 Maen nhw and mewn gwirioneddau ag unrhyw deskrwm yn 15 wrth yr Bethnau oedd y clyw ysgolwyddiwyllalkoedd. A oedd hyw'n meddwl am y peth yn y gallu cy Bead Tunff a'i zyfaf ar y cyffinodau cyllidol? Rwy'n credu eu collif ar gyfer Jackie Bailley a Gaven Brown rydw i'ch mynd yn y clywed yn Droil. Yr ystafell o'r cyfrifoedd dros beth rydw i'n dweud o ganedlai'r gyr新etai, yn wneud y m 레�dol ym yn universityll. Rydw i'n ddod i'r cyfrifoedd. Mae sgwrddach yn cyflei ac mae'r perffinogaeth hon mawr yn gweithio yn ei ddweud i gael g�ain. Mae ddae cofei. Mae'r bach ffordd iawn yn ddefnyddio i'r ddweud. Mae'r ddweud i ddweud i ddweud i ddweud i ddweud, ac Robert Gwithinwch adael i Gymru. Robert Gaffer, y cael ei gael i ddweud, yn pob ddod yn eich ddweud, mae'n credu y cwestiynau. Ac erbyn gyda'r cyflugau sy'n bod yn ffysgol. Mae'r cyflugau sy'n meddwl am ddeithas yng Nghymru, a mae'r cyflugau yng Nghymru. Mwysil yw'r cyflugiau, ac mae'n gweithio ddim yn cael eu cyflugiau a phobl yn gwneud yng Nghymru ac mae'n gweithio'r cyflugiau ac mae'n gweithio'r cyflugiau gan y cyflugiau a'r cyflugiau ar gyfer ddechrau yng Nghymru, gan yr ysgolio agorwyr, yn gwneud unrhyw ymddangod o'r cyflugiau dw i ddweud i genedau chai'r cwysylltu y Unas Cymru. Felly, oes wrth gwrs, mae'n gweithio i ddweud i gyd ansiwn am y cnych, yn ddim yn ddefnyddio gwylliant dyfodol mae'r ddechrau'r hwnnw, oherwydd yn fawr i gynnwys, i fyng o'r cyflwyng hwnnw chiwethaf â phaith gweithio'r bwysig o'r dweud oherwydd hynny, oherwydd yw'r cyflwyng hwnnw i'r或nw i ddweudio. Rwy'n creduolaeth llyfrnoddau â'r cyflwyng hwnnw Those amendments will be set up in such a way that we can co-operate effectively as we're going to be having to answer some of the same questions while respecting our respective independence. From our point of view we're very keen for an open and collaborative relationship with the Commission and indeed with the government. We invite Scottish government officials and the Commission to participate in the meetings where we discuss our forecasts for the devolved taxes and we've found that to be very useful and I hope that we can carry on in that spirit as the scope of of devolution and the role of the commission broadens. After that, I'm very happy to take your questions. OK. Well, thank you very much for that, Robert, and it's great to have you back again at the committee, albeit not in the flesh, so to speak. You said in that very brief opening, you said there was no template, and it's about what worked well and what hasn't worked so well. So, for the OBR, what has worked well and what has not worked so well? I think, from our point of view, things have worked probably better than I would have anticipated when things were set up to begin with. As Ian Lenert's excellent paper makes clear, we're quite an unusual model in the sense that the whole task of forecasting has been contracted out to us by the government rather than having a situation in which we are scrutinising the government's forecasts or producing parallel forecasts. That necessitates a relationship in which we have to have a private interaction with government officials in the run-up to budgets and autumn statements, and that, I think, has worked better than I would have anticipated. The working relationship is a good one. I think that it's interesting that there was a review of external stakeholders who said they, I was pleased to see, who said they had confidence in the work of the OBR. They attributed that to the quality of the staff and the nature of the day-to-day workings, and they didn't put a great deal of emphasis on the formal, legal and institutional underpinnings. I think it would be a great mistake to conclude from that that those formal underpinnings don't work. They are an essential backdrop, and the way in which the working relationship operates, I think, is conditioned, perhaps subconsciously, to a degree, by the knowledge that there is that structure of agreed rules, of agreed working relationships there. I think in terms of what hasn't worked so well, I wouldn't describe it as not working so well, clearly it's a more difficult environment in which to demonstrate your independence where there is that necessary discussion that takes place in private. When I used to be running the Institute for Fiscal Studies, it was slightly easier because the government would produce numbers, and then after the event we would look at them and talk about them and say whether we thought they were too high or too low. There was no interaction. If we had that relationship, we wouldn't be adding anything to what the IFS does anyway, so I think it has worked. It's necessarily more difficult to persuade people that there is a clean distinction, but I think it's the only way we would have added value to what I'd been doing for the previous eight years in the old job. Given the position of the OBEAN, what you've just said, do you feel that the Scottish Fiscal Commission should prepare its own forecast independently of the Scottish Government? Again, we are relatively unusual in doing it ourselves and providing the official forecast that the Netherlands is the only other obvious example. I think that if you set up as the Scottish Government desires a situation in which they are producing the forecast and the Commission is scrutinising it, the experience I think you would find from the Irish Fiscal Council is that with time you end up pretty much having to do a forecast of your own in order to be able to critique the forecast that you're looking at from the government. I think there might be a risk in thinking to begin with that you can do this as it were looking from the sidelines without getting involved in the mechanics of producing a forecast yourself. I think the Irish experience is over time that they've found that that was harder to do. It might also be harder to do in this context because you could argue that if say people were interested primarily in what your view of real GDP growth was, which is not our key role, but for the UK there is a wide variety of other forecasts available in the public domain and one way of viewing reasonableness of a forecast would be to say I'm not going to do a forecast of my own and compare it to that but say how does it compare to the other forecasts that are out there. I think in this environment for the things that the Scottish Fiscal Commission will be scrutinising and the SG will be forecasting there isn't a wide range of other forecasts to look at. So once again that would leave me in the direction of saying not necessarily that they should do the forecast but that over time they might find themselves wishing to get pretty close to doing their own forecast in order to produce adequate scrutiny. To date the commissioners focus very much on whether they believe that the methodologies are reasonable, which is a very sensible approach when the whole system is being set up to begin with. Once it's been running for a while reasonableness will come down more to issues like do you accept as reasonable the interpretation that the government has put on recent out turn data and the way in which that out turn data compares to the forecast and that again gets you more into a parallel forecasting mode. So I would certainly say that it would be a good idea for them to have the resources to be able to do that should they wish to do that. Yeah so you're effectively saying that even if they don't actually have a role of actually producing their own forecasts then de facto they're going to have to immoralise do it maybe in five or ten years or possibly sooner in any case. Quite possibly sooner. A lot of this comes down to the issue of reasonableness. In the bill that the function is set out as to judging whether the forecast produced and the assumptions made for the non-domestic rates are reasonable. It will be for the commission to define what they mean by reasonable. As I said at the moment to date I think they've focused primarily on methodology very sensibly but you get to the point at which you say well how do we define reasonable. Do you define reasonable in terms of a numerical range of outcomes for a particular forecast that you think are acceptable. And that range I think could be quite wide and the Scottish government at the moment doesn't publish five-year forecasts but if you were to say what is from this point a reasonable range for forecasts of the LBTT revenues in five years time that could be quite a wide range because it depends on movements in house prices movements in transactions anywhere and deciding where you draw the line between reasonable and unreasonable is not straightforward but it's implicit in this model. Now obviously you've looked at the kind of the billing in some detail and you looked at the resources behind it. Do you feel the Scottish Fiscal Commission would have the resources to be able to do that because obviously the OBR is much much greater resources than the Scottish Fiscal Commission has or indeed is likely to have? I think so. I think as I said I thought Ian Linnert's paper was an excellent one. I think he did say somewhere that he thought that the Scottish government's assessment of the resource needs was munificent. I think from personal experience that the amount of resources you need to do this job properly may be rather larger than some people who haven't engaged in the process themselves think so I suspect the Scottish government's probably made quite a good judgment on that rather than an excessively generous one but it will depend on the on the on the allocation there. I think from our point of view you're right that you know we have more resources than are proposed for the for the Fiscal Commission obviously we have a wider forecasting remit but even the resources that we have are nowhere near adequate on their own to do the job that we do and it depends crucially on our access not merely to information but also to the assistance time and effort of civil servants in particular in the revenue and customs and work and pensions departments to to do our job properly and in effect we have about 120 people quote unquote working for us particularly in the immediate run up to the forecasting events in those in those departments so I think another issue for the commission is not merely how much resources do they have to play with them themselves but what degree of expectation is there about the time and effort that people in revenue Scotland or the or the Scottish government administration will be able to provide in assisting them with the information with the analysis going through the judgments that they've made so it's not just a question of how much cash they have in the kitty yeah thanks very much i mean you've almost preempted my next question which is i just wonder if you can expand on the level of contact you have with the you know UK departments in private and the basis of those discussions you mean which you've just touched on to some degree yes i think the as i say that the primary area if you were to look at who is devoting most person ours to to in effect working for us it's very much revenue and customs obviously on all the various tax forecasts and work and pensions on the on the welfare forecast now the key thing to bear in mind there is that the forecast that we produce for welfare spending for tax spending are our forecasts they are you know providing us with technical assistance they will make recommendations for example about whether the models that are used to forecast these things should be changed or not at the end of the day it's always our decision whether that's that happens they may have ideas about how to interpret out turn data but at the end of the day it's our forecast and and we uh and we interpret uh and we make that and one thing i've been pleased about is that uh those relationships with officials in those departments are conducted on a very professional basis and you very rarely get the sense of the sort of you know the the political specter lurking behind the shoulders of the officials that you're talking to and i'm very wary of any occasions when it looks as though the material that we're being provided or the assistance we're being provided is being clouded by that sort of political intervention but as i say to date that's worked reasonably well the other part of the relationship we obviously have is is more with the treasury where in a sense they need us more than we need them they bring to us the policy measures that the government is thinking of announcing at a particular fiscal event and we scrutinise that and we have a debate over over um what what we think the right numbers are at the end of the day the government can publish its own numbers but obviously we are producing a central forecast if we don't like those numbers we'll put different ones in the forecast and we're very transparent about that so there is quite a lot of quite a lot of contact um i think one lesson perhaps here for for the Scottish environment is that i do find the fact that revenue and customs is at some arms length from the treasury to be a practical and symbolic source of of reassurance and i think i don't know what the relationship is like or will be like between revenue Scotland and the Scottish government and to what extent there's that sort of degree of arms length separation if it is i think that would be a source of additional confidence for the commission in the scrutiny work that they're doing i mean how do you feel about the commission exerting significant influence over the forecast at the same time as providing an assessment of the reasonableness it's an interest it's a sort of hybrid model that's being proposed here as i understand it you have an influence and at one level obviously you hope there's going to be influence the whole point of this exercise is that by having independent scrutiny uh you are you know the the government being scrutinized knows that and comes up with uh with more sensible forecast i think obviously we we have the whole debate as it were behind closed doors and then we are producing the forecast on the same day in the Scottish context i think there's two issues one is whether the commission provides influence between the draft budget and the full or the subsequent budget where i think they've cited an example where the commission said that they thought that the some of the assumptions that went into the non-domestic rates forecast were a bit over optimistic and the Scottish government said well we responded to that between the draft budget and the and the subsequent one so that's one way in which it shows up the other way obviously is whether it shows up in the run-up to the draft budget forecast and there as i say it seems to be a hybrid model i mean the sort of the ifs model would be to say you don't have any contact before the draft budget the draft budget comes out and then some while afterwards you look at it and you say well yes that seems reasonable all that looks a bit high or that looks a bit low and you you set out your expectations and in which case you did that presumably the Scottish government can then decide whether to amend things after afterwards but which i think Ian Linnott leans in that direction as i understand it the proposal at the moment is that there is an interaction in private prior to the to the the draft budget i don't think there's anything necessarily wrong with that i think it opens up the question of again reasonableness comes in do you want the system to work in such a way that the Scottish government can have a private conversation with the commission in the run-up to publishing the draft budget which essentially they're saying okay if we published this would you say that was reasonable okay if you wouldn't if we published something slightly different would you say that was reasonable um to what extent do you want that negotiation to be taking place in private i'm not sure the outcome at the end of the day would necessarily be different it's clearly drawing back again on our own experience it might be harder to demonstrate and satisfy everybody that you were being independent if there's that sort of of debate beforehand but clearly there would be more opportunity to influence the numbers if you had that prior discussion rather than basically waiting for the draft budget to come out and then the commission then looks at the numbers and draws its own conclusions to influence the subsequent forecast thanks for that now i'm just wondering if you think that the Scottish Fiscal Commission should perhaps have a wider remit to look for example at the sustainability of scotland's public finances particularly for example fiscal rules personally i see no i see no problem with that the way in which the uh our our remit is drawn fairly widely in terms of giving us an overall duty to report on and examine the sustainability of the public finances and then we have specific requirements that are made of us in legislation and in the charter for budget responsibility to produce particular uh reports um it seems to me that though the questions you described there are very good ones to ask uh and it seems to me that the Scottish Fiscal Commission will be a very good set of people to ask them of uh i guess it would depend in part on whether there are other you know university bodies or other research institutes that are doing that work in the way in which for example the IFS does it for the UK as a whole and you therefore might argue there's no point having the commission doing it as well um it's hard for me to tell at a distance whether you would be whether there is that range of alternative opinion but if there isn't then i'd have thought the case for the commission having the ability to talk about those things would be a good thing so you think the bill should perhaps be amended to reflect that really yeah i think um a broad overarching duty with a list of things that is are required of it and a list of things that you're very clear you don't want it to do is probably the best outcome and i think having setting setting it up to begin with i think there's a reasonable case for having breadth to to start off with so you don't have to come back and amend the legislation if you do want it to go in that sort of direction but i think the overall remit question is is clearly one of uh uh of choice not of how it's how it's doing its job but my personal preference would be for it to be broader rather than narrower thanks very much i've just got one final area to touch on before open questions out to the committee and it's actually uh dr Jim Cuthbert who will be giving evidence to committee following your own session is produced as he always does a very interesting paper and one of the the things he talked about was basically about the what he describes as a problem forecasting scottish government's overall revenues because only half the scottish government's revenues will come from devolved taxes and he says forecasting the overall revenues will be a difficult task quite unlike that undertaken by the OBR when it forecasts the UK government's revenues i'm just wondering you know obviously the OBR is in a completely different position in terms of its forecasting you've got a much you can get your teeth into a lot more in some ways do you feel that that that situation that the scottish fiscal commission will face makes it more difficult to be to assess or forecast to look further ahead at scottans finances etc how do you feel about that kind of position that the sfc is in relative to the OBR in terms of looking at finances and forecasts well i think jim raises a good a good point there from our point of view the challenge is as you say we can we can get into this inconsiderable detail and at the end of the day we are producing a completely comprehensive bottom-up forecast over a five-year time horizon uh one thing it's important to say is that we are not producing a forecast of what we think the most likely outcome is going to be we are producing a forecast of what we think the most likely outcome will be on currently stated government policy now from our point of view that requires us to ask the government to be clear what its policy is regarding for example public services and expenditure on grants over a over a five-year period and uh you know for some of the time when you're doing that the actual concrete plans are only laid out for a relatively brief period so the moment we're in the situation where we only have detailed spending plans set out for 2015-16 and we basically get the government to to tell us transparently what they wish us to assume about the total envelope for spending on public services and grants over the subsequent five years when we get to November the 25th of course that will be filled in for most of the for most of the parliament so i think one challenge coming back to Jim's question um you know the if you were doing an overall forecast for revenues for Scotland over a five-year horizon you have to make assumptions about what you think the UK government's policy is likely to be towards grant spending uh over that period of time uh from our point of view as I say we we have to get the government to be as clear as as we can get it to be about that um a challenge then for the commission would be do you take the UK government as its word how do you interpret what they've said which is not a full breakdown so you don't know whether grants particular sorts of grant spending would more be more or less uh protected order you basically produce on the forecast of how you think the UK government might behave over the next five years rather than on what it's what it's uh stated policies are so that does I think add in an extra wrinkle of difficulty or an extra a set of choices to make about how you do those forecasts okay thank you very much for that I'm now going to open up the session to colleagues from around the table in the first call to ask questions will be Richard to be followed by mark thank you convener thank you for your very helpful evidence this morning you've talked about the importance for OBR of having effective dialogue with other with departments of government and with other government agencies as well to do your job and the access to the right of access to information for our fiscal commission obviously is going to be very important matter for them we've already suggested