 Mae'r gwneud fod i 잡eth deallu... .. math à i dd好的en nhw... .. llwyddo i weld y dd zweite yng Nghymru... .. i ddarparu amladdir sy'n ddygymphweld yng nghymru yng nghymru... .. maen nhw'n gwneud Cyngorol. Mae'r wneud yn cael ei wneud ym mwy ffordd o'r teimlad dyma... .. o fewn ffordd o ffordd o'r teimlad... .. mae wir palwg, sydd o mwy ffordd, yng nghymru... .. am dyn nhw, o fewn ffordd a'r teimlad. We have only one item of business today, which is to continue to take evidence as part of our inquiry into Scotland's fiscal framework. Therefore, I would like to welcome to the meeting this morning Dr Angus Armstrong, Professor Charlie Geoffrey and Professor Nicola McEwing. Good morning to you all. Members have received papers from each of our witnesses, so we will go straight to questions from the committee. I think I'll start with your own Professor McEwing. What I would say is that when I ask a question to any specific member of the panel, please should other panellists feel free to come in with their own comments subsequently, so everyone has an equal opportunity to make comments on each other's papers where they wish to. Professor McEwing, you have said that managing the new fiscal framework requires more effective and institutionalised Government relations than currently exists. You have also talked about in paragraph 1.6 that both the Smith report and the UK Government command paper recognise the need for intergovernmental collaboration towards agreement on a new Scottish fiscal framework consistent with the UK fiscal framework. You go on to talk about things where agreements need to be required, such as a block grant adjustment to reflect new tax-raising powers and welfare responsibilities to reflect tax revenues for gone and spending no longer undertaken by the UK Government. Finally, you talk about how the intergovernmental machinery needs to be scaled up. I wonder if you can talk us through some of this a bit more for the record and tell us what some of the pitfalls are and how you think we can actually take this matter forward successfully. There are two things to bear in mind. First is the machinery for co-operation and co-ordination between the two Governments. At the moment, quite ad hoc, there is a mixture of multilateral forums like the Joint Ministerial Committee and bilateral forums like the Joint Exchequer Committee, the finance called laterals, but it is not altogether clear what purpose they serve beyond sharing information, communicating what each level of Government is doing. There certainly don't make decisions. Joint Exchequer Committee is a little bit different because it seemed to be set up with the purpose of managing the transition of new powers emerging from Scotland at 2012, although its terms of agreement were never agreed between the two Governments. There's a little bit of a difference of opinion on what longer term purpose it should serve. It's all very informal, it's all very ad hoc. The meetings are not all that regular. In the case of the Joint Exchequer Committee, we know it hasn't met for the last couple of years, so lots of things get taken over at official level. The interactions between officials are very important, but if there's more ministerial regular interaction, that can help to serve all of the other interactions as well. As we move towards a more complicated and complex devolution settlement, the gaps, the problems and weaknesses in inter-governmental co-operation become more problematic. That's the first thing, and the second thing is an issue for our Parliament. Clearly there is a lack of reporting, a lack of accountability for inter-governmental relations. Again, as those sorts of forums become more important, the role of Parliament in scrutinising what they do and scrutinising the relations between Government becomes more pressing. There's a problem both in the relations themselves and in the accountability and scrutiny of those relations that I think need to be addressed. What you're saying is that it should be certainly much more formal arrangements. I think that it should be more formal and transparent. One of the things that the Scottish Parliament Information Centre said in the report, which you may or may not have seen, is that the quote to John Swinney in talking about the block grant adjustment, I mean, we'll be familiar with that, but again, for the record, I'll read that out. It says, there are two and a half years of evidence gathering different discussions, different research processes and so on, but it was sorted out in a 15 minute conversation between the chief secretary to the treasury, which shows that if there's a will and an assessment to agree these issues, it can be agreed upon within a reasonable timescale. As Spice has already mentioned, those questions have raised transparency around decision making. The committee itself took evidence from the cabinet city treasury, Mr Swinney himself, David Gawke at the treasury and various other people in organisations, and at the end of the day it was sorted out in a telephone call. Clearly, that's no way to resolve things. Obviously, it had to be done at that very last minute because of a lack of agreement and we had a budget to pass, but obviously you would like to see more formal mechanisms where these things are resolved, given the fact that the block grant adjustment decision was, for example, only for one year and we're going to have to go through that again. As I understand it, that 15 minute conversation meant a conversation between one Government's figure, the other Government's figure and they split the difference, which I know that sometimes politics works that way, but looking forward you might like a more systemised way of working these things out, but I think this committee secured a concession which potentially sets a precedent, and that's in the papers that you received from the meetings of the Joint Exchequer Committee. There is nothing like that in relation to the Joint Ministerial Committee or any other inter-governmental forum, and because that committee hasn't met for a couple of years, then clearly that's not altogether satisfactory, but the minutes of the meetings that you received were actually very frank. I was surprised when I was reading them to see how frank they were, and I think that if that can set a precedent for other inter-governmental forums to report to Parliament and allow you to scrutinise those relationships, then that would be a positive thing. Okay, thank you. Just one further point before I let Professor Geoffreyon next. You've also sent a paper that the Calum Commission recommended that a Joint Ministerial Committee finance be established, but this was not pursued. Is that something you believe should be pursued? Possibly. I'm not quite sure why it wasn't pursued, why the Governments decided that there wasn't a need for it. Finance issues come within the Joint Ministerial Committee on Domestic Affairs, but maybe as tax devolution intensifies, there might be a case for having a dedicated forum to discuss purely those issues. The downside of that is that because of the asymmetry and devolution throughout the UK, the Joint Ministerial Committee is for all the devolved administrations and the UK Government, so it might not be the most appropriate forum moving forward. Okay, thank you for that. Professor Geoffrey. Thanks. I am fully in line with Nicola's comments about the need for more systematic relationships between Governments and for greater scrutiny available to parliaments about what Governments do. I'd also say that I've been saying that for 15 years, ever since the devolution reforms in their first incarnation were implemented, and I think that academic expertise has contributed to various inquiries of various parliamentary committees at UK, at Scottish and indeed in Welsh and Northern Irish contexts suggesting this. Now, this probably speaks a little bit to our failure to have the kinds of impacts that we'd like to with our expertise, but it also says something, I think, about the UK state and the approach that its central institutions have taken to what you might call territorial management. The UK state has not adapted in that whole period to the realities of devolution, and that is a more explicit need to think across the various legitimately constituted Governments of the UK to find common purpose and to find mutually acceptable arrangements. In the absence of that, what we have is a set of ever-evolving bilateral arrangements between UK, Scotland, UK, Wales and UK Northern Ireland, around which there is no particular system and which has in some a fragmentary tendency. What I pointed to in the paper that I wrote for the committee was the continuation of that tendency with parallel reforms under way in Scotland, Wales and Northern Ireland, or under discussion, and a political context at the moment, and no doubt for some time to come, which is quite likely to add further ad hoc bilateral adjustments in the various places to that system. I think that that renders the system as a whole increasingly intransparent, but also increasingly difficult to capture in a systematic structure of intergovernmental relations. There is a syndrome here, which no-one appears to be able to get a grip of. Good morning. First of all, I would like to make clear that I stood for a nomination to the Labour Party for Edinburgh South West in January, just so that it is known. Since the end of January, I think that the hustings were the 30 or 31st. I have had no political involvement since then, just for the record. I have very little to add to what my colleagues have said in terms of the machinery. I would only point out that the classic principle of federalism outlined by Walter Oates talks a lot about spillovers. Where spillovers are minimised, it is much easier to devolve powers. Between two such integrated countries—in fact, four such integrated countries—that will be considerable spillovers, which I think supports the need to have as formal a structure as possible to measure and make adjustments for those spillovers. I am going to your own submission, Dr Armstrong. You talk a lot about borrowing. You say that Scotland should be free to borrow under its own name for capital markets, but you then go on to talk about, as you just touched on, spillovers. You say that one of the most important and long-lasting spillovers from decentralising fiscal powers is fiscal and discipline at sub-central government, affecting creditworthiness of central government. Is there any evidence that there has been any fiscal and discipline in Scotland? The question is, in light of the Smith proposals, what would happen? At the moment, it is