 Edwmaster, m родin fy ngifat. the ninth meeting in 2016 of the Finance and The Committee of the Scottish Parliament could please remind everyone present to turn off any mobile phones or electronic devices. The first item on our agenda is to decide where to item 3 in private. Are members agreed? Are members agreed? Our second item of business is to take evidence from the Chief Secretary to the Treasury on the agreement between the Scottish and UK Governments on Scotland's fiscal framework. I'd like to welcome Mr Hans to the meeting and ask him I ask him to make a brief opening statement. Mr Hanz. Right, thank you Mr Gibson. My statement I will try and rifle through it as fast as possible and my apologies again for being late this morning due to traffic. I would like to thank you and the rest of the committee for inviting me to give evidence on the Scottish Government's new fiscal framework. In November 2014 the cross-party Smith Agreement was published. In it the commission stated the need for a new fiscal framework for the Scottish Government. I'm pleased to say that both governments agreed and announced the fiscal framework last Tuesday, the 23rd of February, while the details of this agreement were published last Thursday, the 25th of February. The historic deal will pave the way for the Scottish Parliament to become one of the most powerful and accountable of its kind in the world. As Lord Smith of Kelvin said himself last week, the agreement between the Scottish and UK governments sees the recommendations of the Smith commission delivered in full. I agree, Mr Gibson, wholeheartedly with Lord Smith. I believe that the deal that both governments have agreed is fair for Scotland and fair for the rest of the UK. Before we move on to your questions, I would like to take just a little bit of time to set out some of the detail of the key elements of the deal that we have agreed. Integral to the whole framework is how we determine the Scottish Government's block grant once it becomes more than 50 per cent funded by Scottish taxes. First, we have delivered on our commitment that the Barnett formula will continue to determine changes in the Scottish Government's block grant when the UK Government changes spending on public services. We have further agreed with the Scottish Government to extend the Barnett formula to cover devolved areas of welfare. And for tax, we have agreed to use the comparable model. Under this model, the Scottish Government holds the same risks and opportunities for devolved and assigned taxes as it does for devolved spending under the Barnett formula. That means that the Scottish Government holds the risk that tax per head in Scotland grows differently from the rest of the UK and responsibility for population change will be shared in the same way for tax as it is for spending under the Barnett formula. However, for a transitional period over the course of the next Scottish Parliament, the UK Government will manage overall population change. That being said, I should make clear that the Scottish Government's funding during the transition period will still be dependent on the policy choices it makes on the relative performance of the Scottish economy and on Scotland's specific demographic changes. To inform post-transition funding arrangements, we have agreed that an independent report will be presented to both Governments by the end of 2021. The subsequent joint review of the framework will ensure that we are still delivering the Smith recommendations with the Scottish Government managing the opportunities and risks associated with its powers. While one element of the fiscal framework has garnered the most attention, namely the block grant adjustment, there are other important aspects of the framework beyond the block grant adjustment. We have agreed extensive new borrowing powers for the Scottish Government. For capital borrowing, the Scotland Bill was amended by the Government on Monday to reflect an increased aggregate borrowing limit rising from £2.2 billion to £3 billion, and the Scottish Government's annual limit is being increased to £450 million, allowing for increased investment in vital infrastructure. For resource borrowing, we have agreed to extend the Scottish Government's powers to reflect the new risks and opportunities it will hold. The Scottish Government will be able to borrow up to £600 million each year for current expenditure within an overall debt limit of £1.75 billion, and in addition to managing forecast error, this borrowing can also be accessed if there is a Scotland-specific economic shock. The Smith agreement was also clear that both Governments should share the administration implementation costs of devolution. The broad approach is that the UK Government will provide an agreed contribution to the Scottish Government, and the Scottish Government will then meet all implementation and ongoing administration costs. The UK Government will provide £200 million to the Scottish Government to support the implementation of new powers. This funding will be a non-baseline, one-off transfer that will supplement the block grant. In addition, the Governments have agreed a baseline transfer of £66 million towards on-going administration costs associated with the new powers. With the exception of VAT assignment, where the costs will be shared, the Scottish Government will meet all costs of devolution. This will include costs borne by the UK Government, for example, in relation to the Scottish Government's income tax powers and powers to vary elements of universal credit. Both Governments have also agreed how to treat the principle of no detriment due to post-devolution policy decisions. We have agreed that all direct effects, that is to say, those financial effects that will directly and mechanically exist as a result of a policy change, will be taken into account. Behavioral effects, those which result from people changing behaviour following a policy change, will be taken into account only in certain circumstances. Finally, Mr Gibson, I wanted to touch on the important issue of independent forecasting. We have agreed with the Scottish Government that the Scottish Fiscal Commission will be responsible for producing all forecasts of Scottish Government tax revenues and demand-driven welfare, as well as forecasts of Scottish onshore GDP. This is something that I know the committee supported, and I am pleased to say that this has been achieved. The fact that we have now agreed a framework means that, subject to outstanding actions in both our Parliaments, we can get on with implementing these powers and the Scottish