that there should be a memorandum of understanding between the fiscal commission and other bodies like CEPA, Scottish Government, Revenue Scotland too so we can be reassured they will have access to information but do you feel that something needs to be actually in legislation itself I don't know what the arrangements are for OBR on this matter if it has to be on the face of the bill or if it's something that can be agreed between the fiscal commission and other agencies in in in another way I don't think it necessarily has to be on the face of the bill it's not equivalently for us but that's not to say that the memorandum of understanding isn't very important I think it is an extremely important document at which you every all the participants in the process are setting out the expectations they have of each other in terms of what sort of information you're going to provide and when from our point of view it's in a sense even more important because we have to sort of get to a process at which we have a fully articulated postmeasures forecast on the day of the budget we need to sort of have set out deadlines by which you know the Treasury has a right to expect us to produce a forecast of what would happen if there were no changes at a particular point we need them to tell us about the policies by a particular point for us to have time to integrate them later on so some of those issues aren't going to arise for the commission in the in the same way I thought because you're not having that they're not doing the forecast but nonetheless I think the memorandum of understanding is very important and very useful as I say it's a way of setting that out expectations you don't necessarily want to be approaching it in a very legalistic way where you don't you know wave it around but certainly it's always useful to have something as a backstop and when you think you may be getting into disagreements it's always nice to be able to cite the fact that we did have an agreement beforehand and this is the basis on which we've all set out to operate it so I think it's a very useful intermediate step between the legislation at the top and the way in which the day-to-day working relationship operates which fundamentally is the most important thing at the end having that having that set of agreements in the middle I think has been very useful for us I mean having those official agreements you say has been a useful backstop have you had to use that backstop very often in terms of your own dialogue with other agencies? Not a great deal I mean sometimes for example there's a requirement in the set out that you know when the the Treasury is providing commentary to us on the because obviously we we have an interaction with the material that we are going to publish where we need to check that we've correctly interpreted what the policy decisions that are going to be announced are going to be and there is a requirement that basically says that you know when the Treasury is providing input in that direction it should be on the basis of fact you know fact-checking make sure it's right it's not an opportunity to sort of badger us to change the opinions we've reached and that's something that it's occasionally useful to remind them of but it's not the reason there's a serious problem. And finally for me convener on the issue of forecasting Mr Trotman, you realise there's been exercise in the committee quite a great deal the role the fiscal commission should have in terms of forecasting and I think your helpful evidence this morning suggests that perhaps should have that role or that ability within the commission outlined at perhaps an earlier rather than a later point but you said that at any rate that that role the commission might develop in terms of forecasting in a few years down the line or even sooner maybe something that they will wish to develop in terms of fulfilling their remit of assessing the reasonableness of forecasts. I mean is it fair to say that they're not going to be working from a blank sheet of paper in developing that role presumably they'll be able to consult with the OBR would you be willing to assist the commission or advise them in terms of some of the issues that it will find for itself in developing that role in terms of forecasting you've highlighted not just the importance of resources but the importance of building up those relationships with other people working in government working in academia working in other sectors is that something you'd be willing to assist the fiscal commission with or is that something you think that we need to develop themselves? No well we're obviously always happy to provide assistance and certainly from our point of view as I say we found it very useful both in terms of developing the additional methodologies that we've used and then each time we're updating the forecast to you know get the input of both the Scottish Fiscal Commission and Scottish Government officials at the point at which we're addressing those in each forecast and that's crucially as I say partly that when you start out on this process and this has been true with the commission today you're focused on the overall methodology or approach that you're going to to use in developing the forecast as time goes by the methodology may not change very much and the key issue then is how do you interpret the new news if you have a forecast that says that a particular tax is going to raise £200 million a year over each of the next five years and then in the first year it raises 100 how do you interpret that information do you say well that really means that we look at this and we probably want to conclude the later year forecasts are too high do you conclude oh well 200 a year is probably the best so it may well overshoot in the other direction next year those sorts of judgments those sorts of issues of interpretation are ones on which there's no monopoly of wisdom or folly and you know we will continue to have to produce forecasts for all the things that the Scottish Fiscal Commission is going to be scrutinising the Scottish Government's forecasts of and I'm very happy to have an open as open a discussion as we as we can about that and at the end of the day it's very important that we are independent so you know the Scottish Government should produce the forecast that it wants to we produce the forecast that it wants to doesn't matter if those are are different what I think is useful is for us both to be able to have a shared understanding of why they're different and to be able to explain it to the committee to to other people who are interested you know I think it's very important to make the point that you know there's a world of difference between saying somebody else's forecast is different and somebody else's forecast is unreasonable and as I say it seems to me that the big challenge you know an initial interpretation over time is you know what how do you define reasonableness particularly in a world in which you don't have a large cluster of other forecasts of the same thing so you can't just say well reasonable is somewhere in the middle of the pack thank you very much thank you thank you thank you and marty before by john thank you and good morning mr chute um i just wanted to um ask a couple of questions you mentioned that um the the role of forecasting has effectively been contracted out as it were to the OBR um I just wondered in that respect where are you the only ones producing forecasts at a UK level we're the only ones producing and publishing a fully articulated disaggregated bottom-up fiscal forecast the closest comparator will be the institute for fiscal studies in the annual green budget process which I you know did for for eight years and is still going on I think it's fair to say that they now place less emphasis on producing an alternative bottom-up forecast now that we do it although they still provide very useful scrutiny of the of the of the work that we do but they it's not quite a sort of fully articulated alternative forecast as it was then in terms of the macroeconomic forecast which which is obviously an input into the fiscal forecast there you do have a much larger population of people producing alternative estimates there are roughly 35 the treasury does a round up every month of people's forecasts for you know the GDP growth inflation and balance of payments etc and there you do have a much larger number of people producing forecasts at a UK wide level and we make sure in our reports that we compare the latest forecast we've produced with the distribution and the evolution of those external forecasts but on the fiscal side there's much there's much less of that there are many fewer people who are producing those sorts of those sorts of forecasts so it's it's a very different story between macroeconomics and fiscal because what obviously one of the the points that's been raised is around whether the fiscal commission should be producing alternative forecasts or not alternative forecasts about its own forecasts alongside those that government produces and I just wondered if that was something that that was occurring at a UK level but you seem to indicate that in terms of fiscal forecasting it's very much that OBR is kind of the only game in town where the only game in town in terms of producing a bottom up a really big bottom up forecast uh city forecasters or academic institute forecasters do produce a forecast for for example the public sector borrowing you know the headline budget deficit I suspect that quite a lot of those start with our forecast and then say well we think it's likely to be higher or lower than that because we think that economic growth or inflation is likely to be higher or lower than the OBR is assuming or we take a different view of oil prices or something like that uh so uh there are there are forecasts of the of the headline fiscal variables but they're not generated bottom up from lots and lots and lots of different uh forecasts for particular tax receipts for particular bits of spending in the way that ours are. The cabinet secretary John Swinney has said to the committee that effectively the fiscal commission exercises a kind of veto in the sense that if they say his projections are unreasonable his view is he couldn't then continue with those projections he would have to revise them. Is there a similar kind of check and balance on the forecasting that's being done at a UK level? Well in a sense you have to flip it round we we produce the forecast our forecast based on our best judgment and the government has to decide whether to set policy on the basis of our forecast or whether to say actually we think things are going to turn out differently and accordingly we're setting our forecast in in a different way and to date uh I'm sure they wouldn't accept every last bit of it but the Chancellor has on each occasion we've produced a forecast said I'm happy to use this forecast as the basis for the fiscal decisions that I've made and the and the narrative that he's setting out so for example go back uh to 2012 and thereafter we started to forecast that the government would no longer achieve its target to have the debt to GDP ratio falling in 2015-16 the government's response to that was to say okay we accept the forecast but actually we're we're happier to miss the target than to announce an additional fiscal tightening that would be necessary to hit it so I think that in a sense is quite a you know it's a useful transparent process it demonstrates for one thing that we're willing to tell the government unpleasant stories uh that we're willing to tell them that they're not going to achieve the things that they've set out to achieve secondly it's absolutely right that it should be for elective ministers to decide what to do about that and whether it's more important to hit the target or to achieve some other sorts of objectives and also experience has shown that that decision can go both ways sometimes we've said you won't hit your target if you don't take some policy action and they've taken some policy action in to ensure that they do sometimes we've said you won't hit your target and they've said fair enough we'll have to live with that we think it's better than the alternative so uh as I say you're you're flipping round the the area of responsibility it's for government to respond to us not for us to respond to the government which is the opposite of the way in which it would it would operate under the Scottish government model but but ultimately and you've said there it's for ministers to choose what to whether to take on board or for ultimately although it hasn't happened yet the treasury or the government could effectively disregard what the OBR has produced if they felt that they wanted to pursue a policy objective variance with what you've suggested well I think the key thing there is they could certainly could say we just don't believe this forecast and we're going to operate on the basis of an and then they would have to have a decision obviously of how much they wanted detail they wanted to set out in that forecast and I don't think that that you know that wouldn't be catastrophic for the the system reasonable people can disagree about economic forecast anybody who's conducted them or or read them or use them knows that that wouldn't be uh that wouldn't be a disaster there's a separate issue which is about you know policy advice we very clearly do not provide policy recommendations so if the government in our view is not on cause to hit its target it's not our job to say whether they ought to do what is necessary to hit the target or whether it would be better to miss it quite a lot of other fiscal councils in other countries for them it would be part of their responsibility to say okay you're not on target and this is what we think you ought to do about that that is not part of our responsibility and I think it's it's the sort of it's the the quid pro quo for having a very detailed role in the forecasting process uh with the interaction with government that implies and the counterpart of that is that we shouldn't be providing policy advice we're providing the numbers and it's for other people to draw the policy conclusions from that so uh you know I'm not sure actually from the from the bill whether the idea is that the commission should recommend particular policies or particular actions if numbers are coming out in a particular way or whether again it's just saying as I understand it it's more about are these numbers reasonable not if they aren't reasonable what should you do about it no I don't think that that that's the suggestion I don't think I was trying to imply that OBR would recommend policy or should recommend policy but one final question if I may when we've looked at LBTT there have been obviously forecasts for LBTT income produced by scottish government and also by UK government via OBR and those obviously were at variance when it came particularly to deciding the block grant adjustment going forward obviously Scottish government forecasts will be subjected to the scrutiny by by Scottish fiscal commission for reasonableness I guess the question would be what what check or balance would there be on OBR or UK government projections to the same extent particularly where those are going to be at variance with Scottish government projections well there's I mean we will obviously be as transparent you know we produce a very detailed publication explaining why our forecasts have changed from one forecast to the to the next and as you know we produce a specific paper looking at the details of the of the the devolved tax forecasts when we're discussing those forecasts as I say we have Scottish governments and Scottish fiscal commission in the room via telephone more often than them physically so there there as we are discussing how we ought to interpret recent downturn data why the shares have moved was there any evidence on for example whether Scottish house prices are moving differently from the rest of the UK those sorts of questions would come up and at the end of the day we will then produce our forecast I don't think there's any you know there's any need to worry if we have a different forecast from the Scottish government particularly on something like LBTT where you know that's you know taxes on property transactions are inevitably swing around a lot more than taxes on things like income and consumer spending because they depend in part on house prices which can move around quite a lot and they also depend on the level of transactions how many purchases and sales are taking place I think as I say the useful thing is for there to be a shared recognition on both sides of the table that you know even if you don't come up with the same answer that a sharing of information and understanding and a discussion of how you interpret the information is useful to us and I hope it will be useful to the Scottish government and the Scottish fiscal commission in producing the numbers that they have to do I think for the purposes of the general public and for this committee what I suspect you would most like is if the numbers are different that when I come to you or when the Scottish fiscal commission comes to you and tries to explain why they're different that we have a shared understanding of why that is and it may be because the forecast was done at a different time of year it may be because you're taking a different view of what's a particular economic determinant of that forecast is going to do house prices or transactions or some of that or it may be down to the fact that we've chosen a different methodology to produce the forecast on but I'm very keen that we should have a free discussion about that and that hopefully that the Scottish government would see you know we obviously have a responsibility to the citizens of Scotland as much as to everybody else to produce the best UK forecast that we can we're very happy to discuss the approaches that we're taking the judgments that we're making and I hope that the that the government and the commission will be will be happy to to do that as well because I think at the end of the day you won't necessarily get the same answers but we'll all understand where each other are coming from better. Thank you. Okay, John, too far by Jean. Thanks, convener. Obviously we've covered quite a lot of ground already. I mean Ireland was mentioned earlier on I think by yourself as they had perhaps started off in one way and then I think I don't know if the word evolved was used but had kind of slightly changed the way they were doing things and actually developed more of a forecasting ability themselves and in some of the submissions we've had as a committee it's been suggested that the SFC will just need to evolve especially because we may get more powers in the future. I mean has the OBR evolved over the years or has it been very much a fixed entity? It's been largely fixed. The main difference, I mean the main additions to our role when we have the Scotland Act so we obviously when we started out we didn't know we were going to be doing devolved tax forecasts we now are so that's probably been the major change in the remit. The process, obviously the nature of the publications we're producing we've tweaked that and refined that as we've gone along and been able to produce different sorts of material as we've gone further. The next change which we have coming up is that the charter for budget responsibility has been revised in such a way that we're now going to produce a specific publication probably every two years on fiscal risks which I look forward to discussing with Jim Cuthers among others on how you would set about that sort of process which a lot of other countries do either at the level of their finance ministry or at their fiscal council level which means you know bringing together a lot of the work we already do on things like sensitivity analysis and highlighting risks but perhaps focusing that into a single publication. So those are the main changes that we've seen so far. The other ones that have been proposed for us we should start looking at opposition party policies for example that we should do distribution and analysis have been raised at various times and rejected but the core economic and fiscal forecasting role has basically been unchanged we've developed it and refined it as we've gone along but there's not been a big a big shift. So within the remit that you've got you've got the freedom to produce more reports or less reports or how you produce the report all of these kind of things you've got freedom to do that? The charter sets out some things that we must produce so we have to you know we were in a situation where we had to produce a fiscal sustainability report every year we now we can now interpret that effectively as producing it once every two years which will allow us to alternate it with a fiscal risk report. We are required to produce forecasts twice a year to accompany the budget and the autumn statement. We're required to produce a report that looks back and compares our forecast performance with what the what the outturns in data have been but the additional as I say the overarching duty and we're allowed to fulfil that as the in the way that we want to has allowed us for example to produce a detailed working paper looking at why it is that the public finance is evolved as they did over the course of the of the recession and the financial crisis and the subsequent improvement we've produced papers looking at particular measures of inflation so there is the scope to produce additional material which we think is helpful to our overall duty of reporting on and explaining the our views of the sustainability of the public finances so it's coming back to that to the response I made to the convener initially you have overarching duty some things you can do some things you can't do and then that's the context in which you operate and that's helpful because that's been things that have been suggested that the Scottish fiscal commission should be able to do as well I mean another suggestion has been that a parliament in Scotland might ask the fiscal commission to produce extra reports or anything is that something that happens if the OBR it hasn't happened this occasionally we're asked for particular bits of information and