a hypothetical question. The amount of revenue powers that are about to be devolved are going to be significantly different from what there has been in the past. I am not at all trying to say that there has been discipline in the past. I am merely trying to point out that, around the world where powers have been devolved in federal structures, one of the most difficult issues that people have had to deal with, countries have had to deal with, and a recurring problem is this in discipline because the responsibilities and the liability are not fully aligned. It is much more of a summary of what people find from the evidence from countries around the world over the last 400 years. It was not, I suppose, said that this is a reflective of the past because Scotland has not issued any bonds, for example. I would say that I think that it is lacking in the debate that we have had a real lack of clout on all sides on this question. It really is a very important question. Whether that is the command paper, which seems to suggest something different—you could read it both ways— it goes further than the Smith commission. The paragraph in the Smith commission is just not clear at all what that is supposed to mean, and yet it is extremely important to find a lasting and appropriate solution. I quote that the commission is utterly vague on that. I have no idea that that paragraph seems to be used just about everywhere by all different assemblies, and it is just not clear what it means. There seems to be an assumption throughout your paper about gloom and doom, I feel, that Scotland would run into fiscal difficulties because there is a lot talking about bailouts. You say that Scotland's share of public debt is approximately £126 billion. We need to be repaid before debt issuance powers are granted. How would that be achievable? That was under full fiscal autonomy. The idea was that all tax revenue went to the Scottish Government, so there would be no collection of tax revenue from Scotland to the rest of the UK. The question becomes, suppose that, at some date in the future, there was an issue, what would the rest of the UK's case of address be? Since there would not have any claim to any tax revenues, I thought that the paragraph in the Smith commission said that the UK could always introduce a new tax to deal with this. I thought that that was highly unlikely to be successful, which is the comment that I made about the Boston D-Party. That would be very difficult in those circumstances. If no tax revenue were to accumulate to the central UK Government, in terms of that negotiation, you would like to say, how would the rest of the UK make sure that it would always be protected, and one way would be that there was no tax liability from Scottish taxpayers to the rest of the UK? We do not surely, if this did happen, the debt could be assigned to Scotland in the interest of whatever paid, but you cannot seriously expect Scotland to pay that debt to the UK from where. Where would Scotland find 126 billion overnight? That is the issue of full fiscal autonomy. If no revenue goes into central government, it is quite a big change to where we are at the moment, which is 90% of revenue going into central government. If zero goes into central government, I think that the way that this would be looked at would be, well, in the extreme, you have to go to the end game and say, what would happen to the worst possible circumstances? How would that negotiation work out? That would be that the rest of the UK would have no liability to Scottish taxpayers because they would be getting no revenue from them. Just an agreement to pay the interest would leave the rest of the UK households exposed to the stock of debt that at the moment is the equivalent responsibility of Scottish taxpayers. I accept that these ways that there would be no liability to the rest of the UK in this zero tax revenue going to the rest of the UK Government are a very big departure from where we are today, but they are the way that it would be ultimate protection for the rest of the UK. Professor Jeffrey, what's your view on that? When we move into that territory, I step out of my disciplinary expertise, but let me make a comment, and that is that the discipline of economics, the very fine discipline at Angus, often works with very clean assumptions and tries to draw inferences from very clean assumptions. Politics, physical science is altogether much grubbier in the way that it works. My reading of the situation that Angus describes is that it wouldn't happen in one go. We've heard from SNP sources that full financial responsibility, I think that we now know it as, would be phased in. In a sense, that process is under way with the very limited amount of fiscal autonomy established for the Scottish Parliament at the outset being supplemented as the Scotland Act 2012 powers come in with some variation on the Smith proposals likely to be pursued by whichever party grouping controls a majority of seats in the UK Parliament after the next election with a commitment by the SNP in addition to that to press for full financial responsibility on a phasing in basis. That sounds to me like grubby politics at play which wouldn't leave us at the kind of cliff edge assumption that Angus has set out there. This would be something negotiated in the context of a changing Scottish fiscal framework amid a changing UK fiscal framework over a period of years. Not too much to add outside of my disciplinary comfort zone but to say that it is an illustration of when you increase fiscal autonomy or any other kind of autonomy it does heighten the prospect that Angus referred to at the beginning of those spillover effects in both directions. If you have greater responsibilities within Scotland then paradoxically it could make Scotland more vulnerable to the decisions taken elsewhere that impinge on those responsibilities and also at the same time heighten the potential for Scottish Government decisions to have an impact, to have cross-border effects. It does reinforce the central point that I was trying to make is that the more you increase powers within Scotland the more you need those agreements and institutions in place to manage those spillover effects. I think that the transition to whatever set of new powers we were moving to should go hand in hand with agreement on how you manage and coordinate the messy edges, the spillover effects of that. Just to go back to fiscal autonomy a wee bit. I don't want to go too far into that without letting colleagues in but you said also in your paper that if Scotland were to seek full fiscal autonomy in the UK it would have almost no method of address but surely the UK holds the whip hand on this. I mean they have control ultimately. Well what do you mean by control? Well I mean they control their political and economic levers in terms of the UK economy at present did they not? For the rest of the UK. So as far as I understand full fiscal autonomy the taxation would be collected in Scotland rather than being redistributed back to a block grant with a number of services sort of bought in so to speak defence, foreign affairs presumably financial stability. Appreciate that sorry I was just trying to I probably didn't ask you the question properly. What I'm saying is do you feel that if full fiscal autonomy comes and it's irreversible because that seems to be the implication of what you've said there that's really what I'm trying to maybe we're talking about two different issues here but that was the issue I was trying to get from. I see what you mean. So if full fiscal autonomy happened do I think that there was a way that the UK could seek for address if it wanted to take back some of those powers? Well not with any certainty and that's kind of the problem that you've got to how would you start to turn around and say in what would presumably difficult circumstances that this would be, you know, this would be a better and can I just point out that you know you said that this is gloomy this is not a forecast and the point about economics is to look at the worst scenarios to make sure they're safeguarded against before they ever happen. You know if people had done this in Europe we probably wouldn't have been in these situations of poor architecture if we'd taken notice of this at the beginning. So this is no way it's supposed to be a forecast it's supposed to say well what are the parameters around this would work and I think it's better to be hard headed and clear about these first but I totally acknowledge that ultimately there would be a political negotiation of course they would. I mean I understand that but the reason I was saying gloomy is because I mean the Institute of Fiscal Studies took a slightly different view. They said in the length of March that full fiscal autonomy would give more freedom to pursue different and perhaps better fiscal policy and undertake the radical politically challenging reforms to make additional growth be it the run-out areas where existing UK policy could be improved upon. Would you not accept that? I mean because there doesn't seem to be any of that in your paper. No in the last paragraph I think it says this paper has not looked at what could be the growth improving sides of the revenue there clearly if you have control of your taxation spending then there's lots of things you could do which may or may not make things better or worse it's that would be entirely to decide and quite rightly and we have made it quite clear that Scotland should be free to borrow we did this we've done this a number of times we haven't said they should be constrained so because we understand the idea is that Scotland has the capacity to manage its own fares and that can only I think really happen if it does have at least greater capacity to borrow but I would argue that has capacity to borrow. Before I open up to colleagues I want to move on to Professor Jeffery's paper because I haven't really touched on that I mean it's so involved I always feel as if I'm stealing everyone else's time here when I spend so much time so I'm trying to overdo it in terms of each of you so just focus on one area I mean you obviously in talking about the United Kingdom an enduring settlement or Scotland the United Kingdom an enduring settlement you're saying that it's a liability we are a liable guide for Scotland's the reasons for that I'm just wondering if you can expand on those reasons for the record and also some of the other kind of issues which you believe could create some kind of shifting in what Smith has actually come out with and also if you could touch on Barnett which you say and I quote begins to