 Good morning and welcome to the fifth meeting of the Culture, Tourism, Europe and External Relations Committee in session 5. I'd like to remind members and the public to turn off their mobile phones and any members using electronic devices to access committee papers should please ensure that they are turned to silent. Today we continue to take evidence on the implications of the EU referendum result for Scotland. I'd like to welcome our witnesses today to the meeting, Professor David Heald, Professor of Public Sector Accounting at the University of Glasgow and Professor David Bell, Professor of Economics at the University of Stirling. Welcome and thank you for coming to give evidence to us today. I'd like to begin by inviting Professor Bell to make an opening statement. Okay, thank you very much. Thank you for the opportunity to speak to the committee. So I have been taking interest in the last week or two around the EU budget, what might happen after Brexit. So where I would start is by saying that although the UK is a net contributor to the EU budget, a fair amount of money does come back to the UK and a large proportion of that is what I would call area-based and other words it's tied to specific parts of the country. And the main elements of that are things like the agricultural payments and also the European Regional Development Fund and the European Social Fund, the amounts that are received are determined by different rules. So post Brexit, one question will be whether to retain these mechanisms and there are arguments for and against retaining these mechanisms. So some argue that we should go down the New Zealand route as far as agriculture is concerned and effectively not protect our agriculture industry at all. Equally others argue that the structural funds have not been effective in achieving the objectives that they were intended to achieve and that the case for retaining them is not strong. So that argument is out there. Let's suppose that they are retained in some form or other, then a number of decisions, it seems to me, have to be made. First of all, who sets and how the kind of quantum for each of the policies. So would we expect to spend the same amount of money on support for agriculture as we have in the past and it's not entirely clear whether the amount of money that goes to the different funds is appropriate for the objectives that they set themselves. Having set the amount of money, then the question is how is it divided? How would it be divided between the four nations? At the moment, for example, in terms of the cap, the rule that was applied to the most recent budget round was simply to keep the same proportions as we had in the previous budget round. So it wasn't really looking at anything objective about the state of the agriculture industry in different parts of the UK, rather it was a line of least resistance, just do the same as you did before. So there's a question about doing that because, of course, the EU allocates its other form of area-based funding, the ERDF and the ASF, around quite strict criteria, namely the 75 per cent of average EU GDP and the gap between 75 and 90 per cent qualifying different ways for the ERDF and ESF funding. The UK has nothing quite so objective at the moment in terms of rules about allocating money to different parts of the country. Once a decision is reached about that allocation, some possibilities are open like actually passing the money through the Barnett formula or allowing the different devolved assemblies in Parliament to retain more tax revenue or to have some objective metric that determines how much each part of the UK gets. And remember that in terms of the objective metric, what has happened in the last 20 years or so, as actually Scotland has done relatively well, its economy has outperformed that of other parts of the UK. Now it's only West Wales and Cornwall that qualify for the highest levels of support, whereas in the past the Highlands did qualify under the previous rules. Finally, if the money is divided, who sets the rules about how it's going to be distributed? The EU has worked with the devolved assemblies in Parliament in some instances effectively to determine who gets what. Scotland has gone in its own way in terms of the agriculture policy and so on. In the past, the devolved administrations have had considerable sovereignty as far as the administration and general running of the funding that has come and is area-based. My basic conclusion is that there are lots of decisions that have to be made and it will be very important to understand or to understand how the different levels of government within the UK are negotiating change and responsibilities because there will be lots of opportunities for conflict. As you have indicated, Scotland has punched above its weight in terms of the allocation of EU funding that comes here. From our spice briefing, which is very useful, we get 44 per cent of the fisheries funding, 18 per cent of cap pillar 2, 16 per cent of pillar 1, eight per cent structural funds, which is equivalent to our population. Overall, they calculate that Scotland gets 14 per cent of the UK's EU funding, which is obviously considerably above our population level in the UK. What do you think the likelihood is of us getting the equivalent of that 14 per cent back? If so, how will it be delivered? The critical issue is that whatever gets repatriated from the European Union once has to think about the relationship between repatriated functions and how those repatriated functions are financed. If you look at the public experience statistical analysis on a per