Government can get on with using them. Mr Gibson, I believe this deal is indeed a historic one. It delivers the new powers over tax, welfare and spending that were agreed by the Cross Party Smith Commission. I, for one, look forward to seeing how these new powers will be used. Thank you very much, Chief Secretary, for that opening. What will happen is that I will ask you some brief opening questions, and then I will obviously allow colleagues around the table to get in. Because of the time constraints that we are under within another 55 minutes or so, we will all try to keep our questions brief, and I will try to give everyone about eight minutes. The first thing that I was going to ask you was just to touch on something that you mentioned. You talked about the no detriment issue in terms of policy spillover effects, the fact that there should be no detriment as a result of UK Government or Scottish Government policy decisions post-devolution. That is a question that John Swinney asked yesterday. You also talked about the behavioural effects in certain circumstances. Can you give us an example of what that might be? I think that it might be better, Mr Gibson, to focus on the overviews of the sort of spillovers that we are looking at. Essentially, there are three types of spillovers that you could consider. The direct spillovers whereby, say, a change in welfare or tax policy leads directly in, say, a devolved area leads directly to a change in a welfare or tax in a reserved area. That would be an example of the sort of very direct spillover which will be predictable, foreseeable, et cetera. We have agreed to pay heed to those direct spillovers. The third area is the second round spillover effects, where we have decided not to allow that within the mechanism. The middle area is the behavioural impacts, where we have decided that the behavioural impacts can envisage this being a fairly exceptional case, where the behavioural impacts would have to be defined as being material, somewhat exceptional, perhaps unforeseen, and we would desire an appropriate mechanism in place for dealing with those effects. You mentioned direct effects and behavioural effects. What was the third one that you mentioned? The third one was a second round effect, so these would be things which you could argue that perhaps as a tax change or as a policy change had some kind of very second round effect on, say, tax policy or reserve taxation or something of that nature. Can you give us an example of that? Well, say if somebody, I don't know, it's difficult to sort of speculate, but say you were to speculate that some small change in a welfare administration, in the payment of a welfare payment or the administration of welfare or the level of a welfare payment, were to lead to something like people having some kind of impact on a reserve tax, so let's say national insurance or something like that. Okay, thank you very much. You mentioned in your opening statement the capital borrowing and in paragraph 54 of the agreement, it says that your consideration was given to the merits of a prudential borrowing regime in line with the Smith commission's recommendation and I asked this question, I'm going to ask you to John Swinney yesterday, why was the issue of prudential borrowing rejected because local authorities in Scotland can borrow prudentially, so I'm just wondering why there was no agreement on why the Scottish Government should be allowed to borrow prudentially? Well, Mr Gibson, it was considered, which is what Smith asked us to do. He asked us to consider it. He didn't say we necessarily had to do that and we did consider it and both governments agreed not to go down that road. What we did agree instead, as you know, was to agree a larger capital borrowing limit, which I think is appropriate. We've increased the capital borrowing limit from £2.2 billion under the 2012 act to be £3 billion today. Perhaps even more importantly is the percentage that can be borrowed in one year and other is the annual limit will now be at 15 per cent or £450 million and that was the agreement that both governments made and both governments I think are satisfied with that. Well, I realise that that was the agreement but what was the reason for rejecting prudential borrowing? Well, as I say, we both considered it and I don't think that it's always appropriate to go through the… I don't think that a lot of time, I think that both governments were happy to go through with just an increase in the existing capital borrowing and I think that both governments feel that that was appropriate and it will work best. Okay, thank you. Staying with capital borrowing in paragraph 59, the agreement says that the Scottish Government may borrow through the UK Government from the national loans fund by way of a commercial loan directly from a bank or lender through the issue of bonds. Will there be any preferential interest rate or that? Will it be a straight commercial loan or will there be a premium to be paid on interest? Well, the national loans fund is already established and that is the vehicle by which the Scottish Government can borrow from the UK Government at present. I'm not aware of any proposals to change the mechanism of the national loans fund as a result of the fiscal framework. Okay, thank you very much. Obviously, one of the big issues over recent weeks and one of the reasons that it speculated the media why it was difficult to come to an agreement was the report that the original proposals would cost the Scottish budget some £7 billion over the next 10 years and I've never seen a UK Government response to really challenge those figures. Was there a name on the Treasury side of the negotiations to end the Barnett formula or introduce a long-term reduction to Scotland's budget because that's clearly the perception by many here? No, that's a thank you for the question and it gives me the opportunity to put on the record that no, that was never the intention of the UK Government. The position of the UK Government has been absolutely clear. It first put in the vow signed up by the Prime Minister in terms of keeping the Barnett formula. That was clearly in the cross-party Smith agreement as well as a key part of Smith and was also in the Conservative Party UK-wide general election manifesto last year. Our commitment to Barnett, Mr Gibson, is absolutely clear. To be fair, I think that the only people who want to get rid of Barnett are those who are in favour of either full fiscal autonomy or independence. Why was there a reluctance to adopt the per capita index deduction method? There were discussions