wither on the vine once some of these changes are made Thank you very much Scotland's fiscal framework exists within a UK fiscal framework the two relate to each other and you might well say that there are Welsh and Northern Irish ones as well and quite possibly an emerging English one now they're all moving parts in a system and they're each moving in different ways for different reasons three of them I set out in the paper the first is that the Smith's commission consensus is no longer a consensus on what was written in that report I mentioned in the paper that John Swinney in a sense moved away from that at the press conference marking the launch saying okay we'll take this but we think there should be various ways for various reasons more the Labour party also has supplemented in a rather vague way what it thinks should be on offer as part of a new Scotland bill in the field of welfare and the Conservative party has taken something away which is the commitment in the Smith's commission report that all UK MPs should be voting on any budget decisions to do with income tax that's now gone in the Conservative party vision as set out by William Hague in January and reiterated in an English manifesto a written version of which I have yet been able to track down so Smith is a moving target in a sense with at least three of the parliamentary parties in different ways moving beyond the initial consensus the point about Barnett is a is a different one Barnett is a quite fundamental part of the existing framework for determining the budgets of the devolved administrations but it is becoming less important in so far as fiscal autonomy at the devolved level is increased because that means there is a smaller quantum through which Barnett consequentials will flow because part of the fundraising responsibility becomes that of the Scottish Parliament around the Scotland Act 2012 whatever comes out of Smith there is a similar process under way in Northern Ireland around corporation tax so Barnett is envisaged for Wales as the Silk Commission proposals on finance move towards legislation so Barnett becomes a smaller part of the system and the fiscal autonomy which generates own revenues becomes a bigger part of the system there is a very interesting point about what the party has suggested in moving beyond Smith it has talked about an English rate of income tax I'm not sure whether that's what it's actually proposing it's probably proposing an English, Welsh and Northern Irish rate of income tax to be determined by a group of MPs in the UK Parliament to the exclusion of Scottish MPs but that's whether it's English or English, Welsh and Northern Irish is an interesting issue relative to Barnett consequentials because the package of decision making about what happens in England is what has driven adjustments to devolve budgets through the Barnett process but if you begin to take England as a distinct unit not subject to decision making by all UK MPs, you move into a very different place the Barnett system may make some sense I'm not a fan of the system at all but it may make some sense if all UK MPs are making decisions about England in the consciousness that this affects the budgets of the devolved administrations if you create a separate decision making space for England then that rationale becomes challenged if there are English MPs deciding on matters to do with England without the inclusion of MPs from the rest of the UK it undermines the principles in the system we're not there yet that's speculation but it is a logical consequence of the way in which the Conservative party has moved the final moving part is simply the UK general election if you were meeting in a month's time you might be a bit sureer of where we are but there is there is speculation and to some extent a price list for the involvement of parties representing distinct bits of the UK for their support in helping to establish a UK government of either colour and if we take as an example the democratic unionists in Northern Ireland to whom the price £1 billion per year has been attributed this would not be a Barnett payment because to generate an additional £1 billion for Northern Ireland through Barnett would mean an awful lot of extra spending at the UK level so this would be very explicitly a deal to bypass the current system Plaid Cymru and Wales have argued for equivalent per capita returns to those received by Scotland under the current system again if you were to generate that through Barnett that means a very big boost to UK level spending which would of course feed through to Scotland and maintain the differential so they mean a side payment for Wales in particular which would be beyond Barnett so we could see a system depending on the numbers work out where the current mainstay of the UK's system of territorial arrangements for budget adjustments becomes increasingly bypassed so all sorts of moving parts which renders the current situation certainly less transparent but more subject to asymmetric relationships between the different parts of the UK harder to conceive and manage through intergovernmental relations and much harder for you and your equivalents in the various parliaments of the UK to keep adequate scrutiny oversight over I think that something which Charlie's pointed out touched on the English votes for English laws issues this is where the problem of asymmetry of size really raises its head and becomes very difficult to solve because if one was to go down that route just again hypothetical because we don't even know what that would look like but suppose then you would have the English committee or parliament or whatever it is making income tax decisions for 85% of the union which would clearly have spillovers to the other parts of the union and because it's 85% the monetary policy takes into consideration the overall fiscal position of the United Kingdom 85% of which would be decided by this committee or parliament whatever it is but everybody else would have to live with the monetary policy decisions and so actually that's quite undemocratic in many ways and so that runs into problems as well as we've pointed out to the treasurer select committee there's real democracy issues around that because of this interaction between fiscal and monetary policy when it's 85% ish of the whole union Chris McKee Do you want to comment on this? I don't think that Smith's proposals or their translation into the command paper and the draft clauses was an enduring settlement anyway I think that there were elements in there that would have created new anomalies which would have meant we would be revisiting it before too long anyway maybe an example of that would be around the issues of tax powers that we've been discussing if you devolve all of income tax on earned income only and this parliament chose to raise the higher rate of income tax it's not beyond the realms of possibility for higher earners to shift their income into unearned savings or dividends or to change residence status if that's an option open to them then that would not have been the intention of that power but it could be one of those unintended consequences I think there are anomalies all the way through that package but I agree with Charlie politics is moving on very very rapidly which makes it uncertain as to what I think there will be a Scotland bill I think there will have to be politics also demands something for next year's election but the contents of that I think are still unclear on the issue of an English Welsh Northern Ireland rate of income tax or English votes for English laws I mean I think one of the implications of that that I haven't seen evidence of being thought through yet is that that would demand a change in the way that the UK Government does its business not just in terms of finance but it doesn't think of itself or organise itself on that sort of territorial basis for England only or in a jurisdictional way and that would need to change I think that's one of the consequences of those changes in parliamentary and legislative procedures that would need a change also in government and the executive so I think there's lots of things that are perhaps said in the heat of an election campaign the details of which remain unclear and the consequences of which remain unclear OK, thank you very much for that now, go on to the session to colleagues around the table first person task question will be to convener to be followed by Mark Thanks convener I mean I think probably we're going to begin over similar themes as each of us ask questions I mean the one in transparency which has been touched on already and even the suggestion that for example the DUP might ask for about an extra billion I mean that's very transparent in a sense we all see that happening if it's agreed to that's open so there's no problem with transparency I mean there might be a lack of logic I suppose to it and on the other example I think Professor McEwn when we were looking at the block grant adjustment I mean again it's been quite transparent we've done all the studies for two years and then in 15 minutes they made a decision and the both sides I think have been quite open about that so that's been quite transparent again it might not be totally logical so should we really be worried about the transparency issue I'll literally deal with the DUP issue the point I was trying to make is that that level of transparency that you had after pressing for it I understand is unusual with respect to intergovernmental issues that have read the annual reports of the joint ministerial committee there are about a page and a half of very generously spaced text which barely tell you what was on the agenda of meetings let alone the substance of the discussions so that's where I think that the level of detail that was made available to you in relation to those sorts of discussions maybe should serve a precedent I understand the sensitivities within Government where there needs to be a degree of confidentiality particularly in advance of meetings you're not going to maybe publicly declare your hand if it would be damaging or make it more difficult to gain concessions I understand all of that but I think that there is a balance to be struck in terms of the degree of transparency about what's coming in those meetings so that parliament has an opportunity to scrutinise and question Government on the content of discussions and that in all of the other areas of intergovernmental relations doesn't take place so in an ideal world would we clearly there seems to be from all the papers I can see there's the need for a kind of formal structure and there's also the need for