and then down into the issues of what we do with taxation and block grant adjustment. However, to get the overall picture at the high level first, I will bring in Marie and then I will come to James Kelly on the issue of the taxation taking and block grant adjustment issues. Hi there. I think that I understand correctly what is happening in this decade between 2010 and 2020 as a 10 per cent cut in real terms to the budget, which, as I understand it, is a result of a political choice, as you said, of the UK Government to pursue a austerity agenda. You said that Governments have a choice in how they deal with the situation that they are in, and the choice that the UK Government has made was to cut spending. I will come back on that. I am possibly misunderstanding. The Scottish Government has a good track record. I know that there are some challenges there, but fundamentally there are some strong points to our economy. The Scottish Government has a really good track record of responding to those cuts. I want you to talk a little bit more about how the cut to the block grant is impacting on the Scottish economy and what sort of response we might take to that. The general point is about the choice to cut public expenditure since 2010. There are obviously two parts to that. There is the political choice about the relative balance of cuts, the scale, the pace and so on. Ultimately, to an extent, there is a political choice. People have different views on that—the pace of consolidation, the relative balance, welfare versus tax versus expenditure. That is ultimately a political choice. However, it is important to also remember that we were in a situation where UK fiscal position was completely unsustainable back in the financial crisis, so adjustment had to happen. There is then a political choice about how you make that adjustment, and I accept that. However, from an economic perspective, it is simply not possible to run deficits of 10 to 15 per cent of GDP on a sustainable basis. Debt at the moment is still 80 per cent of GDP. That is high in historic standards of the past 50 years. There have also been times when debt has been a lot higher in the aftermath of the Second World War and things like that. Ultimately, you have to get your fiscal position on a sustainable basis. How you do that, the relative balance of that is ultimately a political choice. I think that most people would accept that there had to be some degree of consolidation over the past few years. There is then a debate and a view that I am sure you will have about whether that was too big, too small or whatever. We would not really have a view on that. One of the consequences of that is that you do see the Scottish budget shrinking in real terms over the next few years. To put that in context, you are talking about the Scottish budget going back to levels about 2005 and 2006. Again, that is quite useful to put it in context. Yes, it is a substantial cut over these few years, but it is still back at where we were back 10 or 12 years ago. Against that, when you get higher demand for public services, that puts pressure on choices and how you do that. The final part of the report is to start to touch on the issues that you are talking about. How do you, in a world where resources are much more constrained, ensure that you still deliver public services that people want? Our point that we make here is to start with the importance of focusing on outcomes, prevention and what matters. Rather than commitments that are particular numbers of people in a particular post or portfolio lines being protected or increased, what matters to people? How can we make people healthier so that they are not accessing health services? Before we get to the point where we are having to correct and invest all of that. In a tight fiscal settlement, when you have increased demand for public services that are going to grow naturally as demographic change kicks in, what can you do to reform and to be more ambitious about how you deliver outcomes and efficiencies? The point is about the difference in terms of tax take and how the block grant adjustment deals with that. I have already taken up the muddle phraser. Just taking around off the taxation part of it, you mentioned a couple of times that a one-pied tax rise would equate to potentially adding £400 million on to the budget. You outlined in the document the SNP proposal stroke approach. You said that that would have a marginal impact on the budget. What kind of financial value would that potentially be? When we add up the commitments that the Scottish Government has made around tax, you have two sets of those. You have commitments that are going to increase revenue, so that changes to the thresholds of income tax primarily. The way that the block grant adjustment works has two effects. First, by increasing the income tax threshold more slowly then that will raise revenue in Scotland. However, if at the same time the UK Government is going to increase the threshold even more quickly, then that will reduce the block grant adjustment. You get a double win in that, so you get a tax increase there. We also note that the Government has commitments to cut taxation, the principal one being air passenger duty, so that it is half the burden of air passenger duty by the end of the Parliament. By taking those two elements together, we estimate that, based on our modelling rate, that works out around £213 million of additional increase in revenue by 2021. That works out just under 1 per cent of the overall Scottish budget by that period in time. There is an additional increase to the Scottish budget from the