about, as I'm sure you know, quite a few different models and the merits of the different models. You'll also be aware of quite a lot of external academic debate about the merits of the different models. It is no secret that the UK Government's preferred model, because we felt that it best matched Smith, was the levels model. The Scottish Government's preferred model was the per capita index deduction model, but at the end of the day, Mr Gibson, these are all negotiations. I think that we both had to make compromises in different areas of the agreement. We now have a fiscal framework that both Governments feel is the right way to go forward, is the right thing that we can adjust to our respective parliaments, and is also fair on taxpayers in Scotland and on taxpayers in the rest of the UK. Thank you very much for responding to my questions. I'm going to open out the session out to colleagues around the table. The first to ask questions will be Lesley to be followed by Jackie. Thank you. It's welcome to be here today. I just want to ask my questions that relate to paragraph 66 about the Scotland-specific economic shock. You mentioned in your opening statement extensive borrowing powers and the new resource borrowing up to £600 million a year. In paragraph 66, it sets out the criteria for drawing down regarding the Scotland-specific economic shock. In the first sentence of paragraph 66, it says that the Scotland-specific economic shock is triggered when onshore Scottish GDP is below 1 per cent in absolute terms on a rolling four-quarter basis and a 1 per cent point below UK GDP growth over the same period. I'm going to be specific because I think that this could be quite a critical point going forward for Scotland. I asked yesterday, the Deputy First Minister, about the definition or his understanding of the term absolute. What I want to know is, is it absolute in nominal terms or real terms? The definitions are quite significant. What is your understanding for clarity? Is it nominal or is it real? Thank you for that question. If I may, can I first explain the background to this? I think that it is a really important part of the deal and leads through to why we need to have the independent fiscal scrutiny to properly derive those figures. The answer is that it must be consistent with the UK fiscal framework. Smith is clear that the Scottish fiscal framework must be consistent with the UK fiscal framework. The UK fiscal framework uses four quarters of GDP as well, so the rolling GDP, which can both look at the outturn of GDP as well as a forward look into the future. I can tell you that, looking backwards, we don't think that this specific event, the Scottish economic performance, has not actually been particularly divergent from the UK as a whole since the times when GDP figures were really properly collected. I think that it was only during the mid-1980s that this event might have been triggered in the past, but that's notwithstanding that it could be triggered in the future. The 1% is that the two criteria are basically designed to show is there a UK-wide economic shock, which is obviously the responsibility of the UK Government to meet that. Secondly, is there a Scotland-specific shock? That is why we need to look at the Scottish GDP relative to the UK GDP. In terms of whether it is nominal or real, if I offer Mr Gibson to write to the committee, the answer is that whatever is in the UK fiscal framework and those two must be aligned. I appreciate that to get the detail. The second point is that it is commonly accepted that recession is a period of general economic decline, and it is typically defined in GDP growth for two or more consecutive quarters. I forgot to say that it seems to be a word missing in the first bite of the Scottish GDP. I think that it meant to be the Scottish GDP growth in that first cent and about paragraph 66. If we are defining a recession as two quarters, when I asked the Deputy First Minister yesterday about the criteria, he agreed that it could be up to 15 to 18 months that it could take to trigger the additional drawdown. Do you think that that is fair? If a technical definition of a recession is for two periods of negative growth, where is the criteria set here? It could be to be 15 to 18 months for the additional borrow-in. Let me try to answer that through you, Ms Chairman. The first is that, again, to reiterate, it needs to be consistent with the UK fiscal framework. The UK fiscal framework defines an economic shock as being four consecutive quarters of below 1 per cent growth, and those can be both out and and forecasts. It needs to be consistent with that. You are right, Ms Brennan, that economists will normally define a recession as being two consecutive quarters of negative growth, but we are talking about a divergence of enough consequence from Scotland compared to the rest of the UK. Our starting point is not a negative GDP, but a UK GDP of less than positive 1 per cent over those four quarters. What the rule is intended to get at is the relative performance of the Scottish economy, which may need the absolute performance in terms of an absolute recession or a below 1 per cent event over four quarters will be dealt with by the UK Government. The question in front of that is what would we do? How would you define a Scotland-specific event? Can I just add for the benefit of the committee, Mr Gibson? Of course, the resource borrowing is not only about the Scotland-specific economic shock. That £600 million per annum limit can be for in-year cash management, a maximum of £300 million for forecast error and £600 million for the cyclical downturn. The resource borrowing powers—the cyclical downturn powers—will probably be the one that is the least used of those three powers within resource borrowing. I am not meaning in any way to downgrade its importance, but there are very significant new powers, which is exactly what Smith said. Smith said that there should be significant additional resource borrowing powers, and that is what we have delivered, particularly in-year cash management and the forecast error powers, as well. I will have to let others in on the three less than 40 minutes left. Jackie, to be followed by Mark. Thank you very much and can I welcome chief secretary to the meeting today. The block grant adjustment mechanism has obviously been agreed for a period of five years. You described it as a transitional period and I wonder whether that is not just a sign that the Treasury has not quite given up on the comparable model. My first question is that you are obviously going to be producing figures