good informal relationships I think that seems to be taken so is the problem at the moment that what we need is we need to have the informal relationship they come to a kind of broad agreement then that comes to a structure meeting and there are actually concrete reasons given for why the decision was made and we seem to have missed that out at the moment would that take us forward do you think I think if you talked to officials they would probably suggest that those formal ministerial meetings are almost things would only get that far if they couldn't be resolved through the more informal channels and that's quite normal and quite common in other systems as well but I think it's where there are politically contentious issues where there are jurisdictional issues then I think it's appropriate that parliament has an opportunity to scrutinise that and so that's the sorts of things if it couldn't be dealt with through the informal channels then it might make it to that sort of forum and maybe you should know about that and know if decisions are made know the rationale for coming to a particular conclusion one thing I would say on the joint ministerial committee and formalisation I think formalisation is important it also has to go alongside a revision to what it's for and a reflection on the purpose of those sorts of forums if they're just regular and institutionalised and they meet to do not very much at all then it's not really going to be in the interests of any government to invest time and resource in that so I think if they are focused with a clear purpose that might mean making decisions which they don't at the moment they're not executive bodies then I think that would probably be a positive thing but they would require agreement from each of the parties on the purpose and their status within it at the moment the GMC has a joint secretary but probably functions in a little bit of a hierarchical way which one could see would perhaps be problematic for the devolved governments that were involved In the spice paper it refers to other countries and I think some of it was commenting on yourself so I'm not sure how much if you're an expert on that area but are there good models out there because I get the impression that in Germany and Canada they're constantly having meetings with each other I mean do they work or are they just kind of formalities do you know? Probably a bit of both I mean Charlie mentioned earlier about this sort of plethora of bilateral arrangements between the different governments and different bits of the UK that are emerging but it's still very little compared to most intergovernmental relations in other countries that I'm aware of anyway there are many more forums for discussing these things now some will be more important than others that might depend on the issue differences between the governments it might depend on the personalities involved so I think in there are two things that I think your briefing paper does point out that I think are important to bear in mind one the UK is not a federation and two well three things two it's incredibly asymmetric with the multinational state and I think those things do affect the dynamic of intergovernmental relations in a way that they don't perhaps in the case of Germany that you mentioned maybe a little in Canada Professor Geoffrey do you want to? I might say something about Germany but I wanted to come back to the DUP point I think there's more to transparency than saying this is what we want and that's our price one might say well where did that figure come from where is the evidence based process which produced that figure when was it debated in the Northern Ireland assembly and I think you'll find that the answers to those questions are well it wasn't it was what we made up because that's what we thought we might be able to get if the numbers turn out that way I think transparency is about predictability it's about having rules of the game so that scrutiny can be done on a systematic basis and it's worth reflecting that the Barnett formula was introduced in a sense to produce a certain level of stability in the rules of the game whereas beforehand the level of funding spent by the UK Government in Scotland, Wales and Northern Ireland depended on the negotiating skills of the Secretary of State for Scotland in discussions with the UK Treasury and that was felt not to be terribly transparent and not necessarily to be the best basis for establishing territorial funding flows and I think what we're seeing now is a calculation about what kind of leverage can come from an election rather than clearly established rules of the get set of rules of the game which are amenable to debate and scrutiny Can I just ask you that point is one better than the other you're saying it used to be just a negotiation and now we've got perhaps a more mechanical system that word was used by a previous witness I mean is one inherently better than the other or is it just two different ways of doing things? Territorial finance in decentralized states is always a mix of the two always calculations of power however defined that can be the economic power that a particular unit has it can be the outcome of an election which can temporarily invest power in a party which will have at best nine MPs so that's always going to be part of the process I think there is a concern given the way that the UK is trying to adapt itself to various pressures for additional decentralisation that a clearer understanding of how territorial finance decisions are made would actually be quite helpful for the stability of the arrangements in each part of the UK and the stability of their operation from 1 to 1 and that's what rules of the game broadly agreed principles around which you have a political negotiation deliver and that's to go to Germany that's what you have in spades in Germany where there is a more or less constant process of negotiation between the territorial units and between them collectively and the central level I don't think this is a particular model for the UK because Germany is in many senses a very centralised country which draws the territorial units into government at the centre and it establishes its rules of the game to a considerable extent in the country's constitution so at a very high level of legal status which I think we're away from in a country which is unable to write down its constitution in one place Thank you Professor, I'm sorry did you want to see anything on that or? Just simply to point out that the amount of meetings and so on it doesn't equal transparency and opacity and a lack of transparency are necessary conditions for having moral hazard so moral hazard doesn't happen out of thin air it's when things are opaque that's the necessary condition for moral hazard that's when you get risk shifting and that's why you want to get rid of it and the best way that Charlie said is by having the rules set as clearly as possible right at the beginning Okay, thank you On your own paper you spend quite a lot of time on debt and the relationship of Scottish debt and UK debt something that has been brought up to us previously is then the relationship of local government debt and I just wonder if you see that perhaps need to look at how we deal with local government debt which largely has does its own thing under the prudential framework as we move forward I actually think that there is this is covering for the whole of the UK an issue with having to have much greater oversight over local authority debt but also local authority off balance sheet financing where there certainly wasn't in the past considerable leeway for agreements, long term agreements that were not clear what they were and what the implications of them could be had things turned out differently in terms of interest rates over the last 10 years I understand that most of those have been unwound but it struck me that the only people gaining for these were the investment banks that were advising them and it wasn't clear at all what the risks were that local authorities were taking on that need to be considered here The argument for the prudential framework has been that as long as the individual unit can afford to repay whatever it's committed to be it straight debt or some other arrangement that should be okay but would you argue that the centre should be more worried about the various constituent parts? Yes I would you could say that the prudential framework these are interesting terms it's as long as you can pay but it's only when you can't pay that it becomes an issue obviously so we have to work backwards to what would happen if somebody couldn't pay and what would the incentives be for another part of government to have to step in and resolve that because responsibilities in liability need to be aligned to have authority and responsible governance and so having that as clear as possible at the beginning and understanding what would happen if things were not to turn out the way that a local authority perhaps envisaged I think that that's very important to establish those rules as clear as possible and that seems to be the lesson from many of these federal governments that there's an ongoing difficulty with being clear partly because of the way these federations evolve and every country's federation has a different structure and different nature to it because of their own political history but trying to be as clear as possible about where the liability lies I think that as an economist is a first-order item If a Scottish local authority get into trouble we would have to go in and sort them out wouldn't we as the Scottish Parliament and similarly if the Scottish Parliament get into trouble the UK would have to step in under current well, obviously these would be your own decisions but under current arrangements then I would expect any local authority to get into trouble in the UK the next level of government to come in and support it not least because of course you as Hamilton said you should only have borrowing powers if you have a means of extinguishing them of extinguishing the debt so if you don't actually have any revenue powers borrowing powers is not very prudent because there would be no way that they could actually resolve it themselves if they got into trouble full fiscal autonomy of course would be very different because all fiscal powers would be awarded to the Scottish Government I think on this final point on the this issue of transparency it's exactly around this issue of borrowing is the intention that a Scottish Government forever runs a balanced budget apart from the errors so errors is accepted, that happened forecasting errors