discretionary tax policies of around about £213 million. Is that £213 million per year or over the lifetime of the Parliament? That is a bit of the end. By the time we get to 2021, what is the additional increase that you have? The £200 million is there. That is a cumulative position. No, it is the end position in that year, so it is how much higher in that year is tax revenues. The cumulative would be that plus the additional revenue that you make in the additional year. That is the final year figure. That is a final point, convener. The scenario that you are painting is that of a contracting Scottish budget. Due to a number of factors, a situation in which we have more taxation powers now at our disposal, but quite a stark situation for the Government and all the parties to face up to, and you point to the need for some more discussion around outcomes. Do you think that the debate needs a more open and honest exchange of views? Politicians and political parties in a poll manned up to this tend to get stuck in our own positions and arguing fixed views. Do you think that because of the scenario that you are painting, it needs a better quality and a more open debate about the issues to give a proper address to the problems that are outlined? That is our key conclusion, our key recommendation from the report, and it gets through all the stuff that we have in chapter 4 of the report. If you start from a position where you have a relatively fragile Scottish economy, a tight fiscal settlement and increasing demand for public services, what is the solution to that? The solution has to be an open discussion, an honest discussion about outcomes, opportunity costs and policy decisions. What is the balance of tax and spend that you want to have in the country and be quite up front and frank about that? That starts to get into the point that Patrick Harvie made about commitments and taxation. What more radical things could you look at in taxation? What is the overall structure of taxation that you want to have? The more that we can get the debate on to that sort of thing, the more you will end up with a constructive outcome in what is likely to be a quite challenging situation. Exactly where Adam Tompkins wanted to take us in his question. Thank you, convener. Yes indeed, I wanted to move into chapter 4 and, in particular, what you have to say there about opportunities looking forward. One of the things that you say is that there are opportunities with regard to social security spending, I am on page 77. Opportunities in particular, for example, to link up better responsibilities in health, education and skills and so on and so forth. What role do you think the finance committee in particular can and should be playing in scrutinising how such opportunities are taken? That is a good point. I have just made a general comment about the social security element. I think that that is a really good example of where there is an opportunity to look at outcomes in a completely different way. How do we focus on what is best for an individual? If you look at an individual, what is the best outcome that they can get? What is the full spectrum of opportunities intervention that the Scottish Government, local government, service providers and so on, can do for an individual? That could be through education, skills, social security systems. How can you get an overall package? That is one of the key opportunities within the new powers that are coming to Scotland. How can you deliver them more efficiently and how can you deliver things in a new way? The finance committee in that is to look at, again, are we spending the money in the right way on an individual in terms of their outcomes? Are we spending it once? Are we spending it most efficiently? What gets to the biggest bang for the buck that we have in the world where we know that we have tight resources? I think that looking at that, taking examples of the new social security powers that are coming in and saying, what are we doing with this and how is this complementing the existing interventions that we have for individuals in a way that delivers positive outcomes? That leads me into a second question, which relates directly to what you have just said, which is that on a couple of occasions in this chapter of the report, you talk about the importance of effective parliamentary scrutiny of draft budget plans. You say that the importance of effective fiscal scrutiny is more crucial than ever, given the environment that we are in, and you say that it is vital to protect the Parliament's role in budgetary scrutiny. As you probably know, the Scottish Government is proposing significantly reduced time for budget scrutiny in this session, as it did in the last session. Have you had any reflections on that in the light of what you have just said about the importance of effective and robust parliamentary scrutiny? I fully stand by the statement that we need really robust scrutiny and examination of those issues. That is really crucial. The issue that you are all wrestling with, and the Government that we are wrestling with as well, is how do you best do that scrutiny in a world in which you now have much greater tax powers and it is much more complex in how we interact with UK fiscal policy through the autumn statement and block grant adjustments and things of that. Do we come before or after the autumn statement? I know that that is a challenge that, if you go after the autumn statement, you really condense the scrutiny period that Parliament has. The one thing that I would say about that, and if we start to touch on the report, is that it will probably make a