 Siegfiaill, wrth y fawr geisidio ar y sgolion yng Nghymru yn 2016 ar y Llywodraeth Cymru, ac maid i'r ffordd arnal â'r porfflu'r mobo, lodge, ales,��ap, a'r gofio'r cyfarfod gan'r SES. Rwy'r pethau'r gwybod wedi'u cyfgriffawr, ac rwy'r pethau'r pethau rwy'r prif, rwy'r pethau'r cyfarfod resume ac dech chi'n gwybod yn fyddemol i'r yr unrhyw ffasbyddiol. Faith, ac mae'r cifigodau, gyda Gŵr, yn rwynt i'ch gyrraedd ychwanegwyr yn ielgrifonau, wedi bod yn gwneud amrywiaeth i gyda'r defnyddwyr, ac yw'r cyhoedd y mae'r cyhoeddau i wneud y cyhoedd yn ei wneud yng Nghymru, ac yn ymddirionedd bobl iaeth cerffoddau ar gwrthodau rydym yn ei ffisgwyshidd iawn i ddod i gweithio ar maesgrowd y ddyn nhw. Rwy'n mi brydettoddau'u gyda'r Watanfaith yng Nghymru. Yr cyhoedd yn amlwg gyrraedd ammaeith. I would like to welcome our witnesses to the meeting and invite Mr Swinney to make an opening statement. Thank you, convener. I am grateful to members of the finance committee for their work to date in examining the proposals for a fiscal framework. In light of yesterday's announcement to the Parliament, I very much welcome this early opportunity to provide further detail to the committee. Paragraph 94 of the Smith commission report recommended that the devolution of further tax and spending powers to the Scottish Government should be accompanied by an updated fiscal framework for Scotland. It is the framework that will determine how the powers proposed by the Smith commission can be used, and so it is as important, if not more so, than the Scotland bill itself. My overarching aim has been to ensure that the new fiscal framework is fair and workable and is in line with the principles set out in the Smith commission report. On 7 October I set out to Parliament the areas where we needed to reach agreement as part of an acceptable fiscal framework. These were on the block grant adjustment for tax, on the implementation and on-going costs associated with the devolution of welfare benefits, and on securing additional capital and resource borrowing powers. I have engaged constructively in the fiscal framework negotiations and met with the chief secretary to the Treasury on 10 occasions through the Joint Exchequer Committee. Over recent days, the First Minister and I have continued to work with the UK Government to secure a fair deal, and we have both discussed the detail of the fiscal framework with the Chancellor of the Exchequer. As a result of those discussions, significant progress has been made across all of the key areas of the fiscal framework, and the committee will know from the First Minister's supplementary statement to Parliament last night that there is on the table an agreement in principle that I believe we can recommend to Parliament. A draft heads of agreement will be published for scrutiny by Parliament by the end of this week. We sought a fiscal framework that gave the Scottish Government the flexibility it needs to create a fair and prosperous Scotland and the ability to use the powers that we have in an effective way. To get to this point, we have all had to compromise. There has been given take as we worked our way through the deal, but I refuse to compromise on one key area, the area of New Dettrowland. Smith said that the Barnett formula should determine the size of the block grant. That is the benchmark against which we must assess the operation of New Dettrowland. The fiscal framework should not seek to undermine the operation of the Barnett formula as the basis for determining public expenditure in Scotland. Crucially, Smith identified that Scotland's budget should be no larger or smaller simply as a result of the initial transfer of powers. We have reached an agreement on the block grant, which involves using the UK Government comparability model that will be configured to deliver the Scottish Government's preferred option of per capita index deduction. Under this proposal, there will not be a single penny of detriment to the Scottish Government's budget as a result of the devolution of powers during the transition period for the next six years to March 2022. The UK Government will guarantee that the outcome of the Scottish Government's preferred funding model per capita index deduction is delivered in each of those years. Alongside that, there will be a review that will be informed by an independent report with recommendations presented to both Governments by the end of 2021. The fiscal framework will not include or assume the method for adjusting the block grant beyond this transitional period. The two Governments will be required to jointly agree that method as part of the review, and this must deliver results consistent with the Smith Commission's recommendations, including the principles of taxpayer fairness, economic responsibility and crucially the principle of no detriment. That secures no detriment now and for the next six years, and we have ensured that there could be no detriment imposed on Scotland at any point in the future. On capital borrowing, we have agreed to increase the Scottish Government's capital borrowing limits to £3 billion, accumulative £3 billion, with annual flexibility of 15 per cent of that. This increases our annual capital borrowing facility to £450 million to invest in infrastructure in Scotland and so improve economic performance. On resource borrowing, we will receive the powers necessary to manage tax volatility and economic shocks by increasing the resource borrowing limit set out in the Scotland Act alongside introducing a new Scottish reserve. The borrowing limit for forecast error will be £300 million per annum. The aggregate annual limit for forecast error and economic shock will be set at £600 million and the overall resource debt limit will be £1.75 billion. On implementation and administration costs, we have agreed a one-off payment of £200 million to support implementation costs and an ongoing funding of £66 million per annum. The committee will be keen to hear that I have also agreed that the Scottish Fiscal Commission will produce the official forecast of GDP and tax revenues and I will bring forward appropriate amendments at stage 3 to the Scottish Fiscal Commission Bill to give effect to those provisions. That all forms the basis of the fiscal framework that is true to the principles of Smith. This deal will ensure that the funding for Scotland cannot be changed without the Scottish Government's agreement. It protects the Barnett formula and it will allow the powers in the Scotland Bill to be delivered. I am acutely aware that not all of the detail is in front of the committee today, but I will make every effort once the material is published to be available to appear in the committee, if that would be the committee's wish, to look at the further detail once it is published in the course of this week. Thank you very much for that opening statement. I think that we are all delighted that an agreement has actually been reached. You talked through a number of areas. You made quite clear that the Scottish Government did not compromise an issue of no detriment, but clearly on issues of other areas, such as the Scottish Fiscal Commission and borrowing, there have