happened but is the intention to always hold a balanced budget if that is the intention that would effectively be saying the last 90 years of economic development that you can smooth shocks that would be cast aside and if you then say well actually you are going to be able to have a macroeconomic policy a separate macroeconomic policy well that seems to contradict what the UK have said in the command paper and this is what I mean by lack of transparency there seems to be no even understanding of what each other's positions are I mean do you think bringing in some kind of third party into all of that would help I mean I think in Australia there's been this talk about the Australian grant commonwealth commission is that what it's called who seem to be able to stand outside the government the relationships is that a good model? As far as I understand that's what happens when things which provinces need to have additional support I think that we're talking very much at the inception stage of how do you set up these rules and the responsibilities and the legislation I think that's for national parliaments to solve themselves the difficulty is it's not clear exactly what each area has in mind when it comes to issues like debt that paragraph that I've quoted is something that's used quite often in various guise a few words change but within the overall UK fiscal framework that's changed does it change every time the UK fiscal framework changes? Okay good question Thank you The final area that I wanted to touch on was a Professor McEw and you mentioned no detriment and that's been something that's come up at the committee quite a lot you can analyse it very clearly in my opinion as to the different levels we could have relaxed no detriment or a strict no detriment I mean are you aware that that has worked in other countries especially the on-going part or evidence I think as to whether on an on-going basis you can really have no detriment or you can't I'm not aware of anything that exactly resembles a quite strict interpretation of no detriment as it's set out in the Smith commission report and there are my knowledge is a little bit sketchy but there are agreements in Belgium for example I know that additional fiscal autonomy went alongside cooperation agreements that would minimise tax competition between the regions within the country so that's a kind of no detriment on an on-going basis sort of issue Charlie might have something to say again about Germany because there is a kind of solidarity principle in place there but it's more a kin I think to abailing out sort of scenario rather than a detriment one but my knowledge of the countries that I know of detriment or consequences spillover effects if you like happens routinely and it's part of the consequences of having multi-level government within the European Union we have an element of control around competition policy which ought to minimise detriment to some extent but I don't know of anything that would go as far as I think as I interpreted that second no detriment clause within the Smith commission that would require financial compensation for policy decisions that had a detrimental impact and I cannot for the life of me see how that would be manageable in a way that wasn't highly politically contentious I saw in your House of Lords committee and you said there's no such thing as watertight compartments there will inevitably be spillover effects so do we just have to live with the facts a bit untidy? I think you do multi-level government is untidy okay sorry I just wanted to reflect on an idea which has been put into the election campaign quite possibly without much much thought it was very big in the Cumberland news recently I've got the press clipping here and there's all sorts of local papers in Cumberland which were very full of it and that's the so-called Carlisle principle that the prime minister set out I think on the 21st of April which is a very interesting idea in which a Conservative Government after may would conduct an annual review of the impact of the Scottish Government's policies including over taxation to assess if they're having an adverse impact on other parts of the UK this is about making sure we understand the impact that devolution is having and make sure that the rest of the country never unwittingly loses out I had a bit of an exchange with Nicola about this beforehand and unbeknown to each other I had coined the Gretna principle and Nicola had coined the Dumfries principle because there's something a bit asymmetric there in the assumptions underlying that and the asymmetry is the absence of consideration of a decision taken by the UK Government which might have a detrimental impact on Scotland and who would be the body set up to have a look at that alongside the annual review of the impact of Scotland on the rest of the UK I think that points a little bit towards a possible need for an independent arbiter at least an arms length arbiter or a capacity for analysis which is not driven by a central Government as judge and jury on a matter without being subject to the same accountability requirements for its own decisions for their spillover impact I think that points to the real difficulty which Nicola has emphasised in acting that ongoing detriment principle it's a very, very strange kind of understanding which doesn't have many equivalents elsewhere except in ongoing intergovernmental relationships insofar as they are institutionalised in other places which clearly do look at those spillover effects but if you don't have those ongoing intergovernmental relationships to organise in a systematic way you cannot have that mutuality which I think is needed in understanding the spillovers between different jurisdictions Can I just this no detrimental phrase I mean it's, I find it extraordinary when it's an economist it sounds like a lawyer's phrase and you know while I think having an independent panel of experts might be the best of a bad way to try and estimate this the idea that it's economically can be estimated I think is very optimistic the point I'd like to make is that the consequences are all the rest of the UK so for example if you take trade between Scotland and the rest of the UK the sterling amount is obviously exactly the same as trade the other way because it just goes across the same border but because Scotland's 8.5% of the UK total trade between Scotland and the rest of the UK as a chef Scotland's GDP is worth about 70% so any change in that has a huge impact on Scotland 7% so a 1% point changed from Scottish policy whether good or bad has a very small effect on the rest of the UK 1% point changed from the rest of the UK policy whether good or bad has an enormous effect on Scotland and so again they say symmetry plays which is very important to get right and that's in a sense why bizarrely enough you'd almost want to have more controls over the rest of the UK than you'd want to have on Scotland although everybody thinks it should be the other way around it's actually the rest of the UK that could really make life difficult through its good or bad decisions or then the other way around that's a fair point did you want to come back in Professor McGill there's not much detail on the Carlyle principle but my reading of it is perhaps a little bit different and it's alongside the interventions of George Osborne that I cited in the paper to the Treasury Select Committee where he seemed to interpret no detriment as meaning that if there was a detrimental impact say in the north of England then it would be the UK Government's responsibility to intervene to manage that and the Carlyle principle could be read in that way as a commitment by the Conservatives made in an election campaign to the north of England to say if there's a detrimental impact we will step in and try to address it what's not clear is if that evidence of detriment would then lead on to some sort of inter-governmental agreement or expectation that the Scottish Government would step in too to try to alleviate that detrimental impact I mean I think that's an altogether different proposition and much more problematic and of course one that would have to work in the reverse situation on which is equally problematic I think that we've got all day on this but I think that that's great, thanks so much Thank you Mark Thank you so having had the convener and deputy convener hoover up most of the questions that I had anticipated asking this will probably be quite brief but just on the no detriment stuff maybe a little bit further on that I mean my understanding at the beginning of this whole process was that the no detriment was intended to apply simply at the point of which powers were transferred to have grown into other definitions and there appear to be three or four different interpretations that are now in play depending on who you're asking and when you're asking them so I just wonder how far forward is no detriment intended in your understanding to apply in terms of how policies are then enacted because you could be 20 years into the future and still applying a no detriment principle and how does that actually take effect well within the Smith commission report there are set out different different no detrimental effects so there is the first that you mentioned at the point of devolution so that neither government should be any better or worse off as a result of that transfer of powers whether it's revenue raising powers or spending powers and that's not necessarily easy as you've seen in the case of adjustment debates but it's doable I think but the Smith commission report also stipulates two other areas of no detriment the first is to say that when changes in tax in the rest of the UK for which responsibility has been devolved should only affect public spending in the rest of the UK that's in relation to the taxes issues that we've already been discussing and the second is that when either government makes policy decisions the tax receipts or spending of the other the decision making government will either reimburse if there's an additional cost or receive a transfer if there is a saving so that is about ongoing policy decisions now George Osborne's interpretation of it didn't seem to go that far my hunch is that because this is so difficult to give effect to that it might not actually transpire into any agreements and arrangements otherwise I don't really see the only way it would operate is if it was a disincentive to diverge at all and I don't see the Scottish government of whichever party doing nothing with its new powers I mean presumably in essence what you've described is essentially a kind of long