capita basis, the index for Scotland is about three times the index for England. There is very significantly higher expenditure in Scotland on agriculture, fisheries and forestry than the UK average and particularly in England. Given the fact that the money that the UK will not be sending to Brussels will stick in the Treasury, the question then becomes that if Scotland is going to get the functions that have previously been run by Europe, how does Scotland get the money to finance those functions? That seems to be the critical central issue. Obviously, you have observed the way that the Treasury operates ffiscally for many years in terms of its relationship with Scotland. What do you think the likelihood is of the funds being repatriated by the Treasury? Once in such strange times, I think that any kind of forecast is completely perilous. On balance, I think that the Treasury is run the Barnett formula fairly honestly. There have been specific issues about the Carter Commission on prisons and the Olympics, but broadly, the system has run on an informal non-statutory basis and the Treasury has largely kept the rules. That has been enormously beneficial to the Parliament in terms of its own discretion about its budget. We are now getting into very deep politics about that basically the whole of the agricultural sector policy was really set at the European Union level. What we were talking about in the UK was actually delivery. Delivery was largely done by the devolved administrations and by the UK Government for England. The question is going to be whether the UK Government now decides that we are going to have a common policy for the UK single market in agriculture, as in other things. It is a very big question about what the attitude will be. That is separate from David Bell's point that there are going to be, I suspect, big arguments about the nature of the British economy after Brexit. David Bell mentioned the issue of New Zealand in the 1980s and the removal of agricultural subsidies. Some people on the leaf side were arguing for that in the run-up to the referendum. I think that all the bets are off in terms of what policy it looks like. Many people on the leaf side also said that Scotland would get full control of its automatic control of the EU competencies, agriculture, fisheries and environment. I rather not get too deep delve too deeply into the politics. People said an awful lot of things during the referendum that were fairly reprehensible. Professor Bell, did you want to come back in again? All that I would say is that, on things like fishing and farming, amounts per head of the whole population are not all that necessarily useful, in comparison. Scotland just does more farming because it has lots more area, and it also does more fishing because it has more abundant seas nearby. It is the case, however, that, if the arguments prevail about reducing agricultural support overall or reducing the kinds of support provided by ERDF and ESF, Scotland will be particularly exposed in relation to farming, and it will be less exposed in relation to ERDF and ESF, because, as you say, it is proportion relative to its population. In that respect, it is not much different from its population share. Tavish Scott and Richard Lockhead Thank you very much, convener. David Bell, can I thank you for your paper on agriculture to begin with? It was really useful yesterday to read that. If you were advising two people, one of which should be the National Farmers Union of Scotland and, on the other hand, the Scottish Government, what would it be in terms of the best funding formula to achieve the current £400 million that we currently spend on Scottish agriculture? Putting aside all the policy issues about whether you believe in freedom to farm or supporting crofters or whatever it might be, if you just go with the money, how would you best deliver what we currently get in Scotland from whatever is going to happen in the future? Well, I think that agriculture is in a particularly difficult position. This is partly because, as I pointed out, it is dependent on EU cap subsidies for a third and a half of its income. If that was to disappear, we would have very significant restructuring of the agriculture sector in Scotland, and clearly that would be difficult for many communities. It is also true that its main markets, its main export markets, are in Europe rather than in the States or Australia or wherever, and therefore, if it wants to compete on an even footing with European farmers, then if cap subsidies are reduced, then inevitably that will force it into driving up prices, which means it will lose competitive advantage with European producers. On the other hand, it will then, if the UK goes into deals with third countries like Canada or Australia or wherever, it will be putting on pressure to reduce tariffs and income support for farmers. Agriculture is probably the most contested area of all in terms of how agricultural trade between countries operates. The WTO has laboured long and hard to try to reduce tariffs and reduce the levels of protection for agriculture, and it has not been all that successful in so doing. There are very significant tariffs that I showed in my paper that protect European agriculture, some are as high as 80 per cent at the moment. I think that this is difficult. My advice to the NFU would be to try to retain as much of the status quo as possible, because that would mean retaining income, but also not being added competitive disadvantage to the European market, which is the main market. Whether that will be feasible in the negotiations with