obviously we try to be responsive not just if parliamentarians but other people are asking questions about the the forecast that we do can we publish additional data etc I mean we don't have a you know a pot of spare resources that were you know that means that we can regularly take commissions of somebody saying we'd like you to do a big report on x or y if people can make the case for us for saying that as part of our duties you know wouldn't it be helpful to look in more detail at x or y oil prices all these sort of things where we can take that on board but it's not as though we have a huge slush fund of uncommitted resources that we can deploy on on particular reasons that people come up with useful I suspect that's going to be the same for SFC the whole question of relationships and the independence question keep we keep kind of trying to deal with and you know we get different suggestions because on the one kind of one extreme you want a very interactive approach and influencing things as they go along and on the other hand it's been suggested to us that the SFC particularly should have a much more you know formal arrangement and they meet ministers on particular days and we all know which days that actually meeting I mean how do you get that balance right how have you found that in the past it's not straightforward to set that out in advance of actually seeing how the process works out in practice we make a distinction between the interactions that we have with government ministers their political advisors their private offices where we you know we log on the website the meetings that we have with them when particular you know forecast material was formally passed over in one direction or another so that's that's important and useful but also we you know we rely enormously on having a good interactive day-to-day working relationship at staff level between for example the officials in our office who you know look at the details of the revenue forecasts and the particular officials in HMRC who are working on those sorts of forecasts and you know it's very important to us that that relationship works unimpeded that there's a mutual respect on both sides that the people in the in the revenue and customs or the treasury or the work and pensions department that we don't get the sense they're being lent on by their political masters in being willing to cooperate on that sort of on that sort of basis so there will be some people and when we embarked on this process my swedish counterpart said that he just did not think that the OBR could be genuinely independent by having that sort of behind the scenes interaction but as I say if we didn't have that we wouldn't be adding anything to what the IFS does already in the Scottish context it's there's a slightly different as it were opportunity because you have a draft budget before a full budget so there is a world in which you would have no interaction prior to the draft budget then the commission and then that's an opportunity to take on board the recommendations but you know as I say I think the way in which it's seen at the moment is that there should be an opportunity for the government to basically you know take on board advice at an earlier stage so you end up with quote unquote a better forecast at the timing of the draft budget but if you do that you're in the world in which you have private interaction so there's a trade off to be taken between you know how early you want their advice or recommendations or influence to be felt and from your point of view presumably having a you know timeliness of having a draft budget which is a good guide to what you're going to end up has attractions but the counter side of that is then you have the interaction in private in order for that to take place so there's no there's no right answer to that you have to decide you know where on the spectrum you want to be we're clearly you know because we're producing the forecast well at the end of the spectrum that has interaction and that means it's incumbent on us to be as transparent as we can both about the process and about how our forecasts have moved to to relay any concerns people have as best we can yeah I mean that's helpful I mean obviously the Scottish situation is going to be slightly different but you've obviously managed to get a kind of a balance so you seem to be happy with it and from what I can see other people are as well between the the interaction but maintaining the reputation of independence I mean do you think the reputation of independence is as much about the individuals and their integrity and how they're seen as a kind of formal laid down process when it's interesting that was certainly the conclusion when Kevin Page the former parliamentary budget officer did a review of the OBR in in 2014 he did a survey of external stakeholder say think tanks journalists etc etc and said you know are you you know do you have confidence and generally the answer was yes and they asked why and they did tend to say that it was more to do with the staff and the and the people and the way in which the work was done than the formal legislative underpinning as I say I think it would be very dangerous to conclude from that that the formal legislation and the formal rules don't matter I think they do and they're an important underpinning for that the other thing in practice that you know that you that helps you develop a reputation for independence is obviously the first time you produce a forecast that says that the government is not going to hit the objectives that is a set itself people say oh yes right they're more independent than I thought they were there was an occasion when the prime minister misrepresented by accident or otherwise the what we'd said about the relationship between austerity and economic growth and I wrote a an open letter it was the lead item on the 10 o'clock news that had an impact on people's views of our independence now clearly what you don't want to be in a world in which you deliberately go out and pick fights in order to to demonstrate that but I think it's the nature of doing the job that over a five-year period you're going to establish enough occasions in which you've had to say things that politicians don't want to hear that that that reputation can be built up on the basis of the way you're doing business year and year out I think that resonates with this committee we do that kind of thing as well I think sometimes and the final area I just wanted to touch on was the the forecasting I mean as understand it the treasury forecasting has been contracted out to you and I think that was the term that was used one of the one of the comments we got from John Swinney and the Government was that if the IF if the Scottish Fiscal Commission was to do forecasts the government would still have to do the forecast itself so it would be parallel forecasts but from what I'm understanding in your situation I mean the treasury is not doing parallel forecasts and then kind of checking up on you is it well it's certainly not publishing any forecasts they are not doing a sort of the going through you know they haven't got the scene it's not like man for man marking on the pitch they've not got somebody doing the equivalent job to everyone of our officials obviously the Chancellor I suspect says to his officials I'm going to get the OBR forecast in a few weeks time what do you think it's likely to say and I suspect that they will you know not go through the whole exercise but they're going to want to provide the answer to that sort of question the treasury may well do more sort of scenario analysis you know what do we think of particular risks you know to inform the policy judgment so I think they you know it's not as though they've got rid of every forecaster that they have there's nobody doing macroeconomics there's nobody doing fiscal analysis of course they are but the the nature of the you know the way they can add value is different and I don't think they would they add value by just completely replicating what we're doing they're having to provide you know the Chancellor with a commentary on the way in which our forecasts are likely to evolve and that requires them to be to be looking at them but it is different from actually just having a parallel you know set of numbers so you know in Korea I think in the United States with OMB and and CBO you just have two sets of numbers that you can compare in public that's not obviously the way in which it works here thanks so much I just wanted to ask I guess as long as this country is not independent there are you know a lot of strands to the kind of communications that go on if if you Mr Chote were heading up the Scottish Fiscal Commission what would you be recommending that your relationship with the OBR would be well as I say I think the the relationship would be one in which you know you know from the from the standard point of view if I was you know my job was to scrutinize the Scottish government's forecasts what I would want from the OBR was such help as they were able to provide in forecasting the same things and being as transparent with the commission about the way in which we're doing that on the grounds that that would provide useful input to the commission in scrutinizing what the Scottish government is doing and we are trying to do that as I say as we do now we think hopefully that it is helpful in addition to being helpful for us to have the the fiscal commission involved in the discussions we do of particular forecasts ahead of each autumn statement ahead of each budget I hope that's also useful to them because we are in a sense you know they're not doing the forecast but we're having to answer some of the same sorts of questions how do you interpret the fact that the revenues of a particular tax came in higher or lower than we and all the Scottish government were expecting is that news or is that just volatility in the data is there some way of explaining that if there is a way of explaining it do you think it's going to persist or not so uh as I say I think what I would want is the OBR to be as transparent as possible and how it was doing its job giving me raw material that I could use in doing my job and I hope that that's what we're what we're doing and if they feel that we can do more we're very happy to do it thank you and given that there is of course you know the rest of the budget that that the reserved matters that Scotland doesn't currently involve itself with is there a relationship then with the with the new Scottish fiscal commission and the what used to be known as the Scottish office and how does that fit into the mix with it with the with the OBR where we don't have any interaction with the Scottish office at all um the I mean I guess again it's depending on how widely the remit of the Scottish fiscal commission was set it may be the it may come to the point at which the Scottish fiscal commission would necessarily have an interest in you know more of our forecast than merely what we're forecasting for the devolved taxes but again we're trying to be as transparent as we can about that anyway uh and you know if there were particular questions about the rest of the forecast or coming back to the earlier discussion we had about the assumptions that we'd made about what was going to happen to government expenditure over a five-year period some of which would not be covered by a spending review then uh then there may be more areas of of uh of mutual uh interest uh needless to say I mean it's not it's not a devolved issue but there's been a lot of interest as you well know from this committee and others about what we've said on north sea oil uh forecast but we hope to be as transparent as we can about those as well as about about the devolved taxes okay and and finally there's been some criticism of members of the the fiscal commission in scotland also being part of the economic advisory group to the Scottish government do you see any conflict of interest uh I wouldn't have said so I my understanding of the nature of the of the advisory group is that it's not a direct it's not very much you know involved in the the detail of policy formulation where you might have greater concerns if they're providing external advice uh as academics uh I suspect that's probably not too great an issue and presumably the the work they're doing that in that role is relatively transparent to the world of what they're saying and about what they're what they're saying I'm not hugely knowledgeable on on exactly what they've done but it wouldn't strike me to start with there was necessarily a problem with that okay thank you okay well thank you very much that's a concluded question for the committee we just have a couple of final points I would want to bring to you Robert I'm just wondering if the Scottish fiscal commission is in any discussions with the OBR about the kind of methodologies you use in forecasting that evolve taxes yes well obviously when the the commission was set up to begin with we uh we had a discussion uh with them and as I say methodology issues arise whenever we're having you know a discussion in terms of the particular you know fiscal event that's taking place do we still think the methodology is working okay are we do we think there are particular reasons for example on those forecasts where we're identifying the Scottish share versus of the UK total are there reasons to believe that you know there are asymmetries which means that share is rising or falling those are things that you know we obviously do discuss every time we do the do the forecast and I'm very happy to do so and there's an agreement on those methodologies on the way that they're actually deployed was not there's not an agreement on you know we produce we produce our forecast and we try to be open and and get the inputs into that as we can the Scottish government obviously produces its own forecast they haven't asked us to contribute before they publish them to the discussions on those but again we'd be very happy to do that if they if they wished us to do so I think for things I mean if you take the example of the LBTT which is you know evolving from the costing of a new policy to something where you're going to be producing forecasts year in year out it's very useful for us to have a discussion about what are the best approaches to doing that and the obviously the fiscal commission has produced a paper in which they've talked about the methodology of this when the the changes were made we explained in detail why we'd made the forecast that we had and so thinking you know clearly in an ideal world we'd have a shared methodology for producing the forecasts and if we want to make different judgments about how to apply that methodology or we're doing forecasts at different times of the year the answers will come out differently that said you know there's no requirement for us to have them the same methodology if we can agree on one that works for for both of us that's great but if people don't want to agree on that that's fine as well as I say it comes back to the point of ideally we and the Scottish government helped by the Fiscal Commission would I think ideally be in a position where both of us can explain why the forecasts are different if they're different but not to be particularly anxious about the fact that they are different that's inevitable whenever you do a forecasting process or if there's any difference in the methodologies as long as you can explain exactly how you got from got to assess the forecast and the way you have done I think that's right I think one of the one of the difficulties I mean LBTT being another good example of if you did have different methodologies working out from how accurate the forecast is whether the accuracy of the forecast is a result of good luck or a better methodology is very difficult I suspect that whether a particular forecast of LBTT at any particular time horizon is more or less accurate in a purely arithmetic sense is going to depend much less on the particular methodology that's being used than on whether you happens to make the right judgment on the level of transactions which is hugely important these things so I think there's a I would be wary of a world in which you basically said we have alternative methodologies and after two or three years we'll have enough data to know which is the better methodology unfortunately you need an awfully long run of data to be able to distinguish from luck and judgment and normally by the time you have managed to distinguish that the policies changed and you're not dealing with the same thing anyway so you know it's helpful but I you know it's not the spot of all competition okay one of the commission's functions will be to assess the Scottish rate of income tax forecasts or rather the Scottish Government's forecast of Scottish rate of income tax receipts I'm just wondering what level of access to HMRC data will the Scottish Government and the commission require to do those forecasts well I think for for for them and for us you we know we respect taxpayer confidentiality so the there is a limit to how disaggregated the information that can be provided to you is on as I say we don't have access to that and I wouldn't expect the Scottish Government or the Scottish Fiscal Commission and the same issue arises for us with things like corporation tax where it can be particularly important because you can have a relatively small number of firms making large contributions in in in particular sectors I think the big difference as we've discussed before with the with the Scottish rate of income tax is that we are moving into a world in which taxpayers will be explicitly flagged as whether they're Scottish taxpayers or not rather than relying on survey estimates of the the Scottish share so that and that will be you know of help to both of us I think in in clarifying that looking forward obviously I mean one you know one important issue and who knows whether it will arise or not is if we get into a world in which the Scottish rate is different from the UK rate that starts to raise the question of how is behaviour on both sides of the border likely to respond to that and that again is exactly the sort of issue where I think it would be jolly useful for us to have a discussion with the people who are doing the forecast and scrutinising the forecast in Scotland about what you think the answer to that question might be but I wouldn't be at all surprised if people come up with different answers because I think it would be a very difficult question to answer. Well in actual fact we're going to be putting some of those questions to Professor David Bell in our third session this morning so I'm sure we'll be very interested in that I'm sure you will be too. Well that's concluded my questions and indeed the committees. Once again Robert I'd like to thank you for assisting the committee by giving evidence this morning I hope next time we see you it will win the flesh so thank you very much. Right. Anything else you want to sorry anything else you want to cover that's not been touched on or anything other further points you want to make? No I think it's been very comprehensive that's covered everything. Okay well thank you very much Robert. Thank you very much. See you soon. Cheers. That being the end of that session I'm going to call a five minute break for a change of witnesses or in this case a change of technology and also to give members a natural break. Okay I'll now reconvene this session and next we will continue your consideration of the Scottish Fiscal Commission Bill by taking evidence from a panel of three witnesses. I therefore like to welcome to the meeting Dr Jim Cuthbert, Professor Ronald McDonald and Matt Taylor. Welcome once again to the finance committee. Members have received papers submitted by each of our witnesses so we will go straight to questions. And the first question actually Mr Taylor is on something which we haven't really discussed this morning at all so I thought we'd freshen things up a wee bit by going to that which is paragraph 16 of your submission in which you say the Smith commission made a number of proposals about no detriment when fiscal changes are made by the UK or Scottish governments. This is likely to be difficult to implement in practice and the commission could play a useful role in reporting on the mechanisms for achieving no detriment. I found this a very interesting paragraph. I'm just wondering if you can expand a wee bit on the role in reporting on these mechanisms, how that would actually work in practice in relation to the commission. Certainly convener happy to do so. I think I'd start with really the principles of where we're coming from and where the point is coming from here and that's really we think that the fiscal commission will play a really strong role in giving assurance and helping transparency along around all the areas of fiscal estimation that affect the Scottish budget and clearly where the Smith commission principles to be implemented then the whole no detriment principle and how that works will be one of the key factors in that and we think that the commission's likely to have a valuable role in playing in looking at some of that. How that works in practice I don't think we've got any insight as to how that might work in practice. We might speculate that it might be a degree of economic forecasting built into the way in which no detriment works and therefore we think that there's a role for the commission potentially in looking at that going forward. Thank you, David Viller. Panelists want to comment on a particular issue. Jim. Yes, I think that it was a good point and I very much agree with it. I think that there's a real danger that discussions about the Scottish budget post Smith just degenerate into a yabw exercise between the Scottish Government and Westminster and it would be very important if the Scottish Fiscal Commission can play an independent and well-respected role as an arbitrator in a sense in that kind of dispute. It's something like the role that the IFS plays down south just now. If the IFS comments on a Government policy then that comment is generally taken very seriously and people think about it. If the Fiscal Commission can play that role in respect to the arguments and debates about how the post