term maintenance of effective status quo arrangement where any change that is made and then I guess the question is how do you then measure the impact of that policy is there an easy way that you could say for example if we took a decision in Scotland around for example the income tax rate is there an easy way to measure whether that has a detrimental impact in another part of the UK you mentioned the Carlisle principle but you know it's probably the Cardiff principle as well and how do you measure those impacts I think it's extraordinarily difficult to measure cause and effect in that way because there will be for any development whether it's in Scotland or whether it's in the rest of the UK there will be multiple drivers, multiple causes that have led to either a fallen revenue or a decrease in jobs or an increase in jobs or whatever it is think of it in terms of new competencies say in welfare and social security if the UK economy changes in such a way as a result of UK Government decisions that increases a welfare burden within Scotland does that mean that Scotland gains additional compensation as a result of that it's very very difficult to establish cause and effect in these cases which is why I think it's deeply problematic of course one could flip it the other way and say that there may be decisions which are taken in either scenario which could result in disproportionate benefit as opposed to detriment would that then simply apply in terms of well if somebody gets a disproportionate benefit that counts as a detriment to the other part of the UK good question I mean I think the intention is that if they make policy decisions that produce benefits that they should secure the savings from those benefits but again that's very difficult to measure and assess I don't know Dr Armstrong or Professor Geoffrey want to chime in at this point Tyrone? Just one comment again and I think it points to the need to have those effective ongoing intergovernmental relationships I think Angus was right of a lawyerly phrase which was bunged into Smith as a means of getting an agreement at that moment and may have been necessary to get agreement at that moment how it works in practice is an entirely different matter and I suspect that the most straightforward way of operating something like that in practice is simply to make sure that the governments talk to each other that they're aware of each other's plans and spill over effects of those plans one example there is much discussion of the full fiscal autonomy that the Basque country and Navarra in Spain for all sorts of historical reasons enjoy but it's not really a full fiscal autonomy because there are discussions with the Spanish central government especially around tax competition which lead to agreements between the two about what each will do that doesn't undermine the principle of full fiscal autonomy it just suggests that the practice is a negotiated practice and I suspect rather than the notion of the UK Government providing an authoritative report every year I suspect actually what you get is a discussion between governments about the consequences of each other's actions the relevant borders and some kind of mitigation of some of those actions if both sides agree yep, that's a problem we better do something about it Dr Armstrong just to point out that it seems to contradict the logic of having federalism in the first place which is actually central government can't possibly know all the preferences and needs and information at a local level that's the whole point of doing it we have greater devolved powers and say but we can't we need to delegate to a greater judge who can work out what all this information is and exactly how to compensate either side that contradicts it it's assuming a level information we just don't have so I agree that some sort of broader discussion about what could be the consequence of some of these policies on both sides of the border or whichever borders in a reasonable way to approach this one of the points that's been raised in the past Professor Heald has raised it quite prominently is around the concept of tax gaming particularly focusing on the Treasury who will have a much broader range of tax leavers available to them even after the Smith commission takes effect it was also raised by I think it was Isabel Dunverno of the law society that perhaps what was required fair play clause or agreement which would ensure that that kind of approach wasn't taken is that something that you think would broadly fit within the concept of no detriment and is something that could be easily applied to yourself first I don't know about a fair play agreement I mean as an economist we sort of assume that people and governments act in their own interests so I find those notions difficult about I do accept the premise which is that tax competition can from either side of the border can have very serious implications again I point out that if the 10 top tax earners walked out of Scotland and the 10 walked out of England the impact on Scotland would be much greater proportionally than in England I mean these issues are potentially very serious but how to get around that a discussion beforehand of what would be the possible consequences does this look like gaming what you want to try and avoid is deliberate gaming I hesitate to step on to the economists about acting rationally in your own interests but you've said also Angus that a central government cannot know all of the preferences the information situation isn't good enough and that's where I come back to predictability and rules of the game because it can be in one's interests in a multiple play game which thinking about fiscal policy between jurisdictions over a period of years would be to have some kind of of regularity of understandings so I suspect that something like that may well emerge through the process of discussion in as we enter the situations which legislation is now bringing to us in other words pragmatic politics would provide a lot of the buffering for the more theoretical economic problem analysis might might suggest sorry sorry Dr Armstrong so just on regular tax policy then I agree because it's a repeated game if one party behaves badly then presumably you'd have to have a way of punishment then in order to correct that but in repeated game it's much easier to easier one could more reasonably see how this would resolve itself into a pragmatic solution that would satisfy people it's the non-repeated game issues such as debt where it becomes problematic because it's not a repeated game and when it does happen people stop being friends in terms of just to move on to the Barnett formula and obviously there has been much discussion around Barnett of late as one would expect given the election campaign that is on going and there's been talk about obviously guaranteeing of Barnett going forward but I'm interested within your own paper to talk about the emergence of pork barrel politics which I quite enjoy but obviously talking about the demands from for example the DUP around additional funding for Northern Ireland the Plaid Cymru in Wales which I think is them looking at a per head of population parity how easy assuming using the old crystal ball and looking into the future and imagining that either of those parties is successful in gaining those demands, how easy or otherwise is it then to continue with the Barnett formula if those uplifts take place? It's easy enough to continue using the Barnett formula in the regular process that is the UK Government makes spending decisions in England on areas that are comparable to those devolved and you apply the population key and that adjusts devolved budgets accordingly the effect of a side payment to Northern Ireland would be to render the Barnett element of funding in Northern Ireland less significant and the directly negotiated element more significant Those payments would essentially be in isolation to further calculations as opposed to having a material impact on those calculations would be your understanding? Except that I guess if you have to pay 5 billion to Northern Ireland and 6 billion to Wales over the length of a parliament that means in principle there's less funding available to spend on the comparable programmes in England which generate the Barnett effects although that's a relatively small proportion of the overall budget and also obviously there is the as the Smith commission takes effect there's a disaggregation of elements of revenue raising power which obviously would be the kind of powers that would give rise to Barnett consequential impacts Does that again impact on how the Barnett formula will work going forward? I mean I know there will still be an element of block grant that will need to be calculated but given that elements of revenue raising for public expenditure will have been disaggregated does that have a material impact on how Barnett could continue in its current form? I don't know if you want to take that first Professor Geoffrey or Very happy to I don't think so I'm just going back to the Cumberland news and finding the Prime Minister's comments this is not about reopening discussion about the Barnett formula and and the other the Scottish player with a particularly strong stake in this game is the SNP which in its manifesto has said that it anticipates the continuing operation of Barnett the point is that the amounts of money that Barnett consequentials would deliver will reduce in proportion to the additional fiscal autonomy allocated to the Scottish Parliament and so if we managed in a phased process to get to 90% fiscal autonomy there would be a really small bit of Barnett consequential left but it still could be the Barnett system operating as is just with a smaller quantum Okay Lastly Obviously we're discussing the fiscal framework at this committee but there is obviously an interaction with the policy framework in terms of how fiscal powers will be used to fund policy priorities Do you see within the package of powers and this is open when we go from Professor McEwen along on this one Do you see from the package of powers that are envisaged within Smith that there is a cohesion and a coherence between the fiscal powers that are going to come to Scotland and how those powers could give effect to policy priorities in areas for example like welfare I mean I think that the important issue around welfare responsibilities is that that won't be funded through the Barnett formula so there will have to be another way of transferring the additional revenue and calculating it because of the way that social security is financed, it's demand-led finance so it doesn't