the European Union, it may insist that that does not happen. It could look at the tariff barriers in relation to agricultural products that might hit some of their own trade, but there is a trade-off clearly going on between politics and economics in Europe just as much as there is a trade-off going on between politics and economics in the UK. That is helpful. You would accept that Barnett is never going to be the way to achieve that, in terms of spending to Northern Ireland, Wales and Scotland on agriculture. We would just go down on that by any objective measure. We would go down compared to what we currently get for agricultural spending in Scotland. It depends on what we mean by Barnett. Barnett has got more and more complicated over time. It started off being really quite simple, but if we take the example of railways, I am not interested in railways. No, please finish my point. When the Scottish Parliament got responsibility for agriculture, what there was was a block transfer. The existing spending on rail in Scotland was moved into the block. The existing spending was transferred in, then Barnett applied to increments. The obvious problem about that is that, given all the uncertainties, it is going to put farmers in competition with nurses when it comes to spending priorities. You cannot just say that barnetising it means that you only get the population proportion. What would actually happen on past precedent would be moving the existing spend into the Barnett formula, into the block and then using Barnett according to the fiscal framework for subsequent changes. The problem is that agriculture, because of all the uncertainties that we are talking about, is actually quite unpredictable. Therefore, it is an argument for not putting it into Barnett and keeping it as a separate transfer to the devolved government. You have to think about the broader policy position. I started my comments by making the point that you needed to think about the relationship between taking on the functions and getting the finance, because no contributions to European Union's, not making them sticks as a benefit to the Treasury. You have the question about who has policy control. You can think of all sorts of arrangements whereby the UK government had control of agriculture, fisheries and food in a policy framework sense, but delivery was done by the devolved administrations and by Defra for England. There are all sorts of variants. For example, it could be put into annually managed expenditure outside Barnett. There are all sorts of possible arrangements. I have been arguing for devolutions for 40 years now, and I have got a track record of wanting to take as many functions as one can get. However, I think that this is territory that you have to think about very carefully. Therefore, I would only recommend taking on policy control of agriculture if the financial arrangements actually come at the same time. Having policy control of agriculture without actually securing the financial arrangements could actually be quite dangerous. However, policy control in London would be a reverse of devolution. Policy control would be a reverse of devolution in that particular context, but we live in strange times. In that previous discussion, there is an assumption that there is a relationship between the share of the budget post-Brexit and policy. However, is it not the case that the UK Government can simply divorce policy from the share of the budget that is allocated to Scotland in terms of agriculture? It could say that 14 per cent has come from Europe, whilst we are a member of the European Union. However, we are out of the European Union. We are just getting a population share in respect of your budget because agriculture has devolved. Therefore, you just take the money and do what you want with it. However, there is no relationship between policy and the share of the budget. Therefore, the UK Government can reduce dramatically the amount of money that goes towards agriculture. I do not think that chimes with what has happened in terms of the transfer of functions over time. For example, the Barnett formula has been adjusted downwards or by the exact amount of tax being raised for the new tax powers. It tends to operate on precedent rather than on the current population share. I agree with what David said previously. If agriculture was put into the Barnett formula and currently 600 million or so is spent on the CAP in Scotland, the Barnett allocation to Scotland would increase by 600 million. In the following years, any changes that happened in relation to spending on agriculture in England, so if they go up by 2 per cent, then there would implicitly be a 2 per cent added to the 600 million for Scotland. It seems to me that the problem is more that agriculture is much less important. Well, it is not all that huge an important issue for the Scottish economy. It is less than 1 per cent of Scotland's GDP, but it is even smaller in relation to England's GDP, and they may take the view that, well, this does not matter so much. You end up in a situation where, if the money going to agriculture is not increasing, but there are reasons in England for trying to increase the amount of money going to agriculture in Scotland, then you are raiding other budgets in Scotland to make that happen. Agriculture is under the Pins of Food and Drink sector, which is a much larger share of the GDP in Scotland. The issue is that the UK Government could take a decision that it does not want to support agriculture, which would therefore impact negatively on the Scottish budget irrespective of the policy adopted