distinction between the length of time you have to scrutinise something and the quality of the scrutiny that can come in. I think that there is an issue in there about what more information can be provided by the Government to allow really effective scrutiny over a short period of time, but, even if that does not happen, how much more information could you provide? One of the big advantages, if you look at the OBR and what it has done, is that it has really transformed how people view budget documents at a UK level. Of course, you can criticise the OBR like you can criticise us for getting forecasts wrong and things like that, but the level of information that they provide now means that anyone can go and know exactly how they have come up with the various forecasts and the various elements. We do not have that yet. I would say that that is the sort of thing that would be really useful to have much more information around that. Issues around presentation of the material within budgets. The issue that is a common complaint and a challenge that we had about where you have some budgets presented with depreciation in it and some budgets without depreciation in it. You find it hard to go from one part of the budget document to another part of the budget document. How can you provide much more information to capture that? How can you look at data that has, for example, splits between what is already committed and what is not? We know, for example, that there are large commitments in certain budgets around NPD, PPP, around wages and so on. Having much more information on that will let you scrutinise what choices the Government has within those individual spending lines. There is quite a lot that you could do to improve the quality of scrutiny that is available. That might be the sort of thing that I would say that this new budget review group could look at. What type of information and what quality of information would enable you to scrutinise the budget in a much more effective way, even if the time period is relatively short? That is extremely helpful. I want to drill down more into that outcome. I have also got a brief supplementary on some of the stuff that was brought up, but if I have time, I can squeeze it in at the end, if that is what you say about the time. First, it is on the outcome stuff in roundabout section 4.2. You are talking about—which is obvious—the way that spending is done at the moment by big departments and everybody is fighting further, based on historically what they have had and how you culturally shift that to something where you have focused on outcomes, talking about the national performance framework, how you link the budget lines up to that. Conceptually, it all makes sense, but you are talking about the quality of scrutiny, and that all ties together. How do we get from where we are to where we need to be? I am just looking at your report, which is 92 pages, and you have got two pages on that. You say that it is really, really important, and we need to do a lot of work on it, and we need to not just give it lip service, and then you do two pages on it and move on to something else. I suppose that AAU is planning to do more work on that. Be what what should we do as a committee, and most of us are new to this, so we are just getting out. We are open to doing it differently from how it has been done before. Then what might the scope of that be? Christy talks about 40 per cent. In my experience from the business world, I think that 20 per cent is more realistic, but it is certainly achievable, which is obviously in the context that we are talking about—big, big numbers. What are your thoughts in that space? I think that it is a really good quality two pages, even if it is two pages. I think that it is right, and I would not say that this is easy. I would not say that this is the sort of thing that you could just do overnight, but it is something that has been wrestling with from Christy. For me, the importance of the data and the importance of the information that is provided is to trace through outcomes. How can we generally see where money is being spent and what does it mean for individuals? Something like social security is potentially a really good example of a case study of where that could really be changed, because you are not starting off with any fixed positions or any examples that you have had before. I think that it is challenging to do. I think that the more data you can get, the better. I think that there also needs to be a realisation, as we say in the report, about the point that Mr Kelly is making about moving away from fixed positions and points that you make around something. For example, if you take things such as protecting the health budget, it is a good example of where we define that as a portfolio. We define it as a level 2 budget settlement, and we say that we will protect the health budget. The answer should be how do we improve health outcomes? That could be investing in programmes in social justice, it could be investing in programmes in local government, and we need to get much better at linking all of that information in a much better way. As I said, data is crucial to that. There are some good examples of where that has been done before on individual spending lines, and I think that the more that we can do on that, the better. That might be the sort of thing that the finance committee would want to have a look at, and that is definitely something that we will be looking at quite strongly over the next few months and years. Yeah, very quickly. It was back to what we were talking about, the fragility of the Scottish economy. If you