go through that departmental expenditure limit system and I think that's one of the issues that's under discussion at the moment within the new ministerial forum on welfare that has been established is how you manage that transition and I think one of the reasons one of the rationales is underpinning the identification of social security benefits around disability benefits and carers benefits is that those are expenditures that are relatively stable they're depending on policy decisions that change that but they're not susceptible to economic cycle effects in the same way that those benefits that will merge into universal credit will be subject to those sorts of cyclical effects so in that sense then there's a rationale, there's a clear rationale for limiting the social security powers to around those stable areas which should make it easier to identify a way to facilitate a transfer of additional financial resources to meet those needs but of course in a different way then clearly there are knock-on effects between those areas of devolved welfare policy and areas which would remain reserved which leaving aside the financial issue creates other anomalies, other potential difficulties in managing that overlap Professor Jeff I don't have anything to add except that I think the assumption is that you have gone off adjustment of Barnett which is negotiated of the block grant which is negotiated which would again shift the quantum in the other direction to the one I just pointed to which would then be subject to Barnett consequentials am I right? I'm not sure that it's clear yet The quote that was brought up at the beginning about the finance ministers was a two hour multi year was it? Discussion about Barnett and then it solved in 15 minutes I can understand because the more you look at this thing there's a lot of moving parts in it My only point to make is that trading off tax revenue powers against the block grant that assumes that it's just a zero sum game that you can get 10 pounds here you can reduce 10 pounds here actually the current formula is a way of risk sharing so tax revenues can be very volatile up and down and you get a degree of certainty at least from transferring the revenues and getting the block grant equivalent so there's a risk sharing element that also has to be considered of revenue that remain in Scotland how those types of revenue move together so in theory you want to avoid it where you're left with a very volatile income stream not least because that makes budgeting much more difficult and then you get back to the question of what happens and what ends in shortfall and there you could say well there's this exception in for errors and knowing what an error is and knowing when it's the beginning of a cyclical trend or even a structural trend because of declining demographics or whatever they're much harder to observe in reality so that's the sort of thing that the OBR strains over what is a structural or cyclical element or it's just a forecasting error they're not that obvious in real time all of which is to say that there's not just a simple zero sum game it's actually quite a complicated issue I understand why it could have taken a lot longer and so I think that there is more to it than just simply a trade off of one to one to get this right to make sure that it's it supports the welfare on both sides of the transaction which is surely what the objective is Thank you Gavin to be followed by Malcolm Good morning What do you think should be the role and the remit of an enhanced Scottish fiscal commission firstly with the Smith powers and then secondly if there are greater powers how would you see that fiscal commission shaping up? Very briefly the commission was set up with some controversy about who was on it and probably too little controversy about the resourcing to it which is very slight in terms of its capacity for independent analysis and as far as I can see from the published papers it has a budget of £20,000 which if you want to do serious arms length analysis which informs a debate and is used to help hold decision makers to account is clearly not enough Okay I think to add profession I haven't given it much thought at the moment but I'll maybe come back to you I think that on one hand you'd say well this is UK debt under these current proposals the Smith proposal and so on therefore the OBR has to be able to make judgments on that that's kind of its role to say are you meeting your fiscal framework or not that's ultimately what it's trying to do having said that there is also in coming to judgment there's a lot of informal discussion between the OBR and government about potential policies whether this would be within the rules and what the implications would be so there's a dialogue and I think a Scottish fiscal watchdog would want to have a separate dialogue with the Scottish government and so I don't think it would be reasonable to expect an OBR to have a dialogue with both and then say well we can somehow guarantee that there's a Chinese wall here which is all at times adhered to I think that would lack credibility to the outside so that's why I'm in favour that it would make sense to have two in order to have those sort of dialogues and obviously I think if that figure is correct the things that are most important are that location should be outside of government and people that are reputed to be of independence and it needs to be properly staffed again if you're going to have forecasts and you want to have reasonable forecasts it goes to reason that you have to have proper resourcing of it Do you think that Fiscal Commission whatever you want to call them should they be responsible for producing the forecasts or should they simply comment on the forecasts that are produced by government So they have to make a judgment on whether the the governments any governments in this case policies are going to be within whatever rules that it sets down Fiscal Rules in order to do that it has to be able to make its own forecast Otherwise the government will make a forecast that shows that the rules are met the whole point so they have to make the forecast on behalf of their forecast completely independently of what is their best judgment going to be the path of the economy and therefore the fiscal whether the fiscal mandate is met or not Moving on we are moving back to another issue into governmental machinery has been discussed particularly by Professor McEwen and Professor Geoffrey you basically said it needs to be more formal than it currently is and Professor Geoffrey said the German example probably isn't one for us to follow Just taking that a stage further then Other than saying it should be more formal are there any other principles that must be out there in their view and if Germany is not one for us to follow are there any international examples that would be either directly relevant for us to follow or at least elements within those examples that we ought to be thinking carefully about It's not just about the formality I mean there is I suppose an element of formality in that there is you know twice a year they will meet in the context of joint ministerial committee it's a little bit ad hoc in terms of the timetabling of that but if you have that timetable then it's much easier for parliaments to scrutinise it and I think that's one other principle is around transparency that we've already talked a lot about there is an ongoing discussion within the joint secretariat of the joint ministerial committee about its role and remit so I think it's perhaps time to revisit its purpose and remit to see if it is still fit for purpose as we move forward into a new complex situation that I don't think it necessarily is so it's maybe thinking about what it's for and I think that what it's for and should it be about making decisions which we'd ultimately then have to go back to the respective governments and the respective parliaments to sanction but is that what we think is an appropriate role for a joint ministerial committee and that may not be it may be that decision making properly takes place within parliament rather than within a closed door intergovernmental forum it's time to now revisit its central function there will be examples from other places that we can look to to see how interministerial or intergovernmental conferences take place around particular issues, some positive some negative but I think because of the peculiarities of the UK system it's highly asymmetric nature I think it's always going to be difficult to transpose something from another context into the UK so my hunch is that we'll have to find yes, take inspiration from this, I have to find solutions internally I just point to one thing which no other place has and that is a situation in which the statewide government intergovernmental negotiations is also the representative and advocate of the biggest territorial unit of the state and I think this is a problematic feature of UK arrangements as they stand and we may be at the starting point of a process of institutionalising England in some form it clearly depends on the election outcome we have but both the conservatives with their plans on English votes and English laws and the Labour Party and the Liberal Democrats as the other main parties represented in England have also set out prospects of some kind of constitutional process to think about England I think that process of disaggregating England from the UK government is tremendously important and in some senses a prerequisite for a system to function UK wide in a more satisfactory way First of all, going back to the watchdog the watchdog needs to make the forecast but it's an interesting question then what happens if the OBR had a different forecast compared to the watchdog so to a certain extent perhaps you want to have those two watchdogs need to have a dialogue between each other and as far as possible come to an agreement perhaps you even want to go first and say there should be an agreement whereas the physical watchdog in Scotland is responsible for discussing with government the revenue and so on spending implications of the policies they're having so they can do that in isolation and then that information is fed in whereas the forecast I think maybe it should just be a single forecast Grateful, thank you I won't go over all the terms you've covered but if I could just ask for clarification of three issues you are and have been supportive of the Scottish Government free to borrow under its own name in the capital markets but also you say that it's difficult to make a no bail out commitment so obviously your paper goes as far as full fiscal