in Scotland. Yes. The whole fiscal framework since devolution 1999 has been non-statutory. It has been basically done, as I said earlier, relatively consensually. There have been arguments about specific points, but basically the precedent has been followed. The kind of policy risk will be if you had separate policy control in the four jurisdictions, and the UK Government decided that it was going to go down a very free market line and not support agriculture. The Scottish Government decided that it wanted to continue to support agriculture. One is going to get a high budgetary cost. I just add on that point too that there is the clash of local control over agriculture and the role that agriculture plays in trade negotiations so that if trade negotiations with the USA involve arguments that direct payments to farmers should be reduced or eliminated because they do not exist in the States. US farmers will say that this is not a fair competition. If they reduce their direct payments to farmers, that will have an effect on what can be done locally in terms of developing policy for agriculture in Scotland. My final question relates to transparency. Clearly, going forward, the public in Scotland Parliament will want to know what the UK is paying into Europe, what is coming back from Europe and then whether Scotland gets its fair share thereafter post Brexit. My experience of some of these issues is that there is a lot of smoke and mirrors. What are your comments on how easy it will be for Scotland to hold the UK Government to account in terms of those figures? I think that it is going to be quite tricky. You may not know, but some local authorities in England took the UK Government to court because they argued that it was the ERDF allocations to different parts of the UK. Their argument was that Scotland, Wales and Northern Ireland were getting too much and that the EU's intention had been to provide more funding to the north of England than it had received. That failed in court and their argument failed. That is just an illustration of the kind of arbitrary nature or informal nature or smoke and mirrors nature of what currently goes on. The existing frameworks do not fill me with confidence that people are going to be happy about the nature of the information that they are receiving and their understanding of the process whereby big sums of money are allocated to different parts of the UK and there is a need to open that up. I know much less about the detail of agriculture than many people in the room. One of the things that I found very helpful was the spice briefing that came with the committee papers. When it comes to the agricultural support, it is relatively clear what is coming into the Scottish budget, but other European payments have been coming into other parts of the Scottish economy. I am not in a position to know how transparent those are. I move the focus a little further on the structural funding side of things, because I think that there are some important issues here. First of all, David Bell in your introduction said that there is an argument that it is difficult to identify evidence from the evidence that structural funds have achieved their objective. The one case that might be offered against that in the Scottish context would be the Highlands and Islands, in which the combination of the efforts of the Highlands and Islands Enterprise and the use of those European funds has removed the Highlands and Islands from the bottom end of the European scale into somewhere nearer the middle. First of all, the case around structural funds is one that will of itself be contentious. Secondly, given the North of England example that you quoted, is it in the interests of those areas of Scotland that benefit from structural funds at the moment for them to be measured objectively on criteria that apply across the UK? Or is it more likely to be advantageous if there is an allocation post-2020 that would then be addressed within Scotland alone? I can say a few things about that. Firstly, I think that Highlander probably agree with you that the EU has had a significant effect on the Highland economy. Most of the evaluations that have been done are European-wide, some have been UK-wide, and there are certain pockets of the European economy in particular that seem to be resistant to improvement. You get Portugal, some parts of Spain, some parts of Italy and so on. Maybe that's been an important context for the views that the structural funds have not achieved their objectives. Of course, what are their objectives is a further question. Probably the one that most people would accept is the cohesion argument, the need to reduce spatial inequalities across the EU. Others have argued that the structural funds are important generators of overall national economic growth. That argument has been contested hotly in recent years by some who argue that the area-based funds are not that useful. Concentrating your money in cities, because you get what are called agglomeration economies, is a more effective way to enhance national growth. You can see a clear line of that thinking into some of the policies that the UK Government is following. The cities approach, the northern powerhouse, is not an area that is focused on particular cities. If that is part of the background thinking of the UK Government and the Treasury, its willingness to provide money to broad areas might think that that is money not well spent, better to improve the infrastructure and skills, but to concentrate that improvement on the agglomeration of cities. I am certainly in principle in favour of using