been some compromises. Are there any other further compromises that have been made that you would wish to advise the committee of? Obviously, in the process of the negotiations, the Scottish Government has advanced particular propositions where we were trying to secure the agreement. For example, on borrowing, I argued for a higher limit than £3 billion, but I accepted that there had to be, and the Scottish Commission report requires this of me, that the borrowing arrangement had to be consistent with the chosen fiscal framework of the United Kingdom. If I am going to argue as strongly as I have argued for the implementation of the Scottish Commission report, I have to accept that there are constraining factors that I have to live within those. I have compromised on the total debt limit that I would have liked to have seen. I have compromised on the degree to which the annual constraints within capital borrowing and a variety of other issues. Fundamentally, I think that you have to take a step back from the conclusions and say in the round, is this a reasonable package that can be recommended to Parliament and in my judgment, it forms that basis. On borrowing, the ratio of prudential borrowing is not going to be one of the aspects of the framework. There will be an aggregate limit set on borrowing of £3 billion, which is an increase from the £2.2 billion that was proposed by the Kalman commission. More significantly, an expansion of the annual borrowing facility that we can undertake, in 2016-17, is £316 million. The new facility will take that up to £450 million, so there is increased capacity there to undertake capital borrowing. One of the easier issues for us to resolve in the process was around resource borrowing, where the chief secretary took an entirely understandable view about the risks of volatility to which the Scottish Government would be increasingly exposed. The facilities that have been offered in that respect are, in my view, appropriate in the circumstances. You talked a lot about the fact that Scotland will not suffer detriment to the tune of one penny, but there are a number of issues that came out over the last couple of weeks, which raised alarm bells. For example, SCVO talked about employability being devolved with £100 million worth of employability being devolved, but only £7 million being devolved to go with it. In terms of issues like that and welfare, where there were considerable concerns that the full cost of devolution of welfare would not be met, what is the position on those? I know that you have mentioned some £200 million in set-up costs of £66 million a year, but I am just wondering what that encompasses when employability and welfare fit in with those. If I could separate those issues out, convener, on employability, I will make a preliminary remark. My comments in relation to the exercise of the no detriment principle is in relation to the block grant, and the employability expenditure is outwith the block grant. The point on no detriment of being not a pound lost from the Scottish block is the relevance and reference point of that argument. Employability is slightly different. The Smith commission report said that the employability programmes should be devolved to Scotland with the appropriate funding streams at the conclusion of the contract. As members will be aware, we expected those contracts to conclude in April of this year, in April 2016. They have in fact been extended, so therefore the moment of devolution becomes later than was envisaged by the Smith commission. By the time it comes to the point of devolution, the United Kingdom Government will have taken decisions within competence to reduce the size of employability programmes within the United Kingdom with a consequent effect in Scotland. By the time it comes to the moment of devolution, the employability programmes will be diminished compared to what they were when the Smith commission took its view. The argument that has been advanced by the Treasury is that the funding that should be devolved is devolved at the point of devolution, not at the point of agreement to devolve. That is an issue in which the chief secretary and I were not agreed, but it is an issue that in the round of compromises I have had to accept that, when it gets to the moment of devolution, the spending by the UK Government on employability programmes will be significantly diminished on what it was at the time of the Smith commission report. That will be the consequential funding stream that will come to Scotland as a result. We expect that in 2017-18 to be £7 million, in 2018-19 to be £10 million, in 2019-20 to be £11 million and in 2020-21 to be £13 million. Of course, the Scottish Government will have the responsibility for employability programmes, but we will certainly not have the funding streams that would have been envisaged by the Smith commission in 2014. You asked finally, convener, about the issues in relation to administration costs. There are costs associated with the setup of new systems in relation to welfare and some other activities in relation to the cost of administration. We agreed a one-off figure of £200 million, which would be transferred to the Scottish Government, supported by an annual figure of £66 million on an on-going basis to support the operation of those programmes in the years to come. How realistic is that in relation to the ability to deliver those programmes? The DWP's estimate for the setup of the equivalent systems in Scotland was £350 million, so we have secured more than half of that capital cost. The Scottish Government's lowest estimate that we had for the setup cost was £400 million. I was mindful, again from the Smith commission report, that the Smith commission argued that the UK Government should pay a share of the setup and implementation costs, not them all. Again, I had to be mindful of the fact that if I was holding to the details of the Smith commission report, I had to do that on a basis that was fair and sustainable. The £66 million, how realistic is that in relation to the ability to deliver? The DWP's estimate of the cost of administering those systems in Scotland was £60 million, with a marginal saving of an additional £12 million. As is customary on block grant adjustment issues, we decided to split the difference on the additional £12 million and added that to the £60 million. It would not be any block grant adjustment without a difference being split at some stage in the process. The Scottish Government is reasonably content with that. Given that your boring is going up to £450 million, you take the view that you will be able to fund the setup costs of that new system. I am going to come at this from the point of view that I do not believe that it is a given that it has got to cost us more than £200 million. That was the estimate that we had, but that does not necessarily mean that we have to spend that. In the way that I take forward those priorities, if I am in a position to do so, after the election, we will be doing that in a fashion to try to control the costs as the committee would expect us to do. One of the issues in our report on the fiscal framework was the issue