look back at your chart 2.1, you go back two years and look at the growth rate Scotland and the UK is broadly similar. You look at what you say on historical tax growth, Scotland vs UK, page 43, Scotland is a higher tax growth in VAT and income tax over the 14-15-year period. You also talk in the report somewhere about potential differential Brexit impact, where the rest of the UK could have a higher, because of the sectors that are involved in finance, etc., plus geographically closer, could have a higher Brexit impact than Scotland. I suppose that the last part of that was your comparing UK growth rates to Scotland, which is fine in the context of what it does on BGA, but, as a more interesting comparison, not other small European countries and their historical growth rates, which have been significantly higher than Scotland. You do want to hear a long question. I guess those three parts in that short question. The first thing is that you are entirely right. What we are looking at is just the short-term horizon for the Scottish economy and what has happened over the last year. That is for this budget and this Parliament. That is probably the crucial bit, but you are entirely right that, if you look over the last, particularly since the start of devolution, Scotland has done relatively better on many indicators than the rest of the UK. The tax revenue is an example of that. I guess the question is, will that continue going forward? That is where our concerns about what has been happening over the last year, if that continues in the short term, then that could have an impact on the Scottish budget. We do compare it deliberately against the UK because that is what matters in this fiscal framework. That is a crucial bit. The way that the fiscal framework works is that Scotland's budget will be better off relative to Barnett if Scotland's tax receipts per head grow more quickly than the rest of the UK. You may disagree with that starting point, but that is the way that the framework is going to work. Comparisons with other small countries or comparable countries is interesting exercise and there are a lot of issues in there. From a fiscal framework point of view, that is almost slightly irrelevant because what really matters is the comparison between Scotland and the rest of the UK. Is relative potential growth rates in the sense of what you might do with the levers and things like that? In terms of that comparison, it ultimately comes down to Scotland and the rest of the UK. We are predicting next year growth in Scotland of 0.5 per cent. The average forecast at the UK level for next year is about 0.7 per cent, so we are predicting slightly slower growth than in the rest of the UK. I was taking a wee bit away from the chapter 4 issues, but other people wanted to speak Patrick Harvie than James Kelly. I want to take some of the arguments that come across in chapter 4 around outcomes, prevention and so on. Compare that with the approach that you have taken in chapter 3 in looking at the Scottish Government's spending commitments. It seems to me that when you are looking at, for example, the childcare and health spending commitments, it seems to imply simply what is the consequent additional squeeze on unprotected areas and what additional cut will happen as a result of that. Do you and how do you take account of the other kinds of savings or other kinds of beneficial impacts of those kinds of spending on the Scottish budget? We know that that kind of social infrastructure can enable people to become more economically active. It can reduce the costs of poverty, which have a financial cost to the Scottish Government as well as a human cost. Even within an overall envelope, it can ensure that some of the worst effects of that burden do not fall on those who are least able to cope with it. Can I ask how you have taken account of those arguments that you make in chapter 4 in your methodology in chapter 3? That is a very good point. Essentially, what we are doing is essentially seeing how we trace through the document. It is really just to almost come at that same question, but from the other way around, which is to say that if you go through the mechanistic approach of looking by what happens at portfolios and what happens in the overall budget, that is what you get. Those are the challenges in those unprotected areas. Then, when we come back to the square of the circle, it is to come back to your point and say, in this environment, both presentationally but also in terms of delivery of public services, what is the solution to that? The solution to that is to exactly do what you are talking about and to say how do you focus on outcomes and how do you focus on prevention, so that, when you have consequences of changes within individual portfolio lines, that has wider implications for demand for public services in other areas. That is what we are trying to do in chapter 4, to come back to exactly the point that you make. The only thing that I would say that is cautionary is twofold. One is what is the likelihood that you will get those benefits in the short term. That is an issue that needs to be borne in mind there. Secondly, are those investments in certain areas actually going to deliver changes in outcomes that you are looking at? Child care is probably an example where we know that that will lead to long-term benefits and improvements in other services and things like that, but you then started to get into answering positives. What do you spend the extra money and health on? Are you genuinely going to use that money, as you suggest, to pay in social infrastructure or health infrastructure