objective criteria to determine who gets the money. Once you get into effectively what end up being negotiations between local authorities and the UK Government, whether it is the Scottish Government or the UK Government, and then you provide support to one of those city initiatives, it becomes very difficult to understand why they have got it against some other potential candidate, and it becomes difficult to evaluate it. At the end of the day, what were his objectives? What would have happened if that money had not been given? At the end of the day, if you are implementing policy, you want to be able to evaluate it and to determine whether it is a success or not a success. Therefore, you would put more money into the successful ones and not into the unsuccessful ones. Looking forward, there is no certainty—I think that I would deduce from that answer—there is no certainty that either the UK Government or potentially a future Scottish Government would accept the current model on which structural funding is based. Can I ask about the short-term aspect of structural funding? At the moment, I think that between now and 2020, the amount of money that is committed is less than half or just about half of that that is allocated to Scotland, and within that half, quite an even smaller proportion has actually been spent. There are a couple of questions that I would be interested in your views on. First of all, whether, in those circumstances, there is a guarantee that we can be confident that that further £400 million that is not yet alive will be alive under the UK Government's guarantee that has been given on structural funding. Secondly, what the implications are for public bodies, local authorities and other universities in Scotland that have to raise match funding in order for those that have been in to go ahead. The context being, if there is a real difficulty in delivering the existing structures before Brexit, the implications of that come forward are significant as well. My expectation is that nothing will change very quickly. On the whole, I would trust the UK Government to fulfil its guarantees about what is going to happen until 2020. The issue will probably be one of whether people will lose heart about applying for European funds, given that all the talk is about Brexit, and particularly the issue about finding the matching funding. The UK is now in a position whereby, if one looks at the IFS green budget that got released early in the week, we are talking about a period of about 15 years, three parliaments of fiscal austerity. That is unprecedented in the last 100 years, so there is going to be intense pressure on all public spending. Once seeing manifestations of that in terms of crisis about the NHS in England, I think that there is going to be a period of intense pressure, and I think that there may well be an issue of persuading people, both of releasing the matching funding and persuading people that it is worth the effort at committing the effort, which of course is very resource intensive, with a very substantial degree of uncertainty about what is going to happen. On balance, as in earlier discussion about the Barnett formula, on the whole, the treasuries thus far played the game fairly straight, but as I said earlier, we are in very strange times. I would agree particularly by expectations on how people change their behaviour, particularly in the run-up to 2020. There are some worrying signs in the scientific community about what the role of UK academics might be in future European projects. This is a couple of very brief supplementaries to that. In terms of the match funding, those structural funds are in euros, with the situation with the fall in sterling. Does that put extra pressure on organisations that might be considering match funding? I understand the value of those structural funds has increased because sterling has fallen. There is more purchasing power from the European funding, but the match funding is higher. My second supplementary is that this committee is quite unusual in that we have three south of Scotland MSPs represented on it completely randomly. There was a plan in the south of Scotland that was quite well developed by local authorities and the Government to create a new statistical European area under nuts 2, which would be in a good position to obtain additional structural funds. Where would that plan be now? I do not know if you are aware of it. Do you think that it is under water? There have been various re-jigging of the boundaries in different parts of the UK over the years. I suspect that the UK Government will not feel constrained by European statistical conventions, which is worrying in itself. However, in relation to the way that any area-based funding might be distributed in the future, it might go for something that more relates to the structure of Government in different parts of the country. That might be local authorities or combinations of local authorities. I do not imagine that the nuts conventions will survive Brexit for too long. There is a broader issue that one of the ways in which the UK Government is kept honest is the fact that Eurostat, the European Union's statistical agency, monitors the UK practice in terms of national accounts in terms of general government finances, particularly in the context of the excessive deficits procedure. You do not have to be a member of the European Union to follow ESA 2010, but it is probably the case that Eurostat takes less interest in the countries that follow ESA 10 but which are not part of the European Union. One of the things that I have been conscious