for the comparable model, which is your preference, and the per capita index deduction model. Do you see any difficulty in publishing both numbers so that we understand the difference? No, I do not. I think that there will be both the comparable model and then it needs to be reconciled with what the per capita index model would have delivered, so I do not see any problem in publishing those figures. Now, there obviously is the joint review in place for the mechanism beyond five years. I am curious to know that, despite all the best efforts that may be put into this, what happens if, at the conclusion of that review, both Governments do not agree on the way forward? I suppose that what I am wanting to know is what is the status quo that we would default back to. Is it a pre-agreement position, or is it actually just the agreement that we have reached just now? There is not a status quo. What the position is is that the independent review, so there will be an independent report on the block grant adjustment during the course of 2021, and then there will be a review on the whole fiscal framework early in 2022. The most important thing here is that the two Governments have it in their common interest to find a deal that will be workable. We have done it before. We did it in relation to the Scotland Act 2012 and the Scottish rate of income tax, which is now coming in. I am glad to see that being debated in the Scottish Parliament in terms of the effect that might have. One of the intentions behind income tax devolution was to have a debate about tax rates in Scotland between the different political parties and different democratic representatives. I am confident that we will find agreement again. The two Governments this time have been a lengthy negotiation. I am not letting anybody into a secret there. We have had 10 different meetings, but ultimately the two Governments have worked well together, and we have an agreement that will work for both parties. Does that mean that you will be persuaded by the per capita index deduction model, because the two generate significantly different sums? It will depend on the course of Scottish economic development and the rest of the UK economic development over those five or six years. The review has no preconceived outcome in terms of which model might be used and nor does it even state what the selection of models could be. Let me press you on this, because despite agreements being reached in the past, there is the possibility that agreement might not be reached. I simply want to explore what would happen in those circumstances and what the financial position of the Scottish Government would be relative to what the Treasury is thinking about. We need to look at all the possibilities in the round. If there is not that agreement, what position remains? Is it the transitional arrangement that would carry on, or is it something else? There is no preconceived plan in that. It is clear that there is no default indexation model. The review will be entirely unprejudiced and will have no preconceived view. It will be an independent review set up by the agreement of the two Governments. Both Governments will have to agree the terms of the review. As I said, I think that it will be in the interests of both Governments to get an agreement and to get a deal. By the way, I think that it will be a little bit easier in 2021 and 2022 than it is today. Of course, by then, we will have had five years of experience of the fiscal framework. We will have real evidence in front of us of how the fiscal framework has been working, which I think will help inform that debate and inform the independent review in particular. I am short of time, so I will be very brief with the next couple of questions. We expected to see detailed annexes to the agreement. They were certainly promised to us by the Deputy First Minister. Can you tell us when they are likely to be published? I cannot give a specific date through you, Mr Gibson, but they are being actively worked on and they will be available as soon as possible. A final question. We have dates for implementation of most of the powers. There is no date for the implementation of the welfare powers. Is there anything that—I understand that switching off a benefit is probably easier than switching it on—is there any kind of barriers to that power being transferred as far as the UK Government is concerned? No, I think that barriers would be the wrong word, but we have to make sure that it is in both Governments' interests and, particularly in the interests of the benefit recipient, that the mechanisms are in place to allow that transfer to take place. It would not be in the UK Government's interests nor in the Scottish Government's interests for that transfer to take place prematurely before the Scottish Government is ready to administer that benefit. Ultimately, that will be down to the joint work between the two Governments in making sure that the time is right. Again, I think that the two Governments will work well in that space, and nobody would want to do anything that could jeopardise in any way the welfare recipient's ability to get that benefit. Chief Secretary, in terms of assisting us in our parliamentary scrutiny, would you be willing to publish the documents that the Treasury put forward with its proposals as part of the negotiation and discussion that took place? It would be very helpful for us in terms of gaining a greater understanding of the negotiation that took place and also what the starting points and changing positions of each Government was. Let me answer that, Mr Gibson. The first thing to point out is that we have published some quite extensive documentation in terms of the communicase after each of the 10 joint extractor committees that give the items discussed and an idea of progress, the fiscal framework itself and the technical annex to follow. Those are all significant amounts of documentation. In terms of the documentation relating to the negotiation, both Governments agreed not to provide a running commentary during the course of the negotiations. It has not been done in the past to the best of my knowledge that working papers for the course of the negotiations of this kind of nature between the Governments have been published before. I personally think that it would be an unwelcome development. There will be a number of further negotiations and agreements between the two Governments and indeed between the UK Government and other devolved Administrations in the coming years. I think that Government's inter-governmental negotiations need an area of space whereby they