Smith fiscal arrangements are working that would be valuable. So clearly you see an expanded role for the Scottish Fiscal Commission with debate right in saying that? Yes, very much so. I try to make the point in the paper that forecasting the devolved tax revenues is going to be extremely important but the operation of the remaining half of the Scottish budget is going to be very complex and it's not something that's been done well so far. I was looking recently at a paper by the IFS on non-domestic rates and you'll be aware of the point but in the sense that the IFS identified the problem that had been there and estimated that Scotland had gained the tune of £1 billion essentially because down south the Government had been switching resources away from local authorities into central Government expenditure and as it did so because the central Government department think about a higher comparability percentage we benefited through the Barnett formula. That sort of thing has in a sense slipped through under the radar. There has been much more scope for that sort of point to our rise than needed to be identified and argued out and I think the Fiscal Commission should be playing a huge role in that. I've been sticking with you, Jeremy. You basically said in the second paragraph right at the start of your paper that the role of assessing risks should, in many ways, be more important than the actual production of forecasts so that's really a continuation of what you've just said there, isn't it? Yes. I very much welcome what Robert Chote said and when he said that they were going to be starting to produce regular reports on fiscal risk and that's something that we've been arguing for for some time. I think that Robert gave perhaps a slightly too glowing account of the IFS's success. I think that in many ways the IFS is over-constituted on forecasts. I may be doing him a disservice here but he detected a slight shift in the way he was talking about forecasts because, as I recall and I may have got this wrong, I always thought that the IFS represented their forecasts as median forecasts. In other words, the outcome was likely to be above it as below it whereas he definitely said in talking on television that the current forecast was the most likely outcome. That is very relevant because I would not regard the current OBR forecast as being median. The risks seem to be all on the downside and I think that if there's been a little shift of ground there, that perhaps is concealing some of the risks and the way that some of the risks around the current OBR forecast are lying, which would seem to be on the downside. Professor MacDonald, you said in your paper that it would make sense for an independent body to assess the sustainability of Scotland's public finances and adherence to any fiscal rules devised. Yes, that's right. I mean just linking up with what colleagues were saying just now. We've covered quite a lot of ground there I think. I agree that in moving forward the no detriment issue has to be taken very seriously and I know that you, Jim, have highlighted the risks associated with the form of indexation that we may have. So I think, as Jim said, in moving forward I think it is important that some group scrutinises very carefully how the block grant is adjusted in moving forward, for example. I have argued to this committee and elsewhere that we should move away from Barnett and that would, I think, if we move to a more transparent and open system deal with some of the perhaps trickier no detriment problems. So I think that that is something that the fiscal commission could look at. So in general terms, yes, I would favour them to have a potentially broader role because there's no one really out there who can do this as an alternative to the fiscal commission if it is set up in an appropriate way. Okay, thank you now. I'm not jumping in about forecasts at the moment, because there's been so much to them forecast in the last session, I'm not. I'm going to try and leave some of that to my colleagues around the table. But one of the things that you've also said, Professor Macdonalds, you've talked about independence transparency. He said you'd give priority to independence, transparency and openness in the working relationship between the fiscal commission, the Scottish Government and other public bodies, and you went on to say, I think that there should perhaps be a clause ruling out members transferring from our body such as a councillor like an adviser straight to the fiscal commission without any lag in service. Now, obviously, you've heard Robert Chote, he was asked a question about it along these lines, and he basically said that as long as there's transparency, he doesn't see any difficulty given the fact that the people who tend to serve on these bodies tend to be fairly eminent and well-respected individuals. So what's your feeling with regard to that? Well, indeed, as I suggested in my comments, it could work both ways. It could be because they have been on the council of economic advisers, they may want to be seen as even more independent than someone who didn't come from that background. So there's that site to it as well. I think the only point I was making there was that there may be a perception, and indeed I think there is a perception in the public mind, that if you've got a body which is advising government ministers, can they actually separate their advice from being purely independent? I mean, we know, for example, that the UK Chancellor has a group of economic advisers, he is a council of economic advisers, we're one of them to be appointed to Robert Chote's job. I think there would be serious questions raised about that. Particularly from Robert Chote? Yes, exactly. Mark, in paragraph 5 on the same theme in terms of the Audit Scotland submission, you say that overall the proposals of the bill appear to provide a significant degree of independence for the Scottish Fiscal Commission. That could be further increased by moving the balance of influence on appointments and financing further towards the Parliament. How would you see such a mechanism working? Who would be the who within the Parliament would effectively fulfil this role, do you think? I guess detailed questions of the arrangements for the Parliament are for the Parliament. I think there's similar appointments, Auditor General appointment, for example, where the appointment is made effectively by the parliamentary appointment, and that's our experience, and our experience is that it supports the independence of the auditor general role very well. The general point that we make is that independence is of course important, and having the Parliament more involved and ministers less involved help to deal with some of the issues that have been outlined at the moment, and that the perception of independence is as important as how that happens in practice. We also make suggestions, of course, which we may come on to, about how the funding works and the same principle applies there. The perception around who has control over the funding and financing of the bodies is important, and we think that anything that moves the balance towards Parliament and away from ministers would be helpful to strengthen that. Having said that, a lot of what's in the bill really does emphasise the independence of that, and we give credit to that in our submission. In your paper, you say that the Treasury should be added to the list of bodies with whom the Scottish Fiscal Commission will need to have a good and well understood working relationship. I'm just wondering if you can talk to us a wee bit about how you see the nature of that relationship working in practice. I think that the answer to that is, I don't know, because the Treasury is a strange body, but in an ideal world, if the Fiscal Commission is going to fulfil this broader role, which certainly I would recommend, and colleagues are recommending as well, of taking an overview of what is happening to the whole budget, and I think that it is essential that it does that, then it will have to have assumptions on, for example, what is going to drive the Barnett formula, which is going to be the trend in devolved public expenditure, that is public expenditure and devolved services down south. Ideally, it would need to know a bit about how that is going to shift between different programmes. I mentioned earlier the importance of the Westminster Government shifting expenditures from local government to central government, and the effect that that has on the Barnett formula. It will need to have information assumptions on those aspects, and it will need to have assumptions on the aspects that will drive the indexation, if we are going down something like the road of total indexation, which will be assumptions about the growth, for example, in the income tax base in the rest of the UK or the whole of the UK. The only people who can give those assumptions are Treasury and HMRC, and Treasury will be essential, because it will depend on Government policy. How willing Westminster Governments will be to engage in a meaningful dialogue on those points, and how willing the Treasury will be not to be a dog in the manger, I do not know, and how unsecure is the proper corporation, I do not know. However, it will be very difficult for the physical commission to do a proper forecast of the overall Scottish budget without good relations with Treasury and with Westminster. You talked about the whole indexation. In fact, much of your paper covers that particular issue, including some mind-numbing calculus that you have put in there, which I am going to ask Richard at some point to go through for the committee, but we will do that in private session. In that, I could not let you away without mentioning that your quote that Scotland would always ultimately be better off under fiscal autonomy than under whole-time indexation. I wonder how you come to that conclusion, if you can talk us a wee bit about your concerns about whole-time indexation. The mind-numbing calculus was not primarily for your eyes. That followed from an appearance that we had before the House of Lords Economic Affairs Committee. I made the point there about fiscal autonomy and the House of Lords asked for proof, and the paper there is the proof of that assertion. However, you may remember the previous appearance before this committee. I said that we would not know how the indexation is operating until it is modelled. I then sat down and tried to do some modelling and published a phase around the paper on modelling the indexation arrangements that has been sent to the committee. What came out of that was that whole-time indexation, as it was originally proposed, is very unstable. Two main drawbacks are inequitable, because if the Scottish Government set a neutral tax rate—the same tax rate as the rest of the UK—then whole-time indexation would be neutral only if the Scottish tax base grew at the same rate as the rest of the UK tax base. Given that the rest of the UK population is growing relative to our population, that would require that our per capita tax base grew faster than the rest of the UK. There is an equity point, but there is also an instability point that if we fail to meet that neutrality condition, if we fall below it, then what would happen to the revenues of the Scottish Government would go down and down and down, and eventually, if the system is led to itself, it would become negative. That is never going to happen, but it is an indication of the pressures that, in a sense, are built into whole-time indexation unless we meet the target of growing our tax base as fast as the rest of the UK. I was arguing to the House of Lords that whole-time indexation was, in a sense, a non-starter. I was also pointing out that I made a suggestion to the committee that improvement to whole-time indexation would be to correct the indexation factor for relative population movement. Again, in the Fraser of Allander paper, I worked through the implications of that. That turns out to be a better, but not perfect, by no means perfect solution. It is more equitable in that neutrality is that we grow our per capita tax base at the same rate as the per capita tax base in the rest of the UK. It is more stable in that, under reasonable assumptions, the system will at least relative per capita spending will tend to a limit. However, that limit is one that would not be politically acceptable, because it would imply that per capita spending in Scotland was about half the level in the rest of the UK. I was surprised when the figure put half tumbled out so neatly from the modelling, but it does. I was arguing to the House of Lords that both pure whole-time indexation was very unacceptable and that adjusted whole-time indexation was not really acceptable. I was putting forward another proposal altogether, which was that maybe the indexation of the abasement should be based upon some fixed factor that is indexed—X per cent in real terms, where X is some fairly modest, initially some fairly modest factor, say 1 per cent. That would have big advantages. It would need to be subject to regular review, and the mechanisms for regular review would need to be well understood. I go into that in a bit of detail in the House of Lords paper. However, it would also have secondary implications for the problem that we face of indexation. It would make the whole indexation and forecasting problem much simpler. We would not need to have an assumption from UK Treasury about what was happening to the overall UK devolved tax base. We would just apply what the appropriate factor was at the time. There are a number of big advantages, it seems to me, for quite a radical rejig to the indexation arrangements that are currently being worked out for the Smith commission. I will let colleagues in to comment on that. Obviously, what we are talking about is the Scottish Fiscal Commission Bill, so we do not want to wander off the subject too much, but I will just share a view on where the role of the Scottish Fiscal Commission could perhaps come in in terms of those discussions and details, Professor McDonald. I agree with Jim's point there. Indeed, I argued in a written submission, I think, to this committee before that it should be a separate fixed factor that we index the growth of the block grant too, and I did not do it in quite a sophisticated way, as Jim did it, but, nonetheless, the point was there. I do agree that, in moving forward, it is very important that these issues are addressed, whether we retain Barnett, what the form of indexation is. As I said earlier, there must be an independent body looking at this, and, if there is no other independent body in town, it would be good if the Fiscal Commission were tasked with taking those issues forward. Is that a view that you would also share, Mark? Of course, we are not going to the policy choices that are available to how this works, but what is fundamentally important is that it is clear how it works and it is transparent how it works, and the public have confidence in how it is working. We see the Fiscal Commission as being able to play a role in that, both around and how the block grant itself works and how Barnett functions, if that continues to be the way in which that is operated, but also how the block grant adjustment works. One of the points that we make in the paper is that we have block grant adjustments now, and there may be a role for the Fiscal Commission now in providing some views on how that is operating at the moment, and it should not be something that waits necessarily until the Fiscal Framework and Smith is implemented and considered. Thank you very much for that. I will open up the session now to colleagues around the table. A few are keen to come in. First, we will be gathering to be followed by Deputy Secretary of State for the Interior. Good morning. First question is to all or any of you. When we get the next draft budget, which will presumably be at the beginning of next year, and we will get the Fiscal Commission's views on forecasts for that period, is your view that we should get the forecasts for the entire economic period, if you like, or the forecast period of three or four years, as opposed to just the single year or the budget that sits alongside? Is there merit in having medium-term projections instead of just single-year projections? I would argue that, yes, there is merit in moving towards a longer horizon, really for issues of sustainability. Certainly, the UK Government has a medium-term budget forecast, and if the Fiscal Commission is to be charged with looking at, say, fiscal rules, which will presumably be about, at least in part, sustainability, then I think, yes, that the short answer is that we do need to look at a longer horizon than the annual horizon that they are currently charged with. I would agree with that. I think that there are a range of different horizons, and it is not necessary to produce forecasts every year on all those horizons. Another requirement, which I think is very important, is that somebody looks forward every now and then 15, 20, 25 years and says, how are things going on present trends? What will the finances of the Scottish Government be like on present trends in 15, 20, 25 years? An authority review on that will be fundamental to the long-term discussion about how Smith is operating, whether there needs to be an adjustment to it, and it will also be fundamental to the Scottish Government's long-term planning of its public expenditure strategy. Every now and then, when we need a very long-term forecast, more frequently we will need medium-term forecasts, and obviously we will need annual forecasts every year. Yes, different forecasts, but maybe in different time, different periodicities of production. The second question is about the bill itself. What is your view on having something in the bill relative to forecasting for the Fiscal Commission? As the bill is drafted, it does not mention forecasting at all on it, the Scottish Government has said various things over the last year, one of which previously was that they felt forecasting would be duplication. Last week or the week before, they basically said that there is nothing in the bill to prevent the Fiscal Commission from doing its own forecasting. There are certainly different positions over different times. My question is, do you think that something needs to be in the bill so that, regardless of who is in government, there is a clear steer for what the Fiscal Commission should be doing, or is it something that can be left out of the bill entirely, and it is just a case of the commission deciding what to do? Well, certainly I said in my written submission that there should be something in the current bill, even if they don't do it in the short term, the forecasting. It's a tricky one, because I think in the short term, and again I put this in my written submission that Scotland's a small country, we know from previous discussions with this committee that there are data limitations within Scotland. It's only, I think, a halfway house, how one of the civil servants put it. So there are data limitations, so that means that any forecasting model that's going to be produced, I think, is going to be relatively small, relatively tractable, and if the Scottish Government are already building and working on that model, it seems to me with these data limitations that if we say to the Fiscal Commission that you've now got to start building a model, it might end up as being a very similar model, especially with the data limitations. So my argument is that you have a kind of tapered approach that in the short term the Fiscal Commission is a scrutineer of the Scottish Government's model, but in moving forward if the Fiscal Commission is to be truly independent, it should be able to produce its own forecasts, and as we move forward, presumably the data will become available to make what would be perhaps an alternative model to the Scottish Government's forecasting model, and then perhaps in the longer term the Scottish Fiscal Commission becomes a bit more like the OBR, it maybe is charged with doing all the forecasting, because in the longer term it seems to me that if the forecasting becomes more sophisticated, I don't really see the point of the duplication of the forecasts, if the Fiscal Commission is to be a truly independent body. If I may convener, just to come back on that question, I think that from our perspective what's fundamentally important is that it should be open to the Scottish Fiscal Commission, how best to assess reasonableness, and the bill should make sure that independence is protected, and we think that there's possibly some risks in overprescribing how it does that in some way. I think that the sentiment of the conversation today, and I think that it was reflected this morning as the real opportunities for how that might develop over time, and I think that making sure that the role of the Fiscal Commission and its independence being protected in the bill, I think that you've got some reassurances about that from Government at the last meeting, is fundamental to how that works in practice. I agree with what colleagues have said. I mean that one can obviously argue this both ways. I think that the important thing is that the remit of the commission should be broad so that it wants to forecast it can, and that it will be resourced appropriately. I would argue that it should be producing long-term forecasts from time to time, but there are certain dangers with the forecasting role. It's resource intensive, and there's a duplication point. If you're concentrating on forecasting, in certain circumstances there's a tendency where you tend to assume the success of policy perfectly legitimately and underplay the uncertainty surrounding what's happening. There are arguments in both directions, so have the remit broad and resource it well. Moving on to another area, Professor MacDonald and Mr Taylor made the point that we should specify the length of office period for commissioners on the face of the bill itself, so you've both expressed that view in your written evidence. Is that something that you feel strongly about, or is it just something that's on balance that you think ought to be done, or is it something that is absolutely critical that it's on the exact