over the time is that the Treasury from time to time puts pressure on the Office for National Statistics about classification decisions. If I was running the Office for National Statistics, one of the things that I would always say to the Treasury was that you might press ars, but you are also going to get that past Eurostat. When Eurostat is no longer relevant or no longer as highly relevant, I think that we may have some significant difficulties on the statistical side. Can I ask one more question on the question of structural funds? In responding to earlier questions, you made the point that agriculture is something that will come into trade negotiations and therefore the UK Government will have a very direct interest in issues such as income support. Structural funding, the decision to support under or less developed regions or alternatively city regions, is there such a conflict? Is there an international or an external aspect of that that would be affected in the same way? You are coming close but I don't think quite impacting on issues such as state aid and public procurement rules, which almost inevitably form part of trade negotiations. Things such as the ESF and the ERDF tend to be a step back in terms of them being infrastructure support or general support for skills. There is a certain amount of ERDF funding that goes into SMEs, but I don't think that trade negotiations worry that much about SMEs. It's a country providing a big chunk of money to say a car company, which then subsidises it effectively to compete with the country that you're trying to do the trade deal with. That's the sort of thing that really does matter in trade negotiation. Ross Greer. That was quite substantially covered in your answers to Lewis MacDonald's point, on the structural funding and the need to match fund. As has been mentioned, there's around £400 million that needs to match funded over the next few years. Our public finances in Scotland are now much more directly tied to the performance of the Scottish economy. We would expect that Brexit will have an impact on the Scottish economy in the next two years, i.e. before the point of Brexit actually happening itself. What would you expect the Scottish Government to be doing about that? The way that the impact happens is through differences in per capita tax revenues. If we fall behind in terms of the amount of money that the average income taxpayer in Scotland pays into HMRC compared with the equivalent south of the border. That will determine what's called the block grant adjustment, which is where the issue of the relative performance of the Scottish economy matters. If Brexit pulls the whole British economy down, then there won't be much effect on Scotland's funding as such, because the block grant adjustment will fall, which means that less will be taken out of the Scottish budget. The question is, will Scotland do differentially badly for whatever reason? Obviously, in recent and the last two or three years, we have seen Scotland do differentially badly largely because of the oil industry, which is a shock that has hit Scotland more than it has hit the rest of the UK. My guess is that in the period up to 2020, our finances will be very constrained, as David has indicated, but we won't do massively differentially badly compared to the rest of the UK. The income tax per head may be falling in both parts of the country. It is a problem for the match funds, because those are amounts that have already been set and their value has increased. The same issue applies in England, and it will apply even more in Wales, which gets far more per head in terms of support from ERDF and ESF than Scotland does. I don't know what action the Welsh Government is going to take in that respect, but what I'm saying is that the situation is bad, but it's not catastrophic. Although I agree with David's emphasis on the differential between per capita tax revenues in England and Scotland, there's also the absolute effect that, if the economy does worth, we're more likely to get more spending cuts past through the Barnett formula. One of the striking things about the IFS green budget this week was the fact that, by 2019-20, the UK ratio of tax and GDP is forecast to be the highest since 1986-87. The IFS is talking about further public spending cuts or further fiscal adjustment of £40 billion. The differential Scotland angle matters, but if Brexit has a very bad effect on the UK economy as a whole, there's going to be more fiscal adjustment at the UK level, which will then fit through to the Scottish budget. There was a question posed to the Scottish Government at FMQs a few weeks ago, and, as is the nature of FMQs, it was posed on the spot, so you don't necessarily expect a comprehensive answer at that moment, but it was around what forecasting they should be doing on the impact on our public finances. If you were in that position, what forecasting would you be doing for both that short-term period of the next two to three years and the five to ten that come after Brexit? I'm not sure I would be forecasting because, as David says, we live in very unusual times and the past isn't necessarily a good information basis on which now to project the future, but what I would be trying to do is to get some information on the issues that do seem critical to me that we've already been discussed, such as how are the structural funds going to continue, is agricultural support going to continue, how is it going to be organised, and how is it going to be funded? That's the first set of questions. The next set of questions I would be going through the Scottish