that then leads to those other benefits? I guess that is our challenge back. How do you use the money in the protected areas most effectively to deliver better outcomes, which then means that demand in other protected areas might fall or that you might make savings or that you might deliver better outcomes? The institute at the moment is not at a point of being able to take some of those spending commitments and make a judgment or an assessment about what the potential positive consequences are yet. We could do that, but that is not what the report does. What the report does, as I said, is simply build up the mechanistic to say, well, this is what you then mean in that, because within that it is then you start to get into the interesting questions about what do you spend the money and health on when that gets into the stuff around prevention? One of the things that we are really interested in looking at is trying to think about how do you approach the whole concept of inclusive growth within a framework such as this. The way that you traditionally do it in economics cannot let you capture the whole benefits of inclusive growth in elements and how you develop that. That is a really interesting bit to look at. I think that that is probably the next part of the exercise. You are right. How you then look at the spending underneath the high-level bits becomes crucial. How do you inform that it is okay if the health budget is rising by £500 million? How do you best use that in a way that benefits outcomes across the board? I suspect that that only underlines the argument for Parliament to have enough time to take ample evidence, a wide range of evidence, when we have a draft budget published. James. Thank you, convener. I will go back to the section on transparency. You make what some might feel is a minor point by actually is quite an important point about the presentation of the budget and that when the documents are released into the public domain, they come in in PDF format as opposed to Excel. I suspect that you spoke at the start of the session about how you have built up your team in recent months and you have got a good number of experts, but in order for yourself and other stakeholders to best and quickly analyse the budget, particularly if we are going to be looking at it on a curtailed timetable, do you think that the Scottish Government should consider publishing it in the Excel as a matter of priority? I think that that would be a helpful step. As I said, I think that if you look at, for example, what they will be our do, as I was using that as an example, they essentially publish all their Excel data, they publish every chart, every table that they produce, they publish that information in a transparent way. It is a very simple thing, but it helps very quick analysis and a quick scrutiny of what is going on. The wider point that we make about transparency is that the framework that we are now going to get is exceptionally complex. There are going to be challenges between forecasts, revisions, money moving from reserves into budget outturns, forecasts for the BGA, forecasts for the Scottish tax revenues, reconciliations, borrowing for cash flow—it is going to be exceptionally complex. The only way that you will get effective scrutiny, but crucially the only way that you will get trust in the system is by having all that transparently set out. You know why a budget is falling three years from now, because there was a forecast error four years ago. You need to be able to have information to do that so that people trust it. If you thought Barnett was difficult in all the complexities of Barnett, you would not have seen nothing yet. The institute has modelled the potential effects of Brexit on the Scottish economy. You have summarised that by saying that it will have a significant negative effect on the economy and that the GDP over the next decade will be between 2 and 5 per cent lower as a result. I wonder if you could expand a little bit on that. I assume that that takes into account an expected reduction in international investment into the Scottish economy. We know that Scotland had been doing quite well on that, and it was the second biggest location outside of London and the south-east. If FDI is considered to be a driver for things like productivity and innovation in the Scottish economy, should we be concerned if that is lower? The productivity in the economy will be lower as a result of that, because of the Brexit consequences. In that context, there are a couple of points that are quite important to bear in mind. What our modelling does is essentially look at what might be the shock from Brexit having an impact on both the Scottish and the UK economies over the long term. There is, obviously, quite a debate about the scale of that shock, whether it is positive or negative. Most economists would believe that it will have a negative impact in the long run, because it might have implications for trade and so forth. Using that as a starting point, you will have, as we say in the report, a slightly negative impact on Scottish GDP of between 2 per cent and 5 per cent, lower than it otherwise would have been. A couple of things in that, as you rightly point out what are the potential implications for investment. We know that Scotland has done relatively well in recent years on international investment. If that is impacted in some way by Brexit, that would have a potential disproportionate impact on Scotland relative to the rest of the UK, and that would be a concern if it was to feed through to productivity and so forth. On the other hand, it is also important to note that