of moral hazard. What we said was that the issue of moral hazard needs to be explicitly addressed in the fiscal framework. I am just wondering how that has been expressed in the framework. We are not at the conclusion of the drafting of the Heads of Agreement. I will certainly reflect on that point as we look at the finalisation of the Heads of Agreement document. That is fine. There are quite a lot of members who want to come in with questions. Let us start with Gavin, to be followed by Mark. Thank you, cabinet secretary. I was pleased that you were able to give a bit more detail than I expected this morning. I want to probe, if I can, on some of it. In terms of capital borrowing, you outlined what the changes would be. When do they take effect? Would they take effect potentially in the budget that we are about to vote on today? Or are we talking about 17-18? They could not take effect until the Scotland Act has got royal assent, which I would not imagine will be before 1 April. I would imagine that Mr Brown will give me one second. I have some further handwritten notes, which will help me here in April 2017 for the borrowing part. In terms of the resource borrowing, you mentioned a number of elements. I want to make sure that I took them down correctly, because I was scribbling furiously. £300 million per annum? I am happy to provide a note to the committee, although it will be a note of course. In terms of resources, £300 million per annum for forecast errors. Then there was a figure of £600 million. Was that for economic shocks? Combined, forecast error and economic shocks. That includes £300 million. The £300 million is a subset of £600 million. Then there was a figure of £1.75 billion. Of a cumulative debt stock, which could be built up as a consequence of resource borrowing. For completeness, I should say that the repayment period for that £1.75 billion debt stock is between three and five years to be determined by Scottish ministers. Three to five years? That is resource borrowing. In terms of the Scottish Fiscal Commission, as you know, I have had an interest in seeing the official forecast done by them. I was pleased to hear that you were going to lodge amendments just for completeness. In terms of parliamentary timetable, you would have to lodge them on the midday on the Friday before stage 3, which is two weeks tomorrow. Traditionally, the Government would put them in the day before to allow other members. Are you willing to discuss the matter so that I do not wait until Thursday to see them and say, right, there is something else to go in? Are you open to having discussions so that I do not have to check them at the last minute and want to do something different? Given that Mr Brown has put such industry into the proposition, I am very happy to have that conversation with any members. I recognise the committee's interest, not least the interests of the convener on this particular issue. I am certainly very happy to engage in some discussion offline on what that would do. I think that we are still working through the detailed provisions of what is expected. That has been an area where I have been keen to agree with the Treasury the issues that matter to them. What I have resisted is essentially comprising the Scottish Fiscal Commission on an identical basis to the OBR. One of the issues that the Treasury advanced with me was the need to have non-executive directors of the OBR. I don't think that they quite understood the fact that there are three commissioners who are appointed by Parliament over whom the Government has no control who exercises functions. The key issue that I have agreed with the Treasury is that the forecasts of revenues and GDP must be undertaken by an independent body. That will be the focus of my attention in drafting the amendments at stage 3. I am not really at all keen to reconstruct the Fiscal Commission because it is operating independently. It will obviously have to be a resource to exercise the functions that will now be falling upon it. However, the very precise agreements that we have arrived at have been in relation to the issues of forecasts, which I know has been material to the committee and to Mr Brown. One of the things that the committee concluded in our fiscal framework report was that there ought to be some discussion of fiscal rules. Maybe you cannot tell us until the end of the week, but were there any fiscal rules agreed between the Scottish Government and UK Government as part of the fiscal framework? I think that I have gone through a few fiscal rules about capital borrowing limits, resource borrowing limits and repayment periods. This is the architecture of fiscal rules. If there is a requirement to have, for example, a debt repayment and resource borrowing over a period of three to five years, that is an obligatory fiscal rule and limits within which we have got to operate. To that extent, yes, there are fiscal rules. I have not gone through with the committee convener the details around the Scotland reserve. That will draw together the current cash reserve provision that was created by the Scotland Act 2012, the budget exchange mechanism facility that we currently have. It will create a single Scotland reserve that will be capped in aggregate at £700 million, with an annual drawdown maximum from the cash reserve of £250 million for resource and £100 million for capital. I would consider those to be other aspects of fiscal rules that will define the arrangements in which we operate. In terms of how matters now progress, the committee will conduct scrutiny. The devolution for the power committee will conduct scrutiny and other committees will do some scrutiny. I understand that legislation is not formally required. What happens at the end of the process? Do you lodge a motion in Parliament that Parliament votes on? What do you envisage being the mechanism for sign-off, if you like, by Parliament? The committee, if I understand the process correctly, is feeding its input into the devolution for the powers committee, who is the lead committee for consideration of the legislative consent motion. As I indicated in my opening remarks, I now consider us to be in a position where we can recommend the Scotland bill for legislative consent subject to the scrutiny that is applied by committees. As I made clear to the devolution for the powers committee yesterday, I have been conscious of the forbearance of parliamentary committees and not been able to scrutinise hard detail. That will become available with the heads of agreement in the course of the next couple of days. That would enable the scrutiny to be undertaken. As I indicated again in my opening statement, I recognise the constraints and timings that have been created, so I will make myself available at any time to come to the committee if the committee wishes to see me again on those questions. We would then recommend the bill for legislative consent. On legislative change, I am led to believe that there are technical amendments that the United Kingdom Government believes it requires to make to the Scotland bill in the House of Lords to ensure that the capital borrowing provisions can take