can be informed, put forward papers, in the knowledge that that will remain confidential to those discussions and preserve the integrity of those discussions. You will appreciate that. The convener asked you in his opening question about the speculation, which I am led to believe is well founded, that the initial starting point of the Treasury was a model that would have led to a reduction over time in Scotland's finances. You have contested that that is not an accurate reflection of the UK Government's position. Do you not think that that would be assisted by us being able to see what the detail of that was, what the Government was putting on the table? I am clearer on everything that we have done, everything that we, the UK Government, have proposed at all times through the whole negotiations is consistent with Smith. I do not recognise the figures that you and the convener have used. I think that I heard one of those figures for the first time at Prime Minister's question time yesterday, put to the Prime Minister as question 1. It was actually right at the very top of Prime Minister's questions that that figure was used. I know that there has been a lot of academic debate and a lot of the academic sources have tried to look forward. Ultimately, in terms of any sort of look forward, it will depend on what the economic performances are, even in the transitional period. You have to recognise the risks and responsibilities being taken on by the Scottish Government in this area. The Scottish Government is taking on economic risk. It is taking on the risk that tax per head in Scotland grows differently to tax per head in the UK. It is taking on demographic risk apart from the headline population risk, but there is demographic risk within that in terms of the types of population increases relative to the rest of the UK, whether you are talking about taxpayers, whether you are talking about elderly people and so on. That is still risk that will be held by the Scottish Government in terms of some of this demographic risk. In terms of the policy choices as well, a lot will be dependent on what the policy choices are that will be made by both the Scottish Government and the UK Government. After all, those powers are designed for there to be, policy choices taken by the Scottish Government. It is often very difficult to look forward with numbers. What I can say looking backwards with the model most recently proposed by the UK Government was that over the last 15 years, compared to Barnett's status quo, it would have yielded an additional £6.5 billion in funding to the Scottish Government. That was the most recent form of the comparable model that was proposed by the UK Government. I want to return briefly to the question that Jackie Baillie asked about what happens in 2022 if there is no agreement. I appreciate that you want to view it through an optimistic prism, and that is fine, but we also have to look at the what-ifs on this committee. The Deputy First Minister indicated to us yesterday that if there was no agreement, that essentially the position would default to the status quo, which would be the status quo at that time, which would be the continuation of the transitional model. You appear to have indicated that that is not the case. Obviously, if there is no agreement, there has to be something that gets defaulted to. What would be your understanding of if there wasn't an agreement reached between the two Governments and there needs to be a continuation of some form of fiscal framework beyond 2022? What is your understanding of what happens in that circumstance? I think that the answer that I gave earlier is no default. Both Governments would need to agree the arrangements beyond the transitional period. However, I think that we would be able to do that. A, we have done it before, and B, we will have real-life experience of the fiscal framework having been in place, income tax devolution powers having been in place by that point for five or six years. I understand and appreciate where you are coming from and that you think that an agreement will be reached. The point is this. If at this point in time an agreement had not been reached, the simple fact is that the Scottish Government would be recommending to us that we reject a legislative consent motion because there was no agreement on a fiscal framework. If, in six years' time, there is no agreement, those powers will be here, they will have been exercised, the fiscal framework transition will have been running, so there isn't that position of, well, we'll just not accept the devolution without a fiscal framework. There will have to be some form of fiscal framework continuation if there cannot be an agreement reached. We can't get to the point in the last gasp in 2022 and say, well, we've not agreed. There has to then be something that follows on. My question is, what is the UK Government's understanding of what would happen in that circumstance? However remote the possibility that you consider might be, you have to have a position of what would happen next. There would be no default option. Secondly, that is effectively the point of the independent review would be to look at this whole question, look at the operation. I personally think that it would be difficult for either Government to go against the central substance of that independent review. That will be, if you like, the importance of the independent review, which is why we've agreed to have this independent review in the first place. I remain confident that the Government would find a way through it. It's difficult to know exactly who the Government will be in that year, but, nevertheless, I think that the owners will be on both Governments to find a way through it. That is why the independent report will be there and the review process is there. I have confidence in that process. The PMQ, you referred to, was asked by my wife, Patricia Gibson. Good thing that I was complimentary about it, Mr Gibson. Almost. Gavin to be followed by John. Chief Secretary, Mr Swinney was asked yesterday about the Joint Exchequer Committee. What does it look like? He gave the answer that it is basically him and you flanked by officials. Clearly, that works if the two personalities can work well together. That certainly appears to be the case at the moment, but there could well come a time where the personalities of the two individuals involved, whether that's five or 10 years down the line, don't work quite so well. What structural changes do you think are needed to the Joint Exchequer Committee in order to make sure that the process can flow essentially