economy sector by sector and saying, well, let's assume that we do enter into trade negotiations with country X, what will be their strengths, what will they be expecting from the bargaining situation because it will be given take, the UK will not get just what it wants, and how going through the Scottish economy sector by sector would be an important exercise to be thinking about in the relatively short-term. I almost think that I should have come in slightly earlier because I'm coming back to a point although you've touched on it again. I think that it was in a discussion with Tavish Scott where you were saying that there wouldn't be a retrospective application of Barnett, but the President would suggest that there would be existing funding transferred, but that if the Barnett formula was the mechanism that was used going forward in relation to agriculture, it would actually be a progressive reduction in the overall support, although, of course, the Barnett formula is highly valued in respect of other sectors in relation to Scotland. I suppose, and you then, I think to Ross Greer, said that this is one of the areas that would need to be thrashed out and agreed. I suppose that I'm interested to know what you think if the situation as you describe it happened, the precedent has applied, the sum is transferred across. What would be the funding formula that this committee should be looking to try and advocate going forward that would protect the sector if it was to progress on the current basis? The second incidental question is really just one about which I don't know and you've referred to New Zealand several times in passing. What happened to the New Zealand agriculture sector in the year subsequent to the removal of the support that was previously there? My understanding is that New Zealand did exceptionally well, but obviously it is an economy in which agriculture is enormously important and it's got lots of sheep. The question about to come back to my own curve area of expertise, I think before I was explaining how you could barnettize it, but I think before you think about the financial arrangements, you have to think about what the UK government intends in the form of policy control. So there's a good, there's a long spectrum between going for a free market and agricultural products and broadly continuing the present level of spending on agricultural subsidy. So until one knows whereabouts on the spectrum that is, and then there becomes the question of to what extent the devolved administrations will get legislative control and to what extent they will continue to have a delivery responsibility. If the UK government wants a smaller public sector, it's obvious that all parts of the public sector, all parts of public spending, are going to have a very difficult, are going to have a very difficult future. One of the significant problems that the UK economy has got, that many other economies have got, is that tax revenues have done very badly since the 2008 global recession. So it's not just a question of what the Government has done on tax, it's the fact that the recovery has been pretty weak and it's not been very tax-rich. There are complicated factors behind why the economy hasn't been very tax-rich. So that all parts of the public sector face a very difficult future. Speaking from my agricultural background as a potato inspector, the New Zealand economy and agriculture sector has done very well. Of course, it had to restructure a lot. In addition, it's not close neighbors but the economy that has thrived the East Asian economy in the last 20 years or so had a huge demand for food. It changed its eating habits quite a lot and that has been another part of the success of New Zealand. It's not obvious that Scotland would have such opportunities. It's clear that we need to have a strong economy to go forward. However, do you think that it would be foolhardy to create a separate Scottish system for cap and the other devolved Administrations, considering that Scotland's agriculture exports are 85 per cent within the domestic market? I wonder if creating barriers and a separate system would create barriers that would inhibit that important market that Scottish agriculture relies on? At the moment, the main element of cap is the direct payment to farmers, which is not related to output. Is this an appropriate way to remunerate farmers? What is it that you want farmers to do? What do you want farmers not to do? I guess you don't want them to damage the environment. You want them to help to sustain rural communities and help to sustain ecological diversity. I would take that as the first principle that I would be looking at when thinking about how to support agriculture. The existing system, which is a direct payment for the number of acres that you have, serves mainly to increase the price of land. It also makes it more difficult for new entrants into farming to get in there, because the capital cost that they face is that much higher and farmers are in general old. If designing my own equivalent of the common agricultural policy, I would think carefully about what farmers do and try to provide them with incentives to do the kinds of things that we want them to do. I suspect that you end up with the restructuring of the industry that will end up—if they are to survive, they have to be competitive—to reorganise themselves into the kinds of structures that will continue to allow them to compete in domestic markets. One of the things that is striking is that agricultural policy has not worked particularly well. There is a very critical audit that Scotland reported