effect. Obviously, there will be the usual intergovernmental dialogue around the contents of those amendments before they are lodged. Thank you very much, convener, and good morning, Deputy First Minister. It's good to see that we have a deal if for no other reason than I questioned you 24 hours ago in this room and it would have started to feel like Groundhog Day otherwise. I wonder if I could maybe look at a couple of bits of the detail in relation to what has been agreed. Obviously, yesterday, Willie Rennie expressed some concern and he has reiterated that today about the way at which the model for the transitional period has been arrived at. In what you have said today, you have said that, effectively, it is per capita index deduction by another name. I wonder if you could just go into the detail of how that has arrived at. Essentially, what we have agreed to is to use what has been described by the Treasury as their comparable model, which looks at the share of taxation of the different taxes, income tax, STLT, landfill tax, VAT, APD and aggregates tax, which emanates from Scotland. It essentially creates a block grant adjustment accordingly. If that was to be applied in the fashion proposed by the Treasury, it would deliver detriment to the Scottish budget, and we couldn't agree to that. What we agreed to was the variation of that model to deliver the outcome that would be created by per capita index deduction. The key point here is what is delivered, what is the impact on the money, and the impact on the money is driven by per capita index deduction. That is what we wanted to secure and we have secured it. That is where the basis of no detriment comes from. Essentially, we have got either an elegant or an inelegant route to get to per capita index deduction. Presumably, the further check that was built in, because the Treasury model was what underlies that, that could pose problems and post the transitional period, but the independent review that requires both Governments to agree would presumably act as a check against that. On the independent review, the committee has expressed its view in the past for some form of arbitration mechanism for disagreements that occur between the Scottish Government and the Treasury. Do you envisage that, through the independent review process, that might provide a model for something similar to emerge in future years? I do not think that that is the case, because what the agreement cements is an important principle that I secured agreement about in the Smith commission. The crucial difference that has happened in this agreement is that the Smith commission at my request agreed that whatever fiscal rules were put in place, they had to be agreed jointly between the Scottish and United Kingdom Governments as equals. Essentially, for the first time, we could not have something imposed on us. That is the origins of the negotiating strength that the Scottish Government has had in this agreement. What I was anxious to ensure by agreeing to this particular block grant adjustment mechanism is that that facility, that opportunity, that equality of status was protected for the future and it is cemented into this agreement. In 2022, when the review takes place, when both Governments receive the independent report, both Governments have got to agree to the mechanism that creates the independent report, both Governments have got to receive it and both Governments have got to agree any reaction to it. That equality of status between the Scottish Government and the United Kingdom Governments in that respect has been cemented into this agreement. That is why I feel able to recommend this for legislative consent and why I do not believe that there is any foundation whatsoever to the remarks that were made by Mr Rennie. In terms of the independent review, we took evidence last night of the devolution and further powers committee from the Secretary of State for Scotland. For obvious reasons, he could not go into issues around composition of who would undertake the review because it is five years into the future. In terms of how it will be composed, will that be something that both Governments will jointly agree in terms of who will be the individuals or organisations to undertake that independent review? That is correct, Chase. In terms of timeline, last night at the devolution and further powers committee, the Secretary of State outlined what he envisaged as the timeline for when powers would come into effect. In this Parliament, you have highlighted when you consider borrowing powers will come into effect. He envisaged that some powers would be available to the Parliament in April 2017, others may take a little bit longer. I noted on the radio this morning that you disagreed with some of that analysis by Mr Mundell in terms of the readiness of this Parliament to exercise some of those powers by April 2017. I just wondered if you could maybe expand on that for the benefit of the record. What I have agreed with the chief secretary to the Treasury is that income tax will be able to be exercised in April 2017, APD in April 2018, on borrowing powers in April 2017. On welfare powers, we will have to essentially do some further work on when that can practically be undertaken. The approach will be informed by the output of the joint ministerial committee on welfare. On welfare powers, one of the questions last night was whether they would all transfer as a basket of powers or whether those powers, which were more easily devolved early, could be devolved early or whether, given the administrative elements, you would want to all pass as a basket? I think that we would have to look carefully at all of the operational arrangements here because we are dealing with benefits to individuals and both Governments would have to be satisfied. I suppose that it is no different to what it is, but it is very different to the stamp duty provisions. However, there is a similarity that is not a contradiction in terms. There had to be a switch-off of stamp duty to enable land and buildings transaction tax to be switched on. One Government has to be ready to start up and one Government has to be ready to shut down. The same thing applies on welfare benefits, apart from the fact that it is more significant because it is people's livelihoods and their income to which they are dependent. We have to be absolutely certain that, on any benefit, we have the necessary arrangements in place. I am satisfied that the arrangements that we have on welfare powers will require negotiation and dialogue, but I see no practical impediment to that being undertaken. The VAT assignment that we expect probably in the financial year 2019-20. Can I ask, just in terms of the VAT assignment, what the reason for that being devolved at that stage rather than the beginning of the process? Essentially, it is the need to make sure that we have a strong methodological and database to enable us to do that because that is what is not currently undertaken just now. I will pick up on the last point about welfare first. My experience is that it is easier to switch off than it is to switch on, so I am assuming that this is about us testing our readiness to