number of years would be on the face of the bill? I think that it's important, again, just in terms of the transparency and independence of the group. I think that there has been mention—I think that the cabinet secretary indeed mentioned that there should be a separation between the political cycle and the appointment cycle, and I think that that is very important. I see no reason why it shouldn't be stipulated on the bill. Just to clarify, Mr Brown, the intent of our submission isn't to say explicitly that there should be a number in the bill, it should be x number of years, but rather that the bill enshrines the principle that the cycle of appointments should be independent from the electoral cycle. There's a number of ways, I guess, that it can be drafted, so it's not about necessarily saying a number, but enshrining that principle that it's not an appointment, and that this hasn't been a practice in this country, but it's not to say it might not be in the future. It's not an appointment, it starts at the end of a political period and ends at a political period. That operates entirely independent of the politics. Okay, no fairer, thanks for that clarification. I'll stick with you for now, Mr Taylor, if that's okay. Just the another interesting comment that Audit Scotland made in their report was that the question to whether we might try to shift the balance of influence away from the Scottish Government to more towards the Scottish Parliament. Paragraph 22 seemed to capture that, but could you expand on what was behind that, and how specifically could that principle be applied? I touched on this with the convener earlier on. I think that our thinking is that the perception of independence is as important as the practice of independence here and a way in which, rather than the Parliament having a veto on ministerial decisions to appoint, that while ministers and Parliament have an interest in who the appointments are, that ultimately those are parliamentary appointments. I think that our suggestion is that if that balance can be shifted towards Parliament, that would strengthen the perception of independence, which we think is important to this role. Okay, when you say shifting it to Parliament, in practical terms, would you envision, for example, the finance committee having a more proactive role earlier on in the process, or are you meaning Parliament as a whole? I would not like to prescribe how Parliament might go about that, but I would expect it to be at a committee level. Obviously, the way things are currently constituted, the finance committee is going to have a significant interest in that. Okay. Last issue, Dr Cuthbert, just in terms of your own evidence, you made the point that something that comes into the bill. You do not feel that a copy of any report should go to ministers first. Can you just expand on that point? Yes, I think that ministers, if there are close working relationships, working level, between the physical commission and civil servants, there should be and it would be desirable, or ministers should have a pretty good idea of what any report is likely to contain, but giving them a copy too soon in advance would open the door for them on occasion to try to influence what is coming out. I suggest that it cuts the 24 hours, but it cuts the fairly short period would be appropriate. Okay. That's helpful, thank you. Thank you. John Toon before by Mark. Thanks, convener. I mean, we've touched on it already, and we touched on it with Mr Chot earlier on the whole question of if there's two bodies doing the forecasting, the Scottish Fiscal Commission and the Government, that would be duplication. Now, his answer to that seemed to be that the UK Government, the UK Treasury, was not doing forecasting, or at least was just doing little bits to challenge the OBR. Clearly, there is a resource implication here, because Dr Cuthbert, you said that the Scottish Fiscal Commission should be resourced appropriately if it wanted to do its own forecasts, but that could be quite a sizeable resource. That would leave us in the position of, if they're going to do forecasting, they need a lot more resources, if they're not going to, they don't need so many. I'm just wondering how we work our way around that. I think probably the answer is much as it's done with the OBR. In a sense, the OBR is the forecasting body, but as Robert Chot said, there's 120 civil servants at the Whitehall who, at appropriate times, are working away doing this. Initially, when the OBR—I don't know what the current situation is when it was set up—they used the Treasury model, and it was important that they developed the capacity to run that Treasury model themselves, which I think they have. However, there is a very strong symbiotic relationship between the OBR and Whitehall, as I understand it. You couldn't really say that the OBR is doing independent forecasting with that input. I see nothing wrong with working towards a similar model here. I think that a safeguard would be if the emphasis was not so much just on the production of a forecast but on, yes, a forecast, whoever is producing it, whether it be the physical commission or the Government. However, what the physical commission is doing is producing a very reasoned assessment around that forecast, saying, here are the judgments that have gone in, here are the risks that are attaching to those judgments unbalanced. We think that, although that forecast is reasonable, there are significant risks of that or of that. That sort of assessment around the forecast would, I think, increase the authority of which it is regarding. It wouldn't matter so much who is actually producing a forecast or how that forecast was produced. OBR is not really completely independent and can't be? I think that de facto is the case. There is no criticism in the sense of their bona fideas, but they are working extremely closely with the Government. A lot of the input that they are getting is from the Government. As Robert said, there are 120 civil servants on occasion working in Whitehall for the OBR or with the OBR. In those circumstances, inevitably, there will be a lot of cross-fertilisation. That is not political influence, it is just cross-fertilisation. The forecast that the OBR produces must be influenced by Government thinking. There is also the question that I mentioned to you before. When you are forecasting certain things, in a policy-influenced environment, the rational forecast will usually be on the success of policy because you are aware that somebody is pulling leavers to try to bring about a particular end. Unless you have very strong reasons to believe that those leavers have become operational and the ship is going to hit the rocks, the rational forecast is that the policy will succeed. The OBR has always assumed that at the end of the five-year forecasting period, the Government will have got the economy back on track under the operating of full capacity in a low inflation environment. That is a forecast that has been successfully in the sense of pushing further and further back. It is not that they are politically dependent on making that forecast. In a policy-influenced environment, usually that is the rational forecast to make. For both of those reasons, the OBR forecast is not truly independent, and that is no criticism whatsoever of the bona fideas of the OBR people. If I understood Mr Chalk correctly, if the OBR makes a forecast, the main people who would challenge that would be the IFS, and they would question the OBR forecast. In our case, if it was the Scottish Fiscal Commission producing the forecast, who would challenge the Scottish Fiscal Commission? That is where my own view would be that there should be less emphasis on the forecast. It does not really matter who produces the forecast, whether it is the Scottish Government or the Scottish Fiscal Commission. The important thing is that, as well as the forecast, there is a reason to assessment. We have done some sensitivity analysis. Here are the key parameters surrounding this. Here are the sensitivities to variation of these parameters. Here are the risks attached to these parameters. Beyond that, there are sort of black swan events that no one can predict, but they are out there, and here is an assessment of what might happen there. If you have that sort of reason to assessment surrounding the forecast, it does not really matter so much who is producing the actual forecast, you are getting that understanding round about it. I do not know whether you want to comment on that. Professor Macdonald, you used the word evolution, I think, and I picked up on that, and I asked Mr Cho about that. Is that how you see it? We do not want a fixed picture here, we want something that is going to develop? That is how I saw it. Obviously, the Scottish Government already started on the forecasting model. For various reasons, which I mentioned earlier, I expect that it will be a relatively tractable small model. If you were to ask the Fiscal Commission to produce a model, they would probably end up with something that was quite similar. In the first round, I would envisage that the Fiscal Commission would simply be commenting and criticising the Scottish Government's model. As you move out from that, it may be the choice will be to develop their own model, and they should have, as we said earlier, the ability to do that. It may be that they decide to stick with developing the Scottish Government's model. In broad terms, I agree with Jim's point that, as long as there is transparency about the model, the assumptions particularly that are made and the uncertainty with which we regard those assumptions, in a sense, either group could be running the model. At the end of the day, I think that this summarises what Robert Choate was saying, that forecasting is as much an art as a science. We cannot write down an economic model, press a button, get some results out and we then take these results. Even if the world were certain, that would not work. There has to be some art, and the art comes around the assumptions that are made with respect to particular coefficient numbers that the data throw up, which we do not regard as reasonable. We have to make some assumption about them, which gives us reasonable forecasts. I think that, as long as the art, the assumptions part is transparent, then, in a sense, either group could actually do it. However, in the longer term, we do not need duplications. There should be a choice between either the Scottish Government continuing to do it or the Fiscal Commission. My own view was that, if the Fiscal Commission were an independent group, it may be better to let them take over the running of the model in the longer term. If they do, then we get into the issues that Jim mentioned with respect to, well, you are going to have civil servant involvement with the group anyway. My view is that that would not necessarily compromise its independence, because a lot of what that is about—and I think that this is what Robert Chote was getting to—although they have a lot of people in the civil service working for them, it is a big model, of course. It is a huge model. It is a model of the whole of the UK economy. Really, they are providing data. They are providing data, as he said, on customs and excise data and pensions data. Presumably, there are assumptions hidden in there, which perhaps the OBR does not see. However, I think that the biggest assumptions will be made by the modelling group itself. In that sense, I think that they will be independent. I was going to ask you something, Mr Taylor. Do you want to say something on that as well? Very briefly. On the fundamental policy choice, is it government or is it the SFC that does the forecast? That is clearly a political choice. If the policy position is that the Government does the forecast and the SFC assesses reasonable illness, our point is that the legislature should not box in the commission on how it assesses reasonable illness and to have anything in the legislation that says, but you cannot do forecast. It would be strange to put the fiscal commission in the position where it might say, well, the best way for us to do this is for us to do our own forecasts, but the legislation will not let us. That is not what is in the legislation, but I think that that is the point that we are making around that. The other angle that we have here is the cost of the whole thing, and that is where the more flexibility we have, the less certainty we have over cost, which becomes a problem for this committee as well. Presumably, to the answer to that, it would be if the Scottish Fiscal Commission had a couple of years in the present situation and then they could come back and ask for more resources, I guess. I do not think that anybody is suggesting a blank check here, and that organisation will be subject to the strictures of public finance as we all are, but there is something fundamental about who makes decisions about resources and whether the Government is placing itself in a position, or future Governments, in a position in which it can restrict the ability of the Fiscal Commission to do a proper job, and I guess where those decisions make our point is fundamentally important to that. The point that I was going to raise specifically with you was in your report that you talked about independence and the whole concept of independence, and I wanted to ask you about that because you say that Audit Scotland, the Audit General for Scotland, the Accounts Commission are all set up in a way that establish their independence from Parliament and Government, and you have given some practical issues as well. Is it the structure that makes Audit Scotland? I have to say that, in my opinion, a lot of people's opinion on Audit Scotland is seen as being independent and quite a strong challenger of different parts of Government. Does that come about because of the structure and the rules that are set down, or does that come about because of the professional attitude of your staff? The short answer to that is both. I think that the structure is important, and I think that Robert Chote said that earlier, and I agree fundamentally with that. Of course, the structure is important, but also the behaviours and, in anodic context, the ethics that we apply in carrying out our work. The culture that we have in Audit Scotland is fundamental, and that has been given fundamental importance, and will continue to be given fundamental importance. That conditions how we do our work and allows us to have the engagement with Government and others in the course of the year and yet protect and maintain that independence. I think that the view that we have and the experience that we have is that level of engagement helps to reinforce our effectiveness as auditors, and it helps to reinforce our independence because we have a better handle on what is going on, and we will be able to discuss some of the nuances of issues as they come up, rather than having a more stilted formal approach where the independence is enacted in the rules that go around that relationship. Short answer is both. I could move to tease that out a little bit more, because we have said that appearance is important as well as the reality of independence. As I understand it, in some cases, an auditor would be in visiting the client or interacting with the client on a very regular basis, maybe even weekly, right throughout the year. Is there always going to be a danger that people do not see that as independent? I guess that what we are clear about and how we manage that interaction is the importance and the cultural importance of independence and how we go about that. We also have a number of practical rules as to how that happens. I think that our experience of that is that that interaction is fundamentally important to us, our ability to do our job well and being able to do our job well by having that interaction on an ongoing basis. We are always clear, the relationship is always clear, the professional duties on both parties are always clear and that ultimately we stand or fall by what we report at the end of the day. I think that you have given recognition to, I think that there is a strong recognition to the reports that Audit Scotland prepares, the audit work that auditors do on behalf of Audit Scotland. It really demonstrates that independence. Have you used the phrase culture of independence? Where did that come from? How did you get that? There are some organisational mechanics that are there about value statements and the like, but there is something that is very precious to both the Auditor General and the Accounts Commission on how they operate and how they expect us, Audit Scotland, to operate that is reflected in ways of working within the organisation. That is something that is established and the tone is set, I guess, in legislation going back to the establishment of Audit Scotland in the year 2000, but it is also something that is embedded in the audit profession and the way in which the audit profession operates and the ethics that go behind the work that we do. The legislation is important to create that. The tone of the political discourse around what is the body set up to do is important to create that, but there is an ownership of that that sits within the organisation itself, and I expect that, as the Scottish Fiscal Commission continues to operate, it becomes a statutory body and continues to protect and engender that independence, that it will do a similar thing. Okay, thank you. Thank you very much, convener. We've covered quite a lot of ground already, but there's a couple of points I just wanted to pick up on. Dr Cuthbert, you spoke about the relationship that the SFC would need to have with the Treasury, and I just wondered following on from the evidence that we received from Robert Chote where his view appeared to be that the relationship essentially boiled down to forecasting on devolved taxes, but it appears from the submission that you've given that there's a wider consideration here around the impacts on the block grant, which obviously will then have an implication for forecasting and also for the policy around taxation, but the forecasting as well. I just wondered if you wanted to maybe go into a bit more detail around that. I think that it's an important point. The role that OBR has is very much simpler in some respects than the role of a body that is trying to forecast the budget of the Scottish Government. The OBR takes effectively government expenditure forecasts and then looks at the forecast and it has to forecast the economy and then various tax revenues. It's very simple, but in the Scottish context, if you're forecasting a Scottish budget, you've got the devolved Scottish taxes, but then you've got to forecast the operation of the variant formula and already gone into some of the difficulties involved with that. Those are things that have not been done well in the past. The operation of the variant formula has been a bit of a mystery, and what should have been quite predictable what was going to happen if the Scottish Government's finances were not picked up. There are other aspects as well, which are less predictable, because I said the shift in vital between expenditure and local government and central government responsibilities. Then you've got the additional complexities about forecasting the operation of the indexation of the abatements for devolved taxes and then the further difficulties about forecasting the abatements for the no detriment principle. That is going to be quite a very complicated process, and a lot of the relevant assumptions will come from Treasury about the evolution of devolved expenditure down south, about the evolution of the tax base down south and so on. A very close work in relation to Treasury would be essential if you're going into that full kind of forecast. Obviously, there's been talk around the memorandum of understanding that will need to exist between SFC and Scottish Government and revenue Scotland and others. I wonder whether your view would be then that the Treasury needs to have an MOU with the Scottish Fiscal Commission in order to enable it to get hold of the data that it requires? Absolutely. If the Scottish Fiscal Commission has got this broader role, which I think the general view of the committee has been that it should have this broader role, then it absolutely should have a memorandum of understanding the Treasury about the data that's required. Professor MacDonald, first of all I wonder if you would agree on that, because I know that you talk about the MOU in your submission, but you also talk about an arbitration mechanism beyond the MOU, which would enable there to be enable disagreements over reasonableness to be dealt with. I just wonder if you want to go into some detail as to how you would see that working and whether that's something that needs to be on the face of the bill or whether it's something that should be developed beyond the legislation. Yeah. Well, on the first point, I mean broad agreement with what Jim said. I mean obviously there will need to be, if things go ahead as they appear to be going ahead at the moment, then there will need to be a considerable involvement with the HMRC. For that reason I think there should be a memorandum of agreement with them. The second point is with respect to the point that I picked up. I had a perhaps a quibble I said about the term reasonableness in the Scottish Fiscal Commission's access to data or information from the Scottish Government. So what I was saying there is well what happens if the Scottish Government says well we don't think that's a reasonable request. There doesn't appear to be any form of arbitration at the moment in any of the documents as to how they would address that issue. So I think all I was flagging up there is that if the committee were to think that that was an issue that we should maybe or you should maybe think about how a rejection of a request for something which was unreasonable could actually be addressed. In terms of the periods of office I note that going beyond the idea of establishing the term limits within the legislation you've said that rather than just one term the opportunity to serve two terms should be available. Is there any particular reason that you've suggested that? Not really. I