autonomy but if we can just pull it back to Smith or something like Smith which is what we'll get no doubt so what would your position be on borrowing under Smith are you saying yes because you're in pursuit of the free to borrow and you just have to accept that there's no you can't make a no bail out commitment or how do you resolve those seeming tensions and contradictions completely correct that there are contradictions and you go into the in that little diagram you go into the cell where it's mixed you have much less vertical fiscal imbalance but you still have the outstanding debt issues that support would be forthcoming so entirely correct there I think that that's a matter for negotiation I think that the most important thing is that you can never rule out support and therefore you're always inviting a degree of moral hazard that's just been what we've identified around the world that happens in many countries the question is to what extent could you reasonably under the sort of Smith package go to make sure that capital markets borrowing is seen to the extent that it can be to be properly under the Scottish Government's name and there's a number of measures one is such as the risk weights that you put on banks holding of Scottish debt what you would say in terms of legislation about this but of course legislations could be always be rewritten but there's a those are two areas where I think that you could at least indicate that this is supposed to be properly priced as there'd be a limit imposed on how much borrowing could take place or would you well this is an interesting question my view is that that should not that actually that undermines the freedom and the responsibility that you know when you have a a small degree of vertical imbalance which it would be under Smith most countries that are in that situation whether it's Canada, Switzerland, the US they don't actually impose on their sub-central governments these sort of rules you know they allow them to make their own decisions and of course given that they have the tax powers they can make their own decisions and that's exactly what responsibility is about okay moving on to the second area of Barnett Professor Geoffrey you say it appears that the SNP envisages the increase flowing as conventional barnett consequence although it is not clear how far this takes into account of the further reductions in consequential effects that any Smith powers extending beyond those of the 2012 Scotland that would bring but I mean in terms of the block grant adjustment I mean does the fact that there would there actually be any consequential effects in terms of the overall amount I mean is the block grant adjustment not supposed to take account of that so that the net effect is the same I mean it's certainly under the kind of Smith proposal so you know it's assumed that the tax will raise a certain amount of money and then so the tax on the assumption of no change in policy within Scotland the tax take and the consequentials and the block grant adjustment still make the same amount as it would have done previously I think we we are still awaiting Mr Swinney's phone call to establish precisely what the adjustment in relation to the Scottish way of income tax will be I don't think we've yet seen that but the Smith's proposal suggests that at that moment there should be no detriment on either side so I think what you have suggested is about right but that doesn't mean that there would not be change going forward and I think it's also clear in the draft bill I think more explicitly than Smith that there should be an incentive effect for the Scottish decision maker in using additional tax powers so that if this through the genius of the decision maker produces additional funding relative to that generated in other parts of the UK then it should be retained by the Scottish Parliament and the converse as well that if the Parliament messes it up then you have to bear the consequences so I think you're right at day one but you're not right at year two as it were and just another point on Barnett is your DUP example but presumably you could just have a one-off feed of an increase into the baseline and then Barnett could continue as before no? Depends what you understand as Barnett I guess and I think most of us are thinking about Barnett as the adjustment process year on year which is driven in different ways for the various devolved administrations by population relatives to England in respect of comparable areas of spending. Yes you could bump up the baseline but that undermines the population rationale of the formula so I think it does undermine the principles on which Barnett is based. I'm just imagining that's what they would do because that would be a one-off adjustment and then it would be population based there after hopefully it will not arise in terms of the DUP and their prospective partners but finally well back to the same scenario I suppose since I don't need to read the Cumberland news I mean when I did hear about the Carlisle principle I assumed that this was a kind of hard interpretation of no detriment in contradiction to George Osborne's soft interpretation but Nicola McCoon you were suggesting that that's not really clear it could be open to either interpretation I think it could be open to either interpretation it just depends on if in that annual review they established that there has been a detrimental impact by whatever process where does the responsibility lie for addressing it and I think that that's still not altogether clear and I read it differently I guess I read it more as the UK Government assuming responsibility or the Conservatives assuming responsibility to step in but perhaps that's an optimistic interpretation. But it's not clear the issue is it's unclear right now. Okay thank you. Okay thank you Jean. It's just a very interesting discussion I've enjoyed all of that. I'm slightly obsessed with the no detriment clause and it occurs to me that what would you think to the notion that we would have to have some kind of assessment as to the detriment that exists? You mean an independent assessment? Because how can you you know that I might want to cite a few things that I consider currently that Scotland actually has detriment and I think that am I not right also in thinking that in the Barnett formula I mean you know very keen to talk about how much money Scotland gets in the Barnett formula but there was an equation and although it perhaps it wasn't seen by Barnett as the be all and end all and something that should have lasted this long and all of that it was actually taking into consideration things like the geography of Scotland and rurality and islands and travel and transport and ferries and all sorts of other things. So I just think that the the detriment clause can't actually I find it difficult to consider how you might come in at some other level now on any change that might be considered by a Scottish Government, Parliament without actually the whole history of where these two four nations sit together. On the Barnett point and the issue of geography that has been used as a justification for the proportionately higher per head of population expenditure on identifiable public expenditure that we see in Scotland but I think that's been a result of lobbying over the decades to maintain that differential Barnett doesn't doesn't do that Barnett's not explicitly not a needs based formula that's often described as such but it's not. So I think if you did want a needs based scenario then you have to you have to replace Barnett with something else and then you run into the issues of the politics of need and which needs do we talk about and which needs are deemed more important than others. On the issue of establishing detriment, my understanding from Smith report is that detriment as a result of policy decisions would be linked to those new powers that would be part of the forthcoming Scotland Bill but I think that the important issue is who would be the arbiter of that. Would it be by inter-governmental consensus or would it be some sort of independent assessment and then you come into the difficulty of having an assessor that could be mutually respected and acceptable to the different governments in different parts of the UK and that's extremely problematic it seems to me. My other just very small point is that would you consider the change to stamp duties you made in the autumn statement by George Osborne to be gaming? I mean I don't I'm not going to say yes or no to that but I think it is an illustration of the need for coordination over the timing of budget statements and there is a mismatch between the budget cycle that the UK Government operates on and the Scottish Government operates on which heightens the possibility that call it gaming if you want or that there will be consequences and knock-on effects from decisions made at one level into another you could also call it policy learning if you like so it's a different way of looking at it but you will have that as well and I think there is an issue of the timing and the sequencing of the budget process and the different governments that will become increasingly more important Can I just add on that when George Osborne was making that announcement I happened to be meeting in London sharing a platform with a senior civil servant from the Scottish Government and a senior civil servant from the UK Government and the senior civil servant from the UK Government said as we were following this on our phones and on Twitter and so on something in there you're not going to like very much and I think that was there was probably an element of mischievousness in there, in the recognition that this was a problematic issue for Scotland but I don't think that decision was taken for that reason it was perhaps a nice little bonus for the UK Government and finally just to ask Doctor Armstrong your quote from Alexander Hamilton at the start of your piece is that issue is a warning or a visionary statement as an example from history of the sort of things that from 250 years ago have been an issue and are still an issue today this issue of debt and shifting behaviour what we now call moral hazard has been around for hundreds of years and to assume that it's not going to be around again in the future would be very brave thank you very much thank you to colleagues around the table that's ended our questions I'm just wondering if our witnesses have any further points they want to make before we wind up the session okay well thank you very much actually for your time and your contributions very much appreciated that being the only item on our agenda