regardless of who is in post? That's a reasonable question. I don't envisage any structural changes to Jack at the moment. Jack is technically, if I'm not mistaken, the Deputy First Minister, myself, the financial secretary, the Treasury and other people at the request of the two Governments. It's been in place for some time and I think it's worked pretty well. I don't see any issues there or any plans to change it, but I'm sure that if a need was felt, the two Governments would discuss it and come to an amicable agreement. In terms of the Scottish Reserve yesterday, which I think is a positive development in terms of the increase in size and actually a bit of increased flexibility, how were the figures and the conditions of the Scottish Reserve reached by the two Governments? I think the Scottish Reserve or the Cash Reserve is an underappreciated part of the agreement. I think it gives a very significant budget flexibility for the Scottish Government. To understand it, it's different to resource borrowing. This is not borrowing, this is the ability to build up a reserve. Others might call it a rainy day fund, which will allow assist in longer-term planning of the Scottish Government and greater flexibility within its budget. The limit in that reserve is £750 million, which is a very sizable reserve, a very flexible and powerful reserve, with annual drawdown limits, which are £250 million for resource and £100 million for capital. I think that this is a powerful mechanism to assist budget management, which both Governments really appreciate, particularly with the greater risks and responsibilities being taken on, that you need to have a greater ability to plan for the long term. You were asked earlier by a couple of people about the behavioural responses to various changes and how it linked in with the no detriment principle. We talked through direct effects, which I think are reasonably straightforward. You talked about secondary effects, which are off the table. The one in the middle for me is the most difficult one, which is the behavioural effects. When I was a corporate lawyer, when you signed up to an agreement, we would spend a long time working out all the things that might go wrong in terms of disputes, and at a time when two parties were friends, we would work out how those disputes might be resolved so that when it came to it, there was a simple contract to look at. You have an outline of how disputes might be resolved, but I wonder if there is any merit in both Governments at a time when relations are clearly very good and there is not any dispute to work out some of the issues that could arise over the course of five or ten years and decide now when we are not actually in dispute to work out how you might approach. There are some illustrative examples out there. I wonder if that is something you would be willing to consider. That is a very reasonable question. What we are trying to get at was a system whereby the direct spillover effects would definitely be dealt with. Those, by the way, could go either way. What we wanted to do was to have a mechanism in place for the behavioural impact that would be used really exceptionally, would not regularly be used. We do not want to be having an annual reconciliation. There might be a little bit of this and a little bit of the other across the two borders. I do not think that would be in the long-term interests of either Government to have financial stability and budgetary stability. We did want to have in place some kind of a mechanism whereby behavioural impact could be assessed. It could be informed by independent evidence, perhaps from the OBR and the Scottish Fiscal Commission, but it would ultimately be a decision for the two Governments following a dispute resolution process that is explicit in the fiscal framework. We wanted to have that in there, but I do not think that either party would want to have that really used on a regular basis because we do want to have the ability for people to operate and be flexible on things like tax rates that they think are appropriate and decisions taken by the respective Government for their respective taxpayers that they would think would be appropriate in that environment. Finally, you have talked about independent forecasting. Both Governments have obviously signed up to that. Can you explain the reasoning behind getting the forecast done independently by the Scottish Fiscal Commission? That is incredibly important. Can I pay tribute to your committee, Mr Gibson, in terms of the good work that has been done on pushing for that? I think that from the UK Government's perspective, when we went down this road in 2010 with the creation of the Office for Budget Responsibility, we were seeking to move to a point where the forecast could be really well trusted as being independent from Government and independently derived. That is the first thing. The second thing is that it is not really, for me, the UK Government to dictate what the Scottish circumstances would be, but, given the fact that, in the fiscal framework, there are comparisons between, for example, UK and Scottish GDP, I think that it is essential that the two forecasts are done in the same way, in this case independently of Government, for us to be able to make that assessment. John Swinney, to be followed by Jean Swinney. Thank you, convener, and good morning, Mr Hans. So you prospered since I last saw you. The baseline adjustment to the block grant is touched on in paragraph 11 of the Heads of Agreement. It talks about the initial baseline deduction will be equal to the UK Government's receipts generated from Scotland in the year immediately prior to the devolution of powers. Previously, when there were discussions, the suggestion was that, for some taxes, at least, they go up and down from year to year, and a five-year average or something like that might have been more appropriate. Could you just explain why the agreement was eventually to have just focus on that one year before devolution? Yes. I think that that is consistent, Mr Mason, with how devolution has always been done. It has always been done in the year that the year zero affected when devolution happens. I think that is an important principle because the UK Government may well have taken different policy decisions in those previous years that could effectively almost have distorted that. What you want to do is to look at devolution at the impact at the point of devolution. There is one exception to this, and it is not a very substantial exception in terms of the amount of money, but it is in terms of cold weather payments, where