accept those benefits. Would that be fair? We will be the paying authority, so we have to be able to pay so we have to make sure that those arrangements are effectively in place. Have you got a timetable in mind? Not at this stage, but obviously the Government will want to exercise those powers as quickly as we can, but we have to do that in a fashion that means that we can deliver on those commitments. Of course. I should have done that at the beginning. Welcome the agreement reached and welcome the Cabinet Secretary's change of heart or compromise, whichever it is, on the Scottish Fiscal Commission, because doing independent official forecasting is absolutely the right thing to do, so I am glad that he is persuaded of it now. Obviously publishing the detail of precisely what that will mean before stage 2 would be extraordinarily helpful. I heard a commitment to do so by the end of this week. The heads of agreement will be published by the end of this week and that will include what agreements we have arrived at with the UK Government on that particular question. As I said in my early response to Gavin Brown, we have talked quite extensively within the joining checker committee about the appropriate arrangements that should be put in place. Some of what the UK Government was arguing for is unnecessary and I think that I have successfully persuaded them that it is not necessary. The key aspects that have mattered to the agreement have been the formulation of official forecasts on GDP and revenues and that point is beyond dispute. I wonder whether I might push at what appears to be a slightly open door and ask you about the sustainability of public finances and how you as a Government are meeting the fiscal rules. Both areas, we felt that the Fiscal Commission might benefit from having a role in. I will consider those points. I am not sure—I suppose that I would be keen to understand from Jackie Baillie what she means by fiscal rules, because I am clear what I mean by fiscal rules. If I have a fiscal rule that says that your revenue borrowing is a limit of £300 million, I know what the rule is. If it matters like that, those matters are clearly a public report. If Jackie Baillie wishes to write to me with her suggestions on that point, I would be happy to consider them. I would even be happy to come and meet you along with colleagues. That might be quicker. We will have a regular queue at my office door to give meetings on that question. Can I come on to the review, which is for March 2022? I have heard what you have outlined and I think that that is a reasonable framework. I am curious to know if one party disagrees what happens then, because what I would not want, as some commentators seem to have suggested, is that this discussion debate argument has been put off for five years. I am curious to know what happens when one party disagrees. My desire would be to avoid that happening, but I think that the crucial point, which is the guarantee for the public of Scotland, is that there is nothing that can be imposed upon us, because there is a requirement for this to be jointly agreed. I am not sure if Jackie Baillie has been sceptical about the possibility of the Government getting to an agreement here, but here I am with an agreement about which I am not complaining. I am saying that I have not got everything that I wanted, but I am not here complaining about it. We are able to secure agreements. If I look at the movement that the United Kingdom Government has made in the Scotland bill, for example, I pressed for that movement to be undertaken and the UK Government undertook that movement, because I felt that that was necessary to deliver what the Smith commission envisaged. I hope that Jackie Baillie might even be able to reflect on that point herself. Maybe the Scottish Government is making reasonable points in some of those arguments to ensure that we deliver the necessary agreements that we are required to deliver. The cabinet secretary will be more than aware that my position was very supportive of the Government and to suggest that he remained at the table until he got that agreement. Let me stick that to one side, because I think that there is an issue here that we just need to understand. If both Governments disagree—and it might be the UK Government, it might not be the Scottish Government—but if both Governments disagree, what then happens? I recognise that nothing can be imposed for the future, but do we go back to something? What do we go back to? My view is that we are getting into hypothetical territory here and I am unwilling to speculate on what might happen. We have a mechanism in place that gives us the confidence that nothing can be imposed on Scotland. The process will be informed by an independent report to which we have supported and participated in establishing the independent report. That will inform the process and from that we will be able to have an informed discussion with the UK Government about those questions, informed by the experience of an entire Parliament. I accept all that. I accept that you have a mechanism that you feel comfortable with. I think that that is something that I find favour with. I accept that nothing will be imposed. My question is that I want to understand exactly what all of the potential scenarios are. What happens if there is a fundamental disagreement? The parties remain in a position that it is not necessarily the intransigence of the Scottish Government, but it might be the UK Government. What happens then to the financial stability of the Scottish Government? That is what I am interested in. That is a position that, as I said in my earlier answer, is a hypothetical position. We have put in place arrangements that enable us to deliver no detriment over the period 2022. We have secured the preservation of our negotiating status on an equal basis with the Treasury at 2022, with a process to be informed by an independent report. I think that that is a very reliable set of arrangements that are in place to protect the Scottish interest. I absolutely agree with that. My problem is understanding what the consequences would be if there was no agreement. I think that it is of value to this Parliament, this committee, to understand precisely what is at stake. While you have agreed no detriment for a period of five years, which we absolutely support, I am worried that, if a consequence of not reaching agreement, that that is not preserved beyond that period. I think that there is a shared interest. On that point, on that scenario, Jackie Baillie has put to me that that could not happen because nothing can be imposed upon us. I am simply saying to Jackie Baillie that the scenario that she has put to me could not happen because nothing can be imposed upon us. I am just so that I am clear. Does that mean that we keep what we would have then and there is no reduction and there is no change? What I have tried to do is to give as definitive an answer as I can within the context of the agreement. I think that that is the firmest response that I can give to Jackie Baillie. Obviously, the value of Barnett to Scotland's public finances has come to the fore during those