think other groups do it. I think it's practised with the OBR. It's certainly practised with the Bank of England's Monetary Policy Committee. I think if someone's seen to have made a good job of the period in office then there's no reason why they shouldn't be reappointed for a second term so I wouldn't rule that out. Just in terms of the, I'm trying to think of the best way to question this one, in terms of the Barnett implications that Dr Cuthbert has identified and I think you identify that as well in terms of the assessment that would need to take place. There are many people throughout history who have tried very hard to predict what will happen as a result of Barnett with limited success. How open do you feel that the Treasury will need to be in relation to Barnett in order for there to be meaningful assessment of the Barnett mechanisms and the implications of that? We'll need complete transparency in all of the assumptions that Jim mentioned with respect to spending on devolved spending, non-devolved spending, the whole issue of indexation. There will need to be complete transparency across all these ranges that impinge on Scottish revenue and again you alluded to the point that Barnett is not a transparent block grant system and that's why I and others have argued that we should be moving away from that and it's maybe something that the fiscal commission should be charged with along the lines of say the Australian body that looks at how the block grant should be evolved, how it should be defined in the first place and then how it evolves over time. That's the Australian grant scheme. I guess the final question and I'll probably put this to all the panel. In terms of the idea that's been suggested, I think it was Dr Cuthbert who suggested about the SFC having an arbitrary role between Scottish Government and Treasury. Obviously, when we produced our report around the fiscal framework, we did say that there needed to be some form of arbitration mechanism where disagreements arose between Scottish Government and Treasury. I guess the question that I would put is, one, do you agree with that and two, would you see SFC as the vehicle for that? I would have some reservations about SFC being asked to be commenting on Scottish Government forecasts but at the same time being asked to effectively hold the jackets between Scottish Government and Treasury. Can I just start by clarifying? I didn't mean that it should, in any sense, have a formal arbitration role. What I was meaning was that it would be good if it established itself as being, in the common view, authoritative and independent, much like the IFS is at present, so that if it pronounced on something, if it said, you know, the way things are going, the finances of the Scottish Government are going to decline by x per cent over the next 10 years, then that was seen as being something that was serious and well researched and which influenced the public debate rather than just being as one side in the debate saying one thing and the other side in the debate saying something else. But I wasn't thinking of it having an instance of a formal role. I see. Thank you for the clarification, Dr Cuthbert. I don't know if anybody else has anything to add on that point at all. Well, maybe if we need an independent officer it should be. Opportunity to accept or decline the challenge, Mr Taylor. I think I'll avoid that opportunity just at the moment. Thank you. The one thing that we'd say here is that transparency is important, but you can't take the politics out of this. Ultimately, there will need to be political negotiation and the agreements about aspects of this. It's impossible to remove that. Of course, if the SFC, as we all hope, establishes itself as authoritative and independent, that will carry weight in those discussions, as indeed other aspect factors well as well, but just a recognition that ultimately there needs to be agreement on those things. I think that that's been demonstrated in the short time around the ballgrass and the rant adjustment in the current period and the need further to be a political agreement on that. Just one final question, so I can hear from you. The evidence from Robert Chute, the indication appears to be that OBR produces forecasts and there isn't really any other kind of anybody else producing forecasts alternative to those. You seem to have suggested this yourself, Doctor. I wonder if we're getting a bit hung up on the idea of who produces forecasts and how many forecasts are produced. The question is whether the accuracy and integrity of the forecasts that Scottish Government produced are properly interrogated. That should really be the focus in terms of SFC rather than whether or not they themselves are producing an alternative forecast. I wonder what the panel's view on that would be. Perhaps start with Mr Taylor and work back along. If I could start with some principles, I think from our perspective, transparency, as I've said before, is important. There's an assurance role there about reasonableness, but also that fundamentalism is to support scrutiny and it's that scrutiny that the value comes from and having that transparency, having that assurance process allows yourself as a committee and others to scrutinise and put forward alternative views on how robust all of the system is. I think that we must remember that when Robert Short was talking about other units not doing forecasts, it was for the fiscal side of things. There are other forecasting groups in the UK that do macroeconomic forecasting who can offer alternative scenarios to OBR, for example. We don't have that in Scotland. Therefore, we perhaps need an independent set of at least the macroeconomic forecast, and it follows if you're doing these, then you're as well to do an independent set of revenue forecasts as well. My own view is that there is a danger of getting too high up in forecasts, but, nevertheless, because of the death of forecasts, maybe the fiscal commission should certainly have the capacity to do it and may decide to do it, but in my view, we need not—I think that the important thing is the assessment going around that. To give an analogy, supposing that one has the money to invest in the stock market, you wouldn't go along to stockbroker and say, what do you focus? The market will be a year from now and act accordingly. You might ask what he thinks the market is going to be, but the interesting thing will be what is the assessment of the risks on either side and what the events might take place. On the basis of that assessment, you would then form a judgment. We're in much the same position. Let's not get too high up in forecasting. It's important, but let's take the broader picture, and the assessment of the risks around it about the forecasts, which, in many ways, are more important. What I think of something earlier—I may have misunderstood this—is that you saw potential in the future that the fiscal commission is taking on a similar role to the OBR in becoming the forecaster for the Scottish Government or for Scotland as a whole. Given your comments just there about the fact that we don't have alternative forecasts in Scotland—we've got a dearth of forecasts on macroeconomics in a certain comparison to the UK where there are a number—wouldn't that make the argument that, on those occasions where it might be justified by assessing reasonableness, or even on a more regular basis, if the fiscal commission thought that was useful, it would be good to have a Government forecast and a fiscal commission forecast, not least to inform debate, parliamentary and otherwise, on economic policy. In principle, I think yes, but then we come back to the point that some of the committee members raised earlier about the expense of the whole exercise, that to have two units doing something very similar is going to be very expensive, presuming that both are funded from the public purse. There would be that aspect to consider. I agree with Jim that we shouldn't get too on forecasting itself. We said this earlier that, as long as there is transparency in the assumptions used, it is perhaps unnecessary to have duplication, but I think where it would become interesting would be if—and this goes back to the point that was raised earlier—that it's really for the Scottish fiscal commission to decide if they want to set up their own model, but I think it would be interesting if they decided to set up a very different framework to the model that was being used by the Scottish Government, then I think there may be a greater case for allowing them to have a different kind of modelling set-up, so that we do get two very different kind of forecasting models, which may—and I emphasise—one may be better able to address some of the uncertainty issues that Jim has referred to. It's not a straightforward situation, obviously, but the other thing I would say is that one of the reasons we don't have alternative outputs forecasting the Scottish economy is that we don't have a very good data set. This goes back to the point that I made earlier. I think that, as the data becomes better, as it surely must, if those forecasting exercises get under way, I think that you will see independent forecasters in Scotland start to perhaps develop their own models. There may be that scenario going on in the background, which might alleviate the need for two models—one from the Scottish Government and one from the Scottish Government. How quickly do you think we are going to be in a situation where the data is improved and more readily accessible? Is that happening now? Or on how do we get to that point? I think that you had a piece about this in your last report. As I recall, you questioned the civil servants on this issue, and I think they said that it was a half-way house at that stage, so there was still some way to go. I think that goes back to what I said earlier. It's most likely that the initial models that the Scottish Government uses will be relatively small and tractable models, because the data isn't there to provide for a fuller, more fleshed-out model. In that report, we also highlighted some difficulties that have been in accessing data and getting data from different departments. Robert Chowitt didn't seem to be particularly concerned about the memorandum of understanding being on the face of the bill, but you said that it should be actually in legislation itself. Is that something that the Chancellor of Fletcher, Robert Chowitt's comments, that being in the bill is still necessary, or is it simply more important the fact that we've got a detailed and transparent memorandum of understanding there? Yes. I think that as long as there is a truly transparent and well-thought through memorandum, whether it's on the face of the bill, I think it makes the Scottish Fiscal Commission more independent, more transparent if it is in the bill, because essentially memorandum moves you beyond a gentleman's agreement. I think that's what you'll want to be doing in this case really. Thank you. Are there other panellists of any views on access to data or developing more data, as the President referred to? I think that one aspect that we shouldn't neglect is the role of the Office for National Statistics, because insofar as some stage comes down to forecasting the Scottish economy, that's critically dependent on data from the Office for National Statistics. They have had their problems over the past few years, and it's not clear that those problems have been sorted out rapidly, so it's not really within the hands of the Scottish Government a lot of what's going on, and there's an important application there. That distinction between UK data and Scottish Government data, I think that we're clear in our paper that we think that the rights of access in the bill are sufficient and they're drawn broadly, and to have more detail and greater specificity in the face of the bill, I don't think it's necessary, because those rights of access are drawn broadly and we think they're quite powerful. A point to be made around an MOU with the Scottish Government and potentially Revenue Scotland and others is that yes, I think that it's helpful about transparency, yes, I think that it's also helpful that working relationships are clear and the way in which things operate, but I think that care has to be taken to avoid a proliferation of such agreements, because often in practice they can dampen down potentially the rights of access that people like the Scottish Fiscal Commission have. So getting the balance right and how much detail everything needs to be specified, I think is an important consideration as the Fiscal Commission sets itself up on a statutory basis and begins to develop those sort of ways of working. I think that those thoughts make an interesting point around accessing data, which isn't under the control of the Scottish Government or indeed this Parliament, and perhaps that's something we need to consider as we look conveniently towards the arbitration process of these issues in the future. Okay, thank you very much for that Richard, and that's it. Oh sorry, Jean, you want to come in? No, we're just really on, I suppose, around the Barnock formula calculus and the Treasury itself. I mean, often we have these discussions, we've taken evidence from different members, but there's still a mystery around how that operate, and on the other hand we want to show absolute clarity. I just wonder if the word trust is needed somewhere too. I mean, presumably there has to be some element of trust between these different organisations and their relationships. Yes, I think that's right, trust and good will, and I mean, I think it's ridiculous, for example, that the Treasury has not produced a funding statement, which the funding statement is the fundamental thing, which tells you for each quite all programme, if you like, what the comparability percentage is, which is the thing that drives, one of the key things that drives the Barnock formula, and that has not been updated for five or six years now. So, I mean, I think the current operation of the Barnock formula is not up to what it should be, and things are going to be much more complex in the future, though there really needs to be a step change in what the Treasury produces and how it goes about this aspect of its functions. Are you hopeful that that can happen, that that will happen? I really don't have any insight into what goes on in the Treasury or in Government. The little hints one gets suggest they're not being entirely cooperative or reasonable in current negotiations, but that's very much an outsider's view. I'm not optimistic, given the Treasury's past record, that that's not an informed view. Yes, well, I've said previously, I don't like the lack of transparency with Barnock, and we'd prefer to move away from Barnock for that and other reasons. But I do take the point, obviously, that there has to be trust and there has to be goodwill between the relevant parties and co-operation. I entirely agree that trust is important, but the operation of bodies like the Scottish Fiscal Commission, who in my mind is primary purpose, is to help to protect and engender that trust in how the system works, that trust of public, that the public has in how the system works. Again, I think that the key ingredients of that are transparency around how it works and as much transparency as possible, the assurance role that the SFC will have over that and the scrutiny process that goes on alongside all of that. I think that those are key ingredients to that trust. Would you agree too that sometimes we, to try and legislate for everything, can really introduce suspicion almost rather than if you're trying to come at me to a certain extent should we assume a culture of trust? When we are looking at the bill. I think that we're into deep water here, but the whole operation of the United Kingdom post referendum, it's not going to work if the thing is seen as opposing factions, not trusting one another, not co-operating. If we want it to work reasonably, there has to be a goodwill. How one achieves that necessary goodwill to make the system work, while at the same time politicians have quite legitimately different and inconsistent political aspirations, I don't know. I think that there is a major problem there, but unfortunately the people who are liable to suffer is Scotland. If there isn't openness about how these funding things are working, they're not going to be properly debated, they're not going to work equitably, they're not going to be evolved in the proper fashion. I mean, there are real dangers in here, I think. Thank you. That has concluded our questions. Panelists want to make any further comments before we wind up the session. Anything else you want to add that's not being covered? Okay, well thank you very much for your evidence today. That concluding that session, I'll now have another short break until I change over what this is and give members a natural break. I shall reconvene the session. Our third item of business is to take evidence on the Scottish rate of income tax from Professor David Bell. I'd like to welcome a former adviser Professor Bell to the meeting and invite him to make a short opening statement. David. Thank you. I'd just like to start off by saying that I think that the session of the finance committee and the associated papers are important because it will place on record the simple point that what you think you may get if you increase Scotland's income tax by 5 per cent, say, is not necessarily what you will actually get. Multipling the average additional tax liability by the number of Scottish taxpayers gives an arithmetic estimate of the extra revenue. The outcome may be quite different because this simple calculation does not take account of how taxpayers' behaviour may change if tax rates change. Changes in taxpayers' behaviour are difficult to predict. That is because it is really difficult to establish what we call the counterfactual. What would have happened had rates not changed. One finding on which there is agreement is that increases in taxes lead to reductions in taxable income. That could take a number of forms. Taxpayers may reduce their hours, drop out of the labour market, retire or even emigrate. All of those responses lead to lower tax receipts on other taxes, as well as income tax. That might have implications for the second no-detriment clause. Alternatively, taxpayers may reduce their effort at their workplace or negotiate higher wages to offset the higher taxes. That will lead to lower company profits. Finally, they may seek to avoid tax by reclassifying their income as, for example, profits. That would lead to a transfer of tax receipts from Scotland to the rest of the UK. The group that is most likely to change their behaviours is the very highly paid group. Scotland gets about 20 per cent of its total income tax revenues from the top 1 per cent of earners. That means that it faces considerable revenue risk if the group alters its behaviour. To me, that suggests that the Scottish Government has to proceed cautiously, call canny, when considering significant changes to the structure of income tax in Scotland. It is also worth bearing in mind that the perception of Scotland as a high-tax jurisdiction not only might affect the behaviour of Scottish taxpayers, but it will also scale migrants who might come to Scotland and have the potential to boost the Scottish economy. That is it. I think that a couple of words that were used there were significant and perception. It is the definition of what is significant. For example, the committee had a two-day study visit to Basque country last week, and one of the first things asked the Minister of Finance was given the fact that taxes are a lot higher in the Basque country, what impact that actually had. He looked at it bewildedly and said, well, not really anything that they have been able to discern. The Basque country has a level of GDP 22 per cent per captor, above the Spanish average. It has productivity 28.5 per cent above the Spanish average, a human development index higher than Norway, Sweden, Finland, etc. The committee said, well, it is only 35 minutes by plane to Madrid, incidentally, from Bilbaus, so it is even closer than London is to us. However, it did not seem to have had any adverse effect, and that was certainly their view. For them, it was, and I quote, not an issue. Basque country raises all its taxes more or less and pays 6.24 per cent of all of Spain's taxes, so there is much higher level of devolution than we have or are likely to have in the foreseeable future. That is why the issue is—I know that Labour's elasticity is covered in your paper quite substantially—where does it become significant? One could argue in the super-rich that even a marginal increase could deter someone, but, ultimately, if you are looking to increase revenue, where is the XY axis occur in your view in the UK context? We have quite a strange structure so that you pay 20 per cent on income between about 10,000 and 42,000, and then 40 per cent up to 150,000. The big action, it seems to me, is more likely to be down towards the lower end of the income tax schedule. If you want to raise a lot of money, I think that we raised around £700 million out of £11 billion from the additional rate, so even if you increase the additional rate a lot and there is no behavioural response, you are not going to get a huge amount of extra revenue. If you move the additional rate and have it kick in at £120,000, that would make a pretty significant difference. You have to think about both bands and rates. Rates in terms of your good point around perception. People see rates as the key issue, but bands are as important. For example, in the Scandinavian case, what used to be the case in the UK was that there was much more stepped. The band widths, if you can describe them as that, were smaller, and then you moved up steps in a smoother fashion than is currently the case. It is at lower incomes that you would have a big impact on tax revenues that has its political costs, potentially. What I think is good in your paper is the fact that you have included national insurance, so people can look at the real rate of income tax. People often forget that it is 10 per cent on a 20 per cent increase, but I think that one of the things that you