we did, because of the fact that it is effectively referencing the weather. Actually, that is a separate debate in its own right as to whether that is influenced by Government policy decisions. I think that perhaps it is, but I am straying down an area of other Government policy that we did agree in terms of cold weather payments that would be averaged out over a longer period. However, in general, we want to stick to the principles of devolution that are at the point of devolution. On the property tax stamp, which was stamped duty land tax, our LBTT, if it was particularly poor year the year before devolution, we would gain from that point of view just because there would be expected growth, but you are happy to live with that? Again, it is important to be consistent in those things and important to deal with it at the point of devolution. On the indexation mechanism, there have been some questions on that already, and the whole point is that it is going to be in paragraph 17 the comparable model and then adjusted for what would be delivered by the index per capita method. Will all of that be published so that those figures will all be in the public domain? Sorry, will the model be— Well, the both models, so that the difference if it was just the comparable model, we would see that figure and then if it was what adjustment is made by the fact that it is indexed. Okay, can I think about that and can I perhaps get back to the committee in terms of precisely what would be published in terms of the models? But I think that it would be in the interests of everyone to have as much transparency as we can reasonably have on that. Okay, thank you, that's fine. On admin and implementation costs, again I think that that's been touched on slightly, could you just explain, I mean we came up with the £200 million, is that effectively just splitting the difference? Because previously, I mean one of the no detriment principles was whoever made a decision on powers would carry the cost and I've always wondered why, given that a lot of these decisions are made at Westminster, it's the Scottish Government that even has to pay the cost for switching off a UK tax. That doesn't strike me as holding the no detriment principle, is it? Well, Smith is actually very interesting in this area, Mr Mason, because it does, if you like, change the precedent to say that the UK Government should bear a share of the costs of devolution. And the both governments estimated implementation costs, you're right to be around £400 million and we did agree to effectively split that down the middle at £200 million each. Now, if you were to say that doesn't sound like very much, I mean what I would say is I think, if I'm correct, about two years ago the Scottish Government's assessment of what the costs of independence as a whole would be was, I think, only £200 million to £250 million. So, I think that £200 million is a very generous number in terms of meeting the implementation costs and we're also, of course, transferring £66 million in terms of transferring the marginal savings from departments in addition to that as well. Okay, thank you. VAT, I realise a lot of work is still to be done on, but I think it's been agreed to use the consumption method so that it would be the end consumer paying VAT that will be the principle. I mean, I've always wondered if we built a factory in Scotland that would add value. Normally, there would be VAT received because of that, but Scotland would not receive any of that VAT. Do you feel that's a fair principle? Well, we agreed what we agreed and I have to say, Mr Mason, that the VAT assignment was not a major part of the debate. I think that both Governments were comfortable, happy with how we're doing that. We're doing, actually, VAT assignment will be fully online a little bit later than income tax. It will come in in 2019-20 again to reflect the proper kind of assessment of the workings of the methodology over that time, but both Governments are in agreement with the methodology and we're both happy with that. Okay, and finally, if I may, I am the one member of the committee who disagrees that the SFC should be doing the forecasts. I mean, would you accept that the OBR is not really completely independent? There have been stories about it being lent on, it's very independent at HMRC for its figures, so independence is not linked with who does the forecasts, is it? No, I strongly disagree with that. I think that the OBR is a robust and independent body. One has to recognise the difference between independence and being, if you like, not interacting. Here is where one has to get it right. You have to have interactions, in our case, between the OBR and the Treasury, because the OBR needs to assess the potential policy changes being produced by the Treasury. At the moment, as we lead up to the budget, there will be interaction between the Treasury and the OBR in terms of looking at the scorecard, so the Treasury needs to say, well, this is what we are potentially proposing, this is what we're looking at, what do you think the impact would be on the public finances if we were to do this or the other, and the OBR quite rightly comes back with an assessment, and that is an iterative process that can go on for some time. That is in no way causing to question their independence. They will give an entirely independent view. I think you might be talking about the case where a Treasury Minister had passed on very indirectly a suggestion. I actually did have a look at that email exchange. It was between my predecessor as Chief Secretary, and I didn't think there was anything wrong with that particular email. I don't think he was seeking to change the forecasts in any way. I am confident of the robustness and the independence of the OBR. The OBR has been given a very strong review, an external review by its Canadian equivalent, and Robert Chote has been reappointed for another term. I think it is a very good body, and I think it has transformed that whole area of UK budgetary forecasting to go independent. I think that it has just been immensely beneficial. I don't hear anybody, actually, Mr Mason, anybody in Westminster who is proposing going back to the old system where the Government did its own forecasts. Good morning, Mr Hanson. Very early on in your opening remarks, you made the statement that Scotland underwent with the news powers. It has become one of the most powerfully devolved Governments in the world. That is not true, but research shows that there are many devolved Governments. Will you stop using the phrase, because it is really irritating