discussions. Have you undertaken any analysis of the value of Barnett and could that be shared with the committee? The Barnett formula has applied at every fiscal event, so we see the implications of that in our budgets. I think that we are discussing this afternoon. I will pursue that separately. Finally, one technical question. In terms of resource borrowing, you talked about £300 million per annum was your ability to borrow for forecast errors. Is there a threshold to that? Does some of that lie—the responsibility lie—with the Scottish Government if you got that wrong? My understanding of the current powers is that that is the case. That is forecast error for the taxes for which we are responsible. I understand that. I am asking about the threshold at which that is triggered. For example, just now, my understanding is that it is triggered. I think that the figure might be £150 million. There is a percentage that, if you get wrong, you have to cover that first element of before you can borrow, so there is no threshold. I, too, was interested in the Barnett formula. Although the committee has taken evidence from lots of people, there was always a mystery surrounding Barnett, including from people who are involved with the Treasury and how that works. I notice through everything that we are talking about that having clarity and being—in fact, I would imagine for the first time if that is the case—being clear as to the calculations that are done on the Barnett formula. Would you agree with that? The calculations that are applied on the Barnett formula are, in my view, pretty open. Essentially, they are driven by two factors, two documents. One is the statement of funding policy, which includes within it a set of comparability indicators, which, for example, are on health. If there is a change to health expenditure in England, there is 100 per cent comparability for Scotland on health, because it is an entirely devolved function. On some other functions, on defence, for example, there is zero comparability. If there is an increase in defence expenditure, there is no consequential benefit to the Scottish bloc of expenditure. If there is an increase in health expenditure, there is a population share of the entirety of the increase in health expenditure in England. The comparability indicators are included in the statement of funding policy. The OBR will publish now a set of numbers that will look at the change within the policy decisions that are made by the United Kingdom Government. For example, if the UK Government was to increase health expenditure by £500 million, that would be recorded by the Office for Budget Responsibility. The comparability factor would be applied to that for health. At every fiscal event, I receive a spreadsheet from the UK Government, which shows me the change in the budget lines. Let's take, for example, £500 million for health. That gives us a consequential, £500 million for defence, zero consequential. I scrutinise all that. My officials go through that with a fine tooth comb to make sure that what was intended in Barnett changes is delivered. Periodically, the statement of funding policy will be reviewed to look at those comparability indicators. Generally, that is a pretty transparent process. Whether it is widely understood is a completely different question, but reasonably transparent. If taxes in the rest of the UK were increased for a reserved matter, you mentioned defence, how would that affect taxes in Scotland? It depends on which tax was increased. If it was national insurance contributions, that would affect Scotland, because that is not a devolved tax. If it was income tax, it would be income tax in England, in the rest of the UK. We will have the power over non-saving, non-dividend income tax in Scotland. A tax specifically raised for reserved powers that Scotland would have a share of that. For example, if it raised tax to pay for trident, we would not be consequentials on the Barnett formula that would reduce that in Scotland. Equally, for the health service, where it is an increase, we would be given our share. However, if there is an increase on reserved matters that we have a share, is the Barnett formula then adjusted accordingly? That is an issue that is resolved in the strategic choices of the UK Government across public expenditure in the UK. The UK Government undertakes its spending review processes and will decide how much money it will spend on health, education and rural affairs and defence. It will make those decisions at the UK Government level and it will make its tax decisions about how it will fund those decisions. The Barnett formula will then be applied to those decisions that are taken in the rest of the UK. If there has been a significant increase in defence expenditure to pay for, for example, the renewal of trident, that will mean that, within the fiscal envelope, less money is available to spend on services from which we might get a consequential. The UK Government is, within its powers, able to spend money on defence. That reduces the amount of money that it can spend on health. When the Barnett consequentials are applied, we get no benefit in the block grant from the money that is spent on defence. Whatever happens to the health budget was cut to undertake to facilitate the defence expenditure. We would see a negative consequential arising out of that. The node detriment principle was, and that has been referred to already, open to interpretation. Are we sure that, given Scotland's much smaller tax base and tax revenue and population growth expected to be less and has been, than in the rest of the UK? Does the node detriment principle kick in to ensure that we will always have that higher per head spending? The Scottish block already carries population risk, because the Barnett formula is a product of population. If Scotland's population is a larger proportion of the UK population, in year 5, than it was in year 1, that will have an effect on the calculation of the Barnett formula. Population is already a risk that is carried by the Scottish Government through the exercise of the Barnett formula, because Barnett fundamentally is a population-based formula. It looks at the relativity of population between Scotland and the rest of the UK. In relation to the question of node detriment, the view that I took from the Smith commission report was that the Smith commission report at clause 95.1 argued that the Scottish block of public expenditure should continue to be determined by the exercise of the Barnett formula. To me, that is the test of node detriment. What should we have out of the Barnett formula? That is the test. Therefore, the block grant adjustment mechanism must not in any way undermine that Barnett line. That is essentially what I have secured. It was not on the table 11 months ago. Believe you me, it was not on the table 11 months ago. Something very different was on the table 11 months ago. Proposition called levels deduction, which over a 10-year period would have reduced our budget by £7 billion. Cabinet Secretary, although I am pleased that you are content that we have an agreement, it still feels that although the Barnett formula