have talked about in Gavin McEwen and his excellent paper covers the issue of migration. The flow of migrants into Scotland could be reduced if the higher tax rates, in addition to the social and psychological costs, deter immigrants. Professor McEwen says, and I quote in paragraph 4, in a 2014 paper, a nukebaer tea of spice surveyed the evidence for tax-induced migration in Switzerland. Obviously, Switzerland and Sweden are not areas where you would expect, for example, to be an issue in attracting migrants, if we look at very high migrant populations. He says, while there is a federal income tax in Switzerland, it is relatively low in cantons and communities of considerable taxing powers, including the rates of tax income. She reports that two studies she consulted found evidence of high-income taxpayers taking a level of taxation into account and choosing the place of residence. One found little such evidence. There seems to be quite a divergence of views on this particular issue. Professor McEwen talks about the diversity of taxation throughout the United States, with a whole plethora of corporation tax, sales tax, etc. He says that there is undoubtedly competition between authorities and influence of migration as a result, but diversity has been remarkably stable and even tended to increase somewhat. If we look at pure economic factors and taxation, it is quite clear that taxes go up and migration would expect to decrease, but what impact do you think the expenditure of those taxes actually has? For example, if I am thinking of moving the wife-and-wains to somewhere, I am not just thinking about a marginal tax rate, I am thinking about what the schools are going to be like, what the public realm is going to be like, what the levels of crime are going to be like, what the relative cost of housing is going to be. How impactful are those marginal rates? If Scotland, for example, had higher tax rates, which seems to be your assumption, in one comparison to perhaps folk looking at Scotland, is just being a higher-quality life place in which to live? That is a very fair point. One that I tried to cover in my paper a bit by discussing the forces that cause people to migrate or maybe not migrate, and a typical pattern would be that it is the young who migrate and the reason that they migrate is that they gain the benefits of taxation over the rest of migration over the rest of their lifetime. It tends to be the better-off higher earners who migrate because the costs of moving mean less to them than they would to lower-income people. The costs of moving are not just the economic costs, they are the psychological costs, the social costs associated with moving from somewhere where your children are established in school, where your wife or your husband has settled social pattern with groups of friends and so on. All of that, if you are thinking of giving that up just to get a lower tax rate, it is not obvious that the lower tax rate would make the big difference. I think that the evidence around migration is very mixed. There is one study that I would refer to where tax rates have been used as a specific policy to attract migrants into a jurisdiction. The policy has been successful, and that is in Denmark. The paper there is clever et al. What happened was that, for a specific group of high earners, tax rates were lowered, and there was an increase of high-income earning migrants into Denmark following the introduction of that policy. Quite a good counterfactual was established with earners who earn slightly less than the threshold at which the lower tax rates kicked in. Their numbers did not change, but there was a big influx of the very high earners. There are a number of reasons why one might be sceptical about applying that argument to Scotland. I think that it is a specific policy in a way that is aimed at attracting migrants. I am not clear how that would—I do not think that, under the powers of the Scotland bill that is currently constituted, Scotland could offer a lower rate of tax to people migrating into Scotland and keep the same tax rates for residents. My understanding is that that would not be a potential policy. Given that that may well not be applicable to Scotland, given that the situation in Denmark is somewhat different from Scotland, it is not clear that that lesson would necessarily apply. Just one thing at one point that I would make is that, in general, it is true that the costs of migration probably have fallen in the last two or three decades, mainly because of the ease of international travel, and the way that the labour market has become much more an international labour market than simply a regional labour market. Obviously, migration is a key issue. You have said that, for example, in the page 3 paragraph at the end of that long section 2, during the period 1950 to 2000, Scotland experienced net immigration of around 900,000. Obviously, that legendary union dividend is coming into play again. When you go down to London, house prices are phenomenally higher, so younger people who want to go have to try and get on the housing ladder somehow. My understanding is that schools are not exactly top-notch for most people. Everything is more expensive. Surely, if we can deliver assuming that there are higher tax in Scotland, there is a reasonable quality of life and a higher level of employment, more equality, all the things that we all want to have. Again, the Basque Country has a very high level of index of equality, much better than anywhere else in Spain above the EU average. We did not deter migration on tax grounds. Incidentally, 29 per cent of the Basque Country's population are immigrants, mostly from other parts of Spain, not from developing countries or wherever. Surely, it is about what you do with the resources that you have, all else being equal? I think that, probably, at the moment, the cost of housing in London, for example, is a big or deter's potential immigrants from, let's say, the financial sector in Scotland to Downsouth. On the other hand, if you are established in the London housing market, having a higher tax rate in Scotland might actually be a negative for moving up. People could adopt different strategies around that. I don't want to say that that would necessarily overcome the lack of migrants going down, but, although it is probably true that, for most people, the costs of emigration exceed the benefits, we have to be careful around even losing, well, it seems to me, a small number of high earners. You can take the view, well, that's it, but if the top 1 per cent is paying 20 per cent of total revenues, I think that you have to be careful. Let's look at it from the other point of view. Say, for example, that to everyone's election next year decides, you know something, we're really worried about the effect of higher taxes. We're really worried about losing some of those higher earners. What we're going to do is reduce taxation. What would be the benefit to Scotland, would you say, of that? Obviously, we'll lose tax revenue and that will have an impact on our public services. What would be the economic impact? In other words, what I'm trying to ask you is, is it an equal relationship? Are people as likely to flow into Scotland if we reduce taxes as to leave Scotland if we significantly raise taxes? Is there any what being done on that? No, not that I know of. What you would get is less of a fall in revenue than you would expect if you just did the arithmetic cost of... You never get as much. What you would lose less income tax revenue than you would expect, you might gain a bit of VAT revenue, but, of course, increased national insurance, the other part of VAT and most other taxes would... If their value is increased, then that money would just go to HMRC. It is also important because to think about, well, where are these people going to come from? If they're coming from outside the UK, then that's a benefit to Scotland and to the UK taxpayer. If they're coming from other parts of the UK, then their increased VAT spend in Scotland, say, is mirrored by the reduction in VAT south of the border, so HMRC isn't actually better off or worse off as a result. If, for example, we reduced the higher rate by five pence or something like that, because the suggestion seems to be that, if it weren't 5P, it would have a detrimental impact on people effectively classing themselves as Scottish taxpayers where they have a domicile in both locations. What I'm trying to say was, if we were reduced at 5P, would the amount we gained offset the amount we lost? The argument seems to be that we wouldn't gain much by putting it up by 5P, but we would gain a lot by putting it down by 5P as a random figure, so to speak. That seems to be a figure that is considered to have an impact. Two or three per cent doesn't seem to have quite the same level of impact that it's perceived. Maybe I can refer to Manning's paper on his view on the increase proposed by the Labour party at the last election from 45 to 50. The arithmetic number was that UK tax revenues would increase by £3.3 billion. His analysis, based on behavioural responses and effects on other tax revenues, was that there would be a range of between £2.8 billion at the top, depending on the elasticities, the most optimistic outcome and a loss of £0.7 billion was the most pessimistic outcome. You expect 3.3 billion if you just do the arithmetic, but, in fact, there's a wide range because of the uncertainty, and the numbers are between minus £0.8 billion and plus £2.8 billion in terms of the effect. I have no reason to believe that it wouldn't be symmetric if you went in the other direction, so that you would probably gain, what's that, about four-fifths of the, sorry, you'd lose about four-fifths of the tax revenue that you expected to lose if you cut the Scottish rate from 50 to, sorry, from 45 to 40, say? £400 million in 2018-19 is the rough prediction SRIT. If we cut it with 5p, what you're basically saying is, obviously the higher rate is much less, but I'm just looking at for arithmetic, but I realise, what's the problem, about £70 million or £80 million for those high-tech, but what you're saying is, if we cut it with 5p, you would lose 80%. You would still gain five-fifth of the money that you lost, say you lost £100 million or whatever the figure was. You would gain £20 million back, so the net loss would be over £80 million in terms of overall revenues. It's really, really difficult to say. I think that, at the UK level, migration hasn't really been an issue, but what has really been an issue is people avoiding tax. Manning, for example, shows how, in terms of self-employed directors, there's a huge bunching of their earnings at around just below £150,000, and then they're taking the rest as profits. There's no reason that that reaction wouldn't happen in Scotland if you bumped rates up and the reverse reaction might happen if you knocked rates down. Of course, that affects the division of moneys as between the rest of the UK, which will take its share of taxes on profits, and Scotland, which will be gaining only on the income tax. A couple of points to finish off before I let colleagues in. One is the fact that it's clearly the case that the lower-yard down-income spectrum, because of lack of mobility, the easier it is to raise or cut your taxes with the assurity of what the financial impact will be. Very few, at a magic basic rate, taxpayers would leave if their tax went up. They might not be happy about it, but they couldn't do anything about it. That money would stay within the Scottish economy and be similar for probably people in the middle spectrum. Would that not be the case? If it was lost, there would be very little beneficial impact in terms of increased revenue. What are we going to move to Scotland because of the basic rates falling? No reason, is that right? Certainly, migration wouldn't be an issue. It's then around basic work incentives. On the question of how people respond in terms of the traditional supply responses, like do they keep up their hours or do some people drop out? Where you would then be raising questions would be around would people take retirement at a bit different time? Would married women drop out, because they have been shown in the past to be quite sensitive to tax rates? Of course, you get into the question of what kinds of rates are being applied to the lowest earners, the people who currently are getting tax credits. You have to do quite a complicated calculation to find out what rates they are actually facing and therefore what rates they might face depending on what happens to tax credits in the first place, but also what would happen if Scotland changed its tax rate. I think that it is the case that migration is not an issue for that group, but you would have to be careful about changes in hours and possible withdrawal for the labour market as well. I should say that there is an article in the Financial Times the other day by Martin Wolff about the problems of the US labour market. It has a much higher drop-out rate than the UK. At the moment, the UK is at a very high level of participation in the labour market, even though a lot of people are earning at relatively low amounts, but the US has really not registered the same benefits in terms of increased participation post the recession that the UK has. Scotland, at the moment, has its highest level of employment ever because participation rates are high. You want to be sure that changes that you might make towards the bottom end of the spectrum still give people an incentive to participate in the labour market. The first question is, as you have said in your last paragraph, as a strong case for moving cautiously when considering changes to the higher rates of income tax in Scotland, even though there may be no evidence that it has a detrimental effect on rates of economic growth in the long run, which I find quite interesting. It is almost if saying that the economy will grow or not grow whether those people are here paying taxes, they are not, which I find quite astonishing. Is there a optimum level of taxation for higher-rate payers, if you like? If the economy can grow, we can obtain optimised revenue without people fleeing the country, so to speak? There has been a huge literature on the optimal rate of tax, which was started by a member of the Council of Economic Advisers, Jim Merleys. I think that it was on the basis of that work that he won the Nobel Prize. There is a huge amount of work on that issue. I thought that I might attempt to do some of the work on that particular question for this paper, but I did not really get round to it. Yes, there is. There are recent estimates that I can send to the committee that are quite a bit higher than some of the rates that are being levied at the moment in the UK. One thing that I would say is that looking at the long-run performance of economies, my last statement, the one to which you referred in your question. I was thinking about Scandinavia and the fact that the Scandinavian economies have had very high rates of income tax for a very long time, but have not significantly fallen behind the rest of Europe in terms of economic growth. Boyd talked to us about how Denmark, across the board, has got 12 or 13 per cent higher levels of taxes, and that is borne by the population. Surely, when the reason that it is borne by the population of Scandinavia is that the disposable income that they have left after that, because their incomes tend to be generally higher, the purchasing power parity, leaves them with a reasonable amount of money in terms of their disposable incomes. Yes, that is true, but they also have a very high level of public services, and people buy into that notion that this is part of the deal. It is perhaps a somewhat different culture from one in which you do not particularly value public services and you are much more concerned about your personal consumption. That is really a cultural issue. I think that it is difficult to prejudge how that might work in the UK, but, certainly, it does not appear to me that countries such as Denmark have significantly suffered from having higher rates over the long run. You might get a reaction in the short run. Thank you very much. A number of people want to ask questions. First, I would like to ask Richard Dipp, to be followed by Deputy convener. Thank you, convener. First of all, I remember being on a Scotland Bill Committee much earlier in this Parliament when we discussed the implications of full devolution of income tax, and then there was quite a discussion about the potential for predatory tax policy to cut the rates of taxes gotten to attract high-income earners and whether they would need to be there for a policy agreement between the Treasury and the UK Government, the Scottish Government, to ensure that there were no agreements that that kind of policy would not be pursued. The fact that there has not been that agreement or not been those kind of tax treaties that exist sometimes between states in America does not indicate that the received wisdom, if you like, is that migration just is not going to be an issue. It is going to be marginal, as a convener indicated, if it is going to be an issue at all. Or is it, you think, actually that these matters would be covered by the no detriment policy that has been outlined in the current Scotland Bill? I am not clear how the no detriment will cover all the ramifications of the effects on the other taxes that I mentioned, the national insurance, VAT, corporation tax and excise duty, fuel duty, if you like. I think that we are all guessing here. Where I would be most concerned is around, in the long run, the effect of not having people migrate to Scotland rather than people emigrating from Scotland. That would be my particular concern. What matters, I think, is perception. If Scotland is, it may be a general perception rather than the detail of the additional rate being 47p rather than 45p. If the perception is that Scotland is a high tax jurisdiction and that the public benefits do not offset the fact that taxes are high, then there could be a negative effect, but I really think that it is very difficult to predict. I accept that, but is it also the case in terms of the European context that we went to 47p, for example, rather than 45p? It would still be behind France, Germany, Denmark, Sweden and others. In a sense, there would be a very marginal impact on perception and talking about things such as European migration, which has been very important for Scotland in the past few years. It is also true that, if you went to 47p, you would not raise the heck of a lot of revenue. That might well be the case, but if you are going to change the amounts of revenue that is coming in through the Scottish income tax, it seems to me that you have to probably look a bit further down the income spectrum to make big hits. Finally, on the convener, I think that the answer to most of the questions and predictions of what will happen if we do X on taxes would be, or we do not know, really. Having said that, do you think that there is enough modelling going on about the potential impacts of various tax changes? Is there any modelling? Is there one question, really? Or could there be more modelling to inform not just Government policy in this issue but public debate and parliamentary debate? That is a good question. Let me just say a little bit about this kind of modelling. The organisation that mostly does this kind of modelling is the Institute for Fiscal Studies. We are actually doing some work with them just now, but, mostly, they talk about short-run changes and focus on the arithmetic effect of changes in taxes. That is reasonable. If they are analysing the budget—they are going to say that 3 million people are worse off or better off or whatever—in the short run, the behavioural effects do not really kick in. If you are thinking about next year, it is not the case that everybody will emigrate before next year. It takes longer. There is work on behavioural responses. We have done a little, but what we have done has been around a general area if we applied the Danish rates to Scotland. You are making a big jump and assumption there. Anything that you would give as a result certainly could be debated, but I would have to qualify it a lot by saying, is it applicable in the Scottish context to use it? I think that there is a very good argument for doing more work just so that this kind of issue can be debated, but there is another issue that, if you are focusing on the very top earners—this harks back to your previous evidence session—there is not much information on this group. There are about 11,000 additional ratepayers in Scotland, and surveys just do not tend to pick them up, so doing the arithmetic calculations of the impact of taxes is difficult enough, adding to that a behavioural response as a further layer of difficulty. I am not saying that it would not be a good idea to try some of this, but it would have to be heavily qualified in terms of the results. On page 2 of your paper, you talk about elasticity of labour supply, and I was struggling a little bit to get my head round this. I was just wondering if you could explain if you increase income tax, real wages fall by 1 per cent, workers reduce their hours by 0.5 per cent, therefore elasticity of labour is 0.5? It is just the ratio of how much the amount of labour supplied. What is the percentage change in the amount of labour supplied to the percentage change in the after-tax income of the individual? It is a ratio, so it is just a number. It does not have any dimension. Small numbers mean that there is not much of a response. Large numbers mean high elasticity, marked response to changes in the tax rate. We are saying that, if you increase income tax, you are always going to get less work done. I quote a guy called Manskey, who is a guru on economic policy in all kinds of areas. He says that there is no consistency on the estimates of the elasticity that I have just been describing, except that there is an agreement that, if you increase tax rates, you will reduce taxable income. Some individual people, in order to maintain their income, will do more work. Absolutely. Theory says that that is a perfectly plausible response to changes in tax rates. If you want to keep your real