when it is simply not fact? We can have a disagreement about that. I think that I am about to appear in front of the Devolution Further Powers Committee, which may well have questions in this area. Even if we were not to agree on that, we would say that, through the Scotland bill going through at the moment and the fiscal framework, the Scottish Parliament would become a lot more powerful and a lot more accountable. If you and I could probably just at least agree on that, I think that the accountability, by the way, is also incredibly important in terms of increasing accountability to taxpayers, which is one of the points behind tax devolution in the first place. I do not doubt that there are merits in the arrangements, but it is not the most devolved regional Government in the world of other countries. When we were talking about the tax base and so on, you highlighted a number of the risks to Scotland. For example, the tax per head or population growth, it seems to many of us that we have a lot of the risks but often not enough of the responsibility in order to change that. In other words, it is very difficult for Scotland to grow its population when that is something that is a reserved power in terms of bringing people into the country and so on. There is a lack of power to grow many of the of the incomes that we might, that are at risk. Would you agree with that? No, I would not. I think that you are talking about the reserve power and immigration powers. What I would say to that is that it is quite right that immigration powers remain reserved. I think that you and I may differ on that, but nevertheless I think that that is the right thing. Secondly, the Scottish Government has considerable powers to attract more people to Scotland. Both people who are coming to the UK in the first place and choosing where to go to in the UK. Secondly, within the UK, the Scottish Government has already got very significant planning powers, housing powers, transport, brilliant universities, skills powers, schools powers, health powers, all kinds of different things to attract more population both within the UK and to those moving to the UK from abroad. I do not agree with you that there are not powers for the Scottish Government to do something about population. We will agree to differ. Just finally, given that there is a bit of discrepancy between the VAW and the Smith recommendations, but a lot of people are concerned, I think, in your Government too, that these are laws made in haste, that it was a declaration in desperation when it looked as though we might gain independence, that the VAWs and the Smith commission have been done in haste. Given that we have this declared transition period, do you think that that is something that needs to be worked on almost immediately, that, in fact, what is happening in Scotland in the next five years is going to be very significant as we look at these outcomes and that there should be real clarity around them, including the Barnett formula and its calculation, but that will take a long time so that it will not be something that needs to be established in the final year of the five-year period. However, it is crucial that we start looking at the kind of data that is required now, and would you see that some review for this committee and this Parliament would be looking at that in detail at least annually or every six months between now and then? I am sure that there will be plenty of commentary over those five years about the workings of the fiscal framework. However, if your suggestion is to start the review now and have a five-year on-going review, that is not something that I particularly favour, and that is not what is in the agreement. It has taken us 10 months to get to this agreement, and I am not feeling a natural urge to start reviewing it right away after all of that work, but I am sure that there will be plenty of independent commentary. As to be fair, there has been on the different models and the negotiations on the fiscal framework up to now to help inform. That is the most important thing. That is why I have a lot of confidence in the review that it will look at five years of real experience prior to that in a way that we cannot really do so today. We can look back as to what models would have done in the past and we can think about and speculate about what models might bring in the future, but by then there will be a real experience to inform that review. That has included questions from members of the committee. I was going to ask the chief secretary about that. Will the OBR continue to forecast revenues for Scottish taxes, or will the Scottish Fiscal Commission be the only forecast published? That is a good question. I genuinely do not know the answer to that. I would look forward to that. I do not think that that should inhibit in any way the Scottish Fiscal Commission, but if I were to write to the committee as to whether clearly the OBR does have to assess GDP, taxation revenues and so on throughout the whole of the UK, I think your question is whether they would then specifically break down a Scotland-only component in it, I would have to check. I think I would have to check exactly what the ONS are also doing in that space. Rather than me idly speculating, Mr Gibson, if I can write to you on that point. That would be very much appreciated. I do want to appreciate you for your succinct and clear answers to the committee. I would also like to thank committee members. We have been very tight for time this morning. I understand that you started over 20 minutes late, and I would point out that if it was a Department of Work and Pensions interview, you would now be sanctioned for being more than 15 minutes late. You have a busy morning, so we will not keep you any further. Do you have any further points that you want to make to committee before we wind up this public session? The only thing that I would say, Mr Gibson, is that the traffic in Edinburgh is perhaps not as bad as in my constituency in west London, but it can be still pretty bad at rush hour. It was the first flight from anywhere in London to get to Edinburgh, so there was no way that I could have been here earlier. I understand that you are probably going to stay overnight because of work at the house, but I appreciate you coming in any case. It was great to have you, and I think that we did get through a lot this morning. I wish you well for the next committee, and thank you very much for coming to speak to finance. That being the end of our public deliberations, I will now call a two-minute recess and then we will go into private session.