this all assumes that policy remains constant, so we do not know what might happen in the future in a post-Brexit world. Policy might change, trade deals might be arranged, etc. That would change the growth trajectory there. The other thing that is really crucial in the context of the fiscal framework is the relative impact of Scotland relative to the rest of the UK, because what is crucial is what happens, as explained, is the growth in UK tax revenues relative to the Scottish tax revenues. If we can grow more quickly or fall less slowly, then we would better off relative to where we were in Barnett. What is interesting from the research that we have done is that we find that the negative impact on Scotland and the rest of the UK is potentially, on our modelling, slightly less in Scotland and the rest of the UK because the UK has slightly more trade integration with the rest of the EU. If we just take that for what it is, it might mean that, in the medium to long term, the way that the fiscal framework might work is that Scotland might be less impacted than it would be than before. There are quite a lot of complex issues going on in there, but the basic point is that Brexit will have an negative impact on the Scotland and the UK economy. What is crucial for the fiscal framework is whether it is more or less impacted than in Scotland and the rest of the UK. There are some areas such as investment and productivity that could be a concern that might make it worse, but in our modelling, we show that at the moment, our estimate is that it might be slightly less in Scotland than it is in the rest of the UK. Yes, thank you convener. One question that has not been touched on so far is in relation to the Scottish Government's capital spend. There is a comment that you make on page 68 in relation to the Scottish Government having new borrowing powers for capital spend in 2015-16 of up to 10% of the capital del budget, which should be around £300 million. So far, the Scottish Government has not utilised that capital borrowing. Would you expect that to be used by end of the year, or is there any indication that the Scottish Government is perhaps struggling to find projects to spend its money on? I would know on that. The one thing that I would say about the use of borrowing powers is that you would expect to see that kick in and be used towards the end of the financial year, because you might as well use all your capital del first. I would expect that you might see a trend for any administration that would tend to use capital del in the first part of the year and then unlock the capital borrowing powers towards the end of the financial year. I would say that, from an accounting perspective, that is probably what I would expect to see, whether there is an issue with capital projects. I would know. I said at the beginning that I would like to question myself about structural slowdown issues, particularly as it plays against the fiscal framework. Your report highlights the risks to Scotland's economic performance, should the recent North Sea oil slowdown prove to be part of a more sustained picture. It describes the lack of fiscal support mechanisms to counteract a asymmetrical structural decline in a sector in which Scotland is more heavily concentrated as a weakness embedded within the new fiscal framework and notes that there are no new mechanisms of protective oil services during sustained structural slowdown, which is pretty worrying, as a result you conclude that Scotland's budget is now much more exposed to the risks that the Scottish Government has limited ability to mitigate. In your view, what would be necessary to increase the Scottish Government's ability to mitigate against those structural issues? Just to be clear, what we are saying is that, under the fiscal framework, if you have a cyclical asymmetric shock—something that is purely temporary—the Scottish Government now has revenue borrowing powers to do that. If a shock where Scottish GDP is less than 1 per cent and more than 1 per cent away from the rest of the UK, you can unlock those asymmetric borrowing powers. The point that we are trying to make there is one about what happens if you have a long-term shock. You have a sector that is not going through a cyclical change but is actually going through a structural change, and Scotland is disproportionately more invested in that than the rest of the UK. What mechanisms are in the fiscal framework to deal with that? There is not anything directly in there in the fiscal framework to do it. You still have, on the reserved side of things, the insurance mechanism that, if you take North Sea revenues that they are collected at the UK level, unemployment benefits, etc., are still from a UK level. You have a mechanism there that helps to smooth the structural adjustment, but purely in terms of devolved services. If you have a decline in a sector that is reducing your income tax revenues, reducing your employment, reducing earnings, etc., then there is no mechanism, automatic mechanism, to deal with that. That sort of thing would be a challenge for going forward. You could then argue that the Scottish Government could potentially be using its new powers in a more effective way—using its capital borrowing or tax leavers, etc. However, it is something that is there that is not in the fiscal framework that you can immediately provide a response to. If you want to make an adjustment, you have to change devolved services or taxation or borrowing, but there is no additional mechanism like the cyclical mechanism that exists in the fiscal framework to deal with a situation like this. That is