income up, if that is what you really value, or your income, you will increase your hours of work. Some people will do that, but on average the findings have been that people will reduce their income. Of course, you can do that at what is called the intensive margin, which is hours of work, so you work less hours, or the extensive margin, where you just drop out, so you do not supply any labour at all. In page 10, in a slightly different context, it says that cultural acceptance of tax rate differences is probably country-specific. Are you arguing that there is quite a lot of differences between how people in one country—for example, Denmark—and another country behave? You can see that there are pretty significant differences across the US. There are pretty significant differences across Canada, Switzerland and Denmark. Of course, this harks back to earlier remarks about what people in those countries might be getting in return for their higher tax rates, and maybe they just take the view well. There is a compensating differential in terms of the public services that are being offered. I guess what I am saying is that we do not know the detail of that, so it is pretty difficult to take lessons from any of those countries and necessarily be able to apply them to Scotland. However, it is worth noting that having differences in tax rates would not make Scotland an unusual part of the set of developed countries in the world, because differences in income tax rates are relatively common. People's behaviour is not logical in one sense, or at least it is a different logic in different places. There are differences in costs and benefits in different places. What other taxes do they face? What is their response to differences in indirect taxes? It does not necessarily prove that they are illogical, but they may respond to incentives in different ways, and they may be facing other considerations such as differences in indirect taxes and differences in the public services that are available to them. It struck me that the bag tax is a separate area, but five p and yet an 80 per cent drop in the use of bags was illogical. Most people are paying £40 or £50 for their supermarket shopping, but they do not want to pay five p for a bag. In the scheme of things, that does seem illogical, but sometimes people react quite strongly to very small things, and I suppose that would be the risk here. Yes. There are two modes of thought in economics. The second has maybe got the appreciation that it deserves, but the first is that people act logically all the time. The second is that it comes from the area of behavioural economics. People are influenced by all kinds of things and may not act in what seems to be their best interests all the time. That is behavioural economics in which Stirling University is particularly strong. I am not trying to suggest that people will behave logically or in their own best interests at every juncture. I am just saying that that adds further to the complication of trying to interpret what we see happening in other countries. People may have a culture of working hard, and that supersedes the effect of changes in tax rates. One of the things that Manning finds is that, on the intensive margin, high earners do not change their hours of work much in response to changes in tax rates. If someone is earning £500,000 a year and the tax rate goes up by 5 per cent, then that person will still put in the same amount of effort in their job, but they will spend more effort finding ways to avoid paying the higher tax. They will also put in some effort into that particular pursuit. That might not seem a logical thing for them to do, but they maintain their work effort. That is a fairly uniform finding. I am finding it increasingly difficult to try to predict what might happen, but you said that you would proceed cautiously, and that is probably good advice. I mean, could we pin that down? If I was to say, well, let's increase the rates to P next March, April and see what happens, would that be proceeding cautiously? I guess that that would be true. There is also the issue of signalling. You might say, well, we are going to increase it by 5 per cent over five years. I think that that kind of behaviour would precipitate action around the tax avoidance behaviour, because I think that that was one of the things that happened in response to the announcement that the 50p rate would be taken down to 45p was the announcement of the tax. Itself had an effect on behaviour, but… No, it would be different to say, well, we are going to raise it to P in April, and then we will leave it sitting there for five years before we do anything else. We would be different from saying, well, we will increase it by 1 per cent every year for five years. Thank you for that. Mark, to the floor, by Jean. Thank you very much, convener. Professor Bell, you mentioned about where people have moved income into profit or dividend income in order to avoid paying income tax on that income. You said that a change in the tax rate, for example, might encourage or discourage that behaviour, but presumably that is only going to be true if the tax that is then paid on that income is lower or the same as they would pay on that if it were dividend income. How far do you need to go in order to encourage that kind of behaviour? People who are probably in a position where that matters are high earners who can pay for tax advice. As I said earlier, if you look at the survey of personal income and you look at self-employed directors and where their pay is bunched, it tends to be bunched just below the £150,000 additional rate cut-off point. I take from that that people earning that kind of money are taking advice and they have opted for the incorporation tax on their remainder of their income, whatever that might be. Of course, as soon as the two rates were the same, there would be no incentive to do that. You would not see the bunching happening. How much the difference has to be, well, you are offsetting the cost of your tax advisor that you have to pay to give you the advice about what to do. As long as you are ahead on the game, which I guess if you are earning half a million, it is quite possibly worth your while to do that. It is both the difference in the rates between incorporation tax and the top rate of income tax, but also how much above the top band, the £150,000, your income actually is. If you are at £151,000, it does not matter. One of the other ways that tax behaviour could exist is at the other end, because, obviously, although the personal allowance is not going to be devolved, there is talk of the Scottish Government having the ability to set a zero rate. That is another way in which—I am not saying one way or the other—that that would be what happens, but that is another way in which tax behaviour can be manipulated for one of a better term. That is true, and I think that that raises an interesting point. Even if you just do the arithmetic calculations, the IFS reaction to the budget kind of calculations, it is worth really doing those, because if your concern is around poverty or inequality, say, then changing the personal allowance may not necessarily have as big of an effect as you might expect. That is partly because we usually look at issues such as poverty or inequality not on an individual basis, but on a household basis, because it is households that are faced with the difficulty of putting food on the table or whatever. Then what matters is whether there are two people in the household who would benefit from the increase in the personal allowance, or is there one person working, one person not working, different combinations, all of those kinds of things are possible. You need to do a very detailed calculation to see whether that would benefit people, as opposed to reintroducing tax credits or compensating people for the loss of tax credits. Even without adding the behaviour, that kind of calculation is worth doing, because it gives you the picture as far as the household is concerned. Are we moving people above the poverty line, which is 60 per cent of median household income—it is not individual income, it is median household income—as a result of changing the personal allowance? I am not saying one way or the other that it is not a good idea. How people will react to the change in the personal allowance? I am sure that there are studies out there, but again there is always the problem of finding what the counterfactual is and what would have happened if people did not weren't subject to an increase in the personal allowance. I guess that the other question that I had was that we have spoken about the potential migratory impacts. The question is, in a population of just over 5 million, what qualifies as significant in terms of behavioural impact? From my perspective, if only a small number of people are behaviourally impacted either positively or negatively, is that really a significant impact or are we talking about where those people are in terms of the amount of tax that they pay has to be looked at in terms of the significance? In terms of where people are, clearly that is important. It is for HMRC to be able to accurately determine where people are in relation to their tax liabilities. From the news this morning, it is not clear that HMRC has been all that effective, for example, in pursuing people who apparently have been evading tax. In terms of migration, the short-run impact may not be all that much. If additional rate payers pay in total at the additional rate that contributes about 700 million to the Scottish revenues, it might not seem to necessarily be all that negative to lose some top earners. You have to be careful, because those people may also be entrepreneurs the fact that they move might have impacts on other parts of the economy. One of my big concerns about the last 20 years of the Scottish economy is the loss of decision-making power at the top end within Scotland. The number of FTSE 100 companies that are located in Scotland has fallen over the years, so I am fairly concerned about that issue. In terms of the longer-run migration, one of the main differences to why the Scottish population will grow more slowly than the rest of the UK over the next 20 or 30 years is that we are forecast to have a lower level of net in migration. Over time that builds up. Around 900,000 people were lost in the 1970s and 1980s. It is massive in terms of what effect it has had on the Scottish population. I am not saying that a change in the tax rates is going to reverse what has been a trend towards in-migration in Scotland in the last 12 or so years, particularly since 2004. Migration is something that we have to be concerned about, but I do not think that taxes are by any means the major issue around what determines the overall flows of migrants. It is more things like public services and quality of life and so on. I guess that the point that I was trying to drive at was that if you were to take the view that using the tax levels that you levy would attract people to Scotland or flip side drive people out of Scotland, at what point are the effects of that significant? How many people would you need to take in for you to say that the policy had a significant effect or vice versa? Is there a model that you can look at that would say that if you attract 10,000 people on the basis of this or you lose 10,000 people on the basis of this, that has a significant impact? I do not know that we have a model that does that. It would depend on what kind of people they were in terms of what their average income was and therefore what kind of tax contribution they were making. Clearly, if the Scottish economy is growing itself, then irrespective, it seems to me, of tax rates, migrants will be attracted into Scotland just because there will be employment opportunities in Scotland and there are plenty of people around Europe who already have taken advantage of the employment opportunities that are available in Scotland and have moved in in the last decade or so. Again, whether changes in tax rates would affect the overall pattern of migration is not entirely clear because we will not be able to do what the Danes have done and offer a specific rate to people coming in. However, it seems to me that you have to be careful about losing or not gaining a group of high earners within the overall pattern of migration. There is movement that gross migration flows, significant flows each year to Scotland and from Scotland. The net difference around 10,000 to 15,000 a year is roughly where we are with migration. It is unlikely that differences in tax rates would make a huge difference to that overall net flow, but you have to be concerned about whether the tax base or the tax revenues, whichever way you want to look at it, is disproportionately affected by the migrant flow. On how long you would need to look at this to accurately judge the impact, one of the criticisms that has been levied around looking at the 50p rate the way that it was applied is that, because it was only applied for effectively one year, you could not really judge the long-term behavioural impact of that. You can only really forestall the first year that something comes into effect, but that maybe would not affect those people who move towards profit. How long a period do you need to assess a tax change or a tax policy before you can accurately judge its impact? You need at least three to five years, I would think. Partly at least because you are not actually getting the information around the revenues, the overall revenues, until about 18 months after the year end, if we are talking to a large extent about the self-employed, they complete their tax returns in January after the end of the tax year, then there is a bit of debate, so the accounts are not finished. Some of the debate around the 50p rate was actually being done in the dark because they did not even have that information available to them. I think that you are right that it is going to take what I would call a medium-term perspective before you really know what is happening, what effect is changing taxes on that. I have a very quick question. It is around the evidence when something has already happened, but in the early 80s we were paying 33p in the pound and, due to political philosophy at the time or policies, that was changed over the next few years until the present 22 or 23p in the pound that we pay now. What evidence is there? Can you refer us to anything about that or me? In a sense, that is hard evidence of what happens when, for whatever reason, approved of or not, but when you reduce income tax. I know that there is taxes went all sorts of other places and there were changes elsewhere. However, nonetheless it did happen, and since then there has been a real nervousness by every Government to change that. There was a considerable shift in tax policy in the 80s. That is why looking at income tax on its own is only giving you a partial view of what was happening. High marginal tax rates were cut. Tax revenues did not fall all that much. What did happen was that there was an increase in indirect taxes, VAT in particular. The overall tax burden fell a bit, but not massively, for the UK's economies at all. What has happened since then is that Governments have continued to rely more on indirect taxes than on direct taxes. That is partly because it is easier to collect indirect taxes than it is to collect direct taxes. By indirect taxes, VAT, excise duty, fuel duty and a few others have a distributional impact, because most people buy goods that are subject to VAT. Most people pay fuel duty, and most people will pay excise duty and cigarette duty and so on. In terms of real income, that tended to favour the rich relative to the poor, that shift towards direct taxes. Partly because it did not just happen in the UK, it was partly driven by the fact that it was easier to collect indirect taxes than direct taxes. Of course, in the UK, it seems to me—and this is a difficulty for the Scottish Government—that income tax has become sacrosanct and increases in direct taxes in the last couple of decades have not really come through income tax at all. They have all come through national insurance. Of course, Scotland does not have the power to vary national insurance. There have been reviews of what has happened, notably the Institute for Fiscal Studies, which has done that kind of work. I am happy to give the reference for that. That is a small point, but on the basis that the increase in tax rates people work less. On that basis, is there any evidence, again, going back to the 80s to the 90s, where the tax was reducing? Is the convert also true, but it is not? Well, whether things work in reverse is difficult to assess. The evidence, for example, on married women's participation, mostly comes from the 1980s and the big changes in income tax rates that happened over that time. The argument is that what evidence is out there, and it is all subject to qualification, is that full-time males tend not to vary their labour input, working time very much in relation to tax rates. The same is true of single females. Married females are a bit more doubtful, but that might have changed. The rules that might have applied in the 1980s or the observations that we might have from the 1980s may no longer apply now, because the nature of work has changed so much—the ability to work at home, for example—so that you can put in your hours at home. I guess that I'm just saying that this is all quite difficult. A couple of very brief ones. Professor Bell, you gave us the example of Denmark using tax rates to attract migrants. I think that Cleven was the name of the study. Do you have some idea of the magnitude of tax change that was used in that case? I've forgotten, but it was fairly considerable, but the response was also pretty considerable. I know that the elasticity was about 1.52, which is very high, but I've forgotten what the initial change was, and I'll send that to you. The question of the 45p to 50p rate has been raised a few times in your paper. You're quoting somebody else, but in your paper you basically say that it's not possible to measure how much extra tax would be collected. I think that what we know for sure is that the static costing will be wrong. That won't happen in practice, but surely having seen it happen and then having seen it being removed once in each direction, we must have some idea of the behavioural response that we would expect if it were to happen again? I think that we should know that very soon. I was quite surprised that Manning's paper, which was produced just before the election, didn't actually have the numbers for what actually happened in terms of how much additional rate was collected, but that must be available. Last, I just want to, just for clarity, the point that you made in response to Mark McDonald, you're talking about being slightly cautious about playing about with tax rates too much too quickly. In terms of migration, you said that the flows could remain the same in each direction, so you could end up with net migration being exactly the same with a change tax rate, but your point was that the composition of those flows could change. Let's say that you put tax rates up dramatically. Are you saying that the overall numbers of people might remain broadly similar if lots of people who are high-rate taxpayers are leaving a lot of people coming in who are not high-rate taxpayers and the impact on the public finances would be? The current pattern is that, for example, the average age of migrants out of Scotland tends to be lower than the average age of immigrants. The young leave Scotland and a bit older people on average are coming back, so that will be made up of quite a lot of young migrants coming to Scotland but also people retiring into Scotland. As you say, what proportion of that group are responding to the changes in tax rates is quite important because it will affect the demands for public services and the level of revenues that the Scottish Government is collecting. Just one final point from you for the wind-up minutes. It is looking at a Gavins paper in paragraph 7 that refers to a study by McGuire and Rubin. It says that how spending is corresponding to reduced matters, thus tax cuts leading to reduced spending on services, impact on businesses such as education, may have an offsetting effect on business location and economic growth. Again, the Government is on in paragraph 11 to say that the general conclusion is that states wishing to foster entrepreneurship should focus on creating a stronger business climate and economic growth, rather than on tax policies. If tax is reduced, it can have a detrimental effect, but the tax is, again, referring to the point that you made in the last paragraph of your submission. Does that not necessarily affect overall long-term economic growth? I think that that is probably true. Tax is one consideration among many when you are thinking about locating your business. I have a small amount of evidence that suggests that companies think carefully about, for example, moving people around. If they are an international organisation, they have people working for them in different parts of the world. Already, some companies are thinking about how they might compensate employees if higher rates of taxes were paid in Scotland or, I guess, pay them less if taxes were lower in Scotland. That kind of tax planning, I think, is some of them are thinking of that. In terms of locating a business, the company itself will make an assessment of how important it is for their particular type of employee to have a lower or higher rate of tax and may make compensating adjustments, but then we will look at all the other costs and benefits associated with the jurisdiction that they are thinking of moving to. Of course, in Scotland's case, that would be free education, free health and all the public services. Any further points before we end up the session? Thank you very much for your responses and indeed for your paper. Thank you very much. Also thank you to Gavin for the excellent paper that he also produced. The committee previously agreed to take the next item in private. I therefore like to close the public part of the meeting. Just have a short two-minute break and then we'll get on with the rest of our agenda.