may be adjusted and your content node detriment and all that, we are secure that we still have no power to grow our population. In many ways, we are working with the system as is without the levers of having the power to react to a smaller population or being able to grow that. Is that true? I think that that is a fair assessment. It is a product of the conclusions of the Smith commission. I argued for more economic responsibility and economic levers to be devolved to the Scottish Parliament in the Smith commission. You can see how far I got by the product of the Smith commission report, but there are legitimate issues that we are constrained in our ability to grow the economy by the availability of the economic levers. That is why the application of the node detriment principle in the fashion that I have set out is so important in this agreement. John Swinney to be followed by Laisley. First of all, congratulations, cabinet secretary, on getting the agreement. I was not sure where we were going with that. I felt that some of the opposition parties were not quite as committed to holding the line as you have been. The fact that there is no detriment is excellent. Obviously, I did hear you giving us the main concession when you were asked on the radio the fact of the fiscal commission and that it is going to be doing the forecasting. Clearly, I am very disappointed about that. However, I do accept that that is one of the compromises that had to be made. Do you anticipate more resources being required for the fiscal commission because of that? I suspect that I better prepare the committee for a supplementary financial memorandum. I know how sticky the committee is on financial memorandums, so I better keep myself on the right side of that requirement. Since the convener was such an enthusiast for those arrangements, I am sure that that will be accommodated. I will probably fall to myself to question whether the amount of money is too generous, because I did feel that what they were getting was pretty generous. Have we any reaction from the fiscal commission members? Are they definitely willing to carry on in their roles given these new plans? I was able at the weekend to advise Lady Rice that I thought that that might be a possibility. I have not had the opportunity to speak to Lady Rice since the agreement was made yesterday afternoon, but I had forewarned that that might be a possibility. I am keen to discuss the issues with Lady Rice and the other members of the commission. To establish that particular point, I will report accordingly to the committee. I take it that we are not being given any resources from Westminster despite the fact that they want us to have this enhanced role. I am going to accommodate that within the wider capital and set-up costs that we have. The VAT has been mentioned in 2019-20 for bringing that in. I am right to think that that will not require any legislation on our part. Can you clarify for us how the VAT has been agreed as to how we get our share of VAT? One of the questions before was, is it purely at the time of final spend when the consumer buys the biscuit? Or are we getting any share of the value added by a factory, say, which happens to be built in Scotland? The approach that we have agreed in principle is a consumption-based approach, but, as I indicated to one of the members of the committee, the methodology is a new territory for Assygnation. We will have to work through many of those questions of detail with the UK Government as part of the process. What has been agreed is that it is consumer-based. Building a factory or expanding a factory in Scotland would not automatically give us an uplift in VAT. I think that I would prefer not to venture into some of the detail of this without us being able to do some more work. I think that we have plenty of opportunity and I am very keen to understand the committee's perspectives on some of those questions so that that can inform us in taking forward this work. We are literally in a territory where there is no methodology on the shelf that we could just take down to apply, so I am keen that I do not get into a territory that we have not yet defined. That is absolutely fair, that is fine. I just think that VAT is one, perhaps, that has not had the scrutiny that some other sectors have had. I am sure that we will all be keen to look at that. Can you clarify for us what legislation in the Scottish Parliament will need? I am assuming that APD will, I am assuming that all the welfare side will. Is there legislation that is required around income tax? I do not think that there will be any requirement because I would just need to look at the mechanism about how the Scottish rate of income tax will be. The resolution-making powers that we use for the Scottish rate of income tax, which we exercised a couple of weeks ago, are sufficient to enable us to exercise the new powers under the Smith commission, so I do not think that there will be anything that is required. In terms of set-up arrangements, the architecture of income tax devolution is now in place and ready to operate on the new financial year. If the Government wishes to create new welfare provisions, it will have to be legislated for. The existing welfare provisions will be able to be taken forward as they stand. There will be no legislation that is required on capital borrowing or revenue borrowing, certainly not required, but I may decide to bring forward legislation in relation to the creation of some of the fiscal arrangements, such as amendments to the tax powers and revenue of the new Scotland bill, if I judge that to be necessary, but I do that as a requirement for legislation. The fiscal commission obviously has to be some states of the amendments on the fiscal commission. Admin costs have been mentioned, particularly around welfare, £200 million and the ongoing £66 million, or whatever, each year. With the Scottish rate of income tax, we have been somewhat at the mercy of HMRC as to what its charges would be. I take it that continues to be the case for increased income tax powers that will be very much dependent on what it wants to charge us. I want to reassure the committee that the Government looks very closely at the estimates that are put forward in that respect. We exercise significant control over those estimates. The HMRC has required less funding than we envisage it would require in the implementation of the Scottish rate of income tax. The heads of agreement that we are expecting this week, how detailed will they be or will they be more detailed in some areas than others? They will be pretty detailed. They will have to provide the clarity that is required on those questions. I have a draft of the heads of agreement in front of me, which currently extends to about 19 pages so far. Those predate the issues that were resolved in the course of yesterday, so they will have to be revised to take that into account. I welcome the agreement, but we are trying to take in the details. The agreed model for the block grant adjustment is not explicitly indexed per capita deduction. However, the outcome, the results that have come out of the wee bit of a fudge model