something that has happened in our long-term structural issue across the UK. What mechanisms would the UK have to deal with that sort of impact? There are two things. One is that it could obviously use greater borrowing powers over a period of time. Secondly, the way that it would work with the fiscal framework is that if the UK was having a structural challenge, then it would be UK revenues as a whole that would be declining, which would in turn mean that the block grant adjustment would be declining as well. If it was a shared shock—if it was a shock that was identical in Scotland and the rest of the UK—the Scottish tax revenues would fall, yes, but the block grant adjustment would fall, so the net effect would be zero. The challenge that we have here is that Scottish tax revenues are being suppressed by the shock, but the block grant adjustment is not being affected by it because the UK is a much smaller fraction of the UK economy. Is your institute looking at that more deeply at that particular issue, or is there other institutes out there who are doing that sort of work? That is obviously something that, in the longer term, is going to be quite an important issue. It is something that we are looking at. One of the things that we are doing is developing our economic modelling that we have in the Fraser of Allander. The models that developed looked at the Brexit shock and things like that. We are now extending them to build in the fiscal framework into those models. We can look at what happens if you have an asymmetric structural shock between Scotland and the rest of the UK. What would be the potential long-term economic implications of that? What are the opportunities around if you can grow your economy more quickly? What are the long-term benefits of being able to recycle those revenues over and over again into public services and into the wider economy? I assume from what you are saying that, if, for example, a hard Brexit scenario resulted in a similar shock to financial services, that clearly would have some effect in Scotland, but it would have a much bigger effect in the rest of the UK. That kind of asymmetric shock in the other direction would have a positive effect in Scotland. Is that a correct assumption? Exactly. That is the asymmetry that is in it. In that scenario, what you would have is the block grant adjustment being much smaller than it would have been, and Scottish tax revenues being less impacted by that, so you would have an asymmetric shock in the other direction. The key point is that there is asymmetry built into the potential system where Scottish Government is now facing additional risks, both up and down side, which you do not control. You do not have the lever to control or address. I am sure that, at some stage in the future, we will need to come back and look at a bit more examerate, but we do not have time to go into that level of detail today. On the issue of transparency issues and the amount of information that is available, I wonder what level of macroeconomic data the Scottish Government should be prioritising, what we should expect to be seeing published, economic growth data, etc. What do you think would help us in that area? There are a number of things. On the economy side of things, what you want to scrutinise and look at are the assumptions that underpin modelling. Models are models, and they will give you a number, but what is crucial is what you put into those models. One of the things that OBRs have done really well is that they set out all the various assumptions about how they came up with the results. That is crucial, because you then know why you are expecting Scottish growth to be faster or slower. You can trace the effects in that area. There is a lot that you can do on the information that OBRs produce on the economic side that would be useful to have. What are the determinants of future stamp duty revenues going forward? What are the key determinants? What are assumptions about that? Are those assumptions reasonable? That means that you can scrutinise them. If you see that revenues are growing quickly, you know why they are growing quickly, because they are assumptions about faster house price growth or greater increase in the number of houses. That sort of information would be crucial. The second bit is what information you would want on the fiscal side of things. We have touched on that already in relation to information on budget lines, non-cash versus cash, so that you can see where the discretion is and issues around bits of the budget that are committed. For example, the obvious thing in there is NPD and PPP commitments. You know that those are locked in. How much of the share of a budget within a portfolio are they going to take? Does it take a large share with an education portfolio or a small share with an education portfolio? That lets you scrutinise and be a bit more aware about what the opportunities are to do something different and how constrained you are. I think that thinking about both the economic side and the fiscal and budget side would be quite useful. I do not see them indicating that they want to come in with any other supplementary. I thank Professor Graham Roy for his fascinating and illuminating session. I have certainly found it very interesting. The next meeting of the committee will take place on 28 September, when the meeting will take evidence as part of its inquiry into the first-year operation of the land and building strategies tax. At the start of the meeting, we said that we would take the next item in private. I therefore now close this public part of the meeting and will take a short break.