that you are comfortable with, as they are similar to the outcome if it was an indexed per capita deduction. In the agreement that we reached yesterday—it might help the committee if I read it into the record—the agreement says, "...for a transitional period covering the next Scottish Parliament, the Governments have agreed that the block grant adjustment for tax should be affected by using the comparable model brackets Scotland's share close brackets, whilst achieving the outcome delivered by the indexed per capita method for tax and welfare. That will ensure that the Scottish Government's overall level of funding will be unaffected if Scotland's population grows differently from the rest of the UK." In short, the UK Government's preferred comparability model is being reconfigured to deliver the outcome that would have been created by per capita index deduction. That is either elegant or inelegant. I shall leave it to the committee to decide. Models are generally inelegant because there is always discussion and agreement, and it is not compromised. You said about the £600 million for economic shocks and forecasting errors. Is that £600 million in total, if there was an economic shock, or if there was no forecast errors? Can you spend the £600 million if there was an economic shock? I can borrow up to £600 million for forecast and economic shocks. That would read to me as if I had no forecast errors. I could borrow if I wished £600 million for economic shocks. I should clarify for the committee that that is for what would be described as a Scotland-only economic shock. If there was a UK economic shock, then that is a UK macroeconomic issue, and the UK takes its decisions in relation to those questions. If there was a Scotland-specific shock, that is triggered when onshore Scottish GDP growth is below 1 per cent in absolute terms on a rolling four-quarter basis and 1 per cent below UK GDP growth over the same period. There is a rule that specifies what is a Scottish-only economic shock, which is part of the agreement. That is what has to be triggered to enable the Scottish Government to undertake any resource borrowing to deal with an economic shock. Onshore Scottish GDP growth is one of the reasons why there is an issue about why the UK Government was keen to have a forecast of GDP undertaken by the Fiscal Commission. You said that it is onshore, so oil and gas would still be considered as UK if there was a... The fiscal regime of the oil and gas sector is entirely within the competence of the United Kingdom Government. Following up from that, you said that the cumulative debt stock regarding that borrowing for the revenue income was the limit of £1.75 billion. It would need to be three years if you were spending that £600 million, if there was a sort of downturn. Then we would need to repay that. If there were three years of £600 million extra spend, in year four we would need to start paying that back because it needs to be repaid within a three to five year period. Is that correct? That is what I would consider to be some of the elements of the fiscal rules and the exercise of fiscal responsibility. Without nailing my colours to the mast, if you had two years in which you were borrowing for economic shocks at £600 million per annum, I think that you would need to take some action to remedy that pretty soon. Correct. One last thing about the population. What is the Scottish Government doing? Obviously, the population is inflows but outflows as well. People leaving Scotland are going elsewhere for jobs. I think about when I used to teach at the university and quite a lot of the students would leave Scotland and go with it, be it Australia, New Zealand or even in England. I suppose about ensuring our population, what other factors will the Scottish Government be doing to make sure that we try to keep our own population here? We have a keen interest as a Government in encouraging the growth of the Scottish population, whether that is by encouraging people to come to live here, who live elsewhere just now, or by encouraging people who have been educated here to stay here. There are a variety of things that we do. A lot of that is driven by the economic climate and the economic opportunities. We spend a lot of our time with the university sector trying to make sure that we have exciting research and development opportunities that enable people to see their future being here. There are a whole variety of different interventions to encourage people to come to Scotland and to live here. There will be mechanisms and incentives that we would like to have at our disposal. The post-study work visa is a very good example, where the Smith commission said that we should make progress on that question. Virtually every university principal in the country believes that we should make progress on the post-study work visa, but the UK Government said that we are not having it. It is an example of where we might have laudable aspirations in Scotland, but we cannot fulfil them because the UK Government says that we are not doing that. I hope that we can get some movement on some of those questions in due course. The first one is what role do you envisage for the Joint Exchequer Committee as we go forward in terms of implementation of the framework? The Joint Exchequer Committee will have an on-going role in taking forward the fiscal framework. It will be an essential part of the governance arrangements of the fiscal framework. I would expect it to remain closely connected to the development of the framework. Will the framework provide a breakdown of the adjustment of a block grant for each of the individual devolved taxes? I do not know how much detail we will go into, other than the fact that the comparability factors for tax will be included in the agreement. The agreement is there to set the rules, and the application of those rules will be evidenced by the material that emerges through the formulation of the Scottish Block of Expenditure. It will be clear to us from the numbers that emerge at each fiscal event. Thank you for that. Are there any further points that you would wish to make to the committee before we wind up? I would like to thank you for answering your questions comprehensively. In the light of the committee receiving the heads of agreement, if the committee wishes to see me again, I would be happy to come back at a time suitable to the committee to make sure that the committee has the opportunity to fully scrutinise the heads of agreement before feeding its contribution into the work of the Devolution Further Powers Committee. As I left my office this morning, the Devolution Further Powers Committee has asked to see me again, having not seen me yesterday. It saw me before the fiscal agreement had been reached. If the committee wishes to see me again, I would do everything that I can to try to accommodate that request. I think that that is more or less a certainty that what we do is looking to have Mr Hans here next week also. Thank you very much for that. I will now close the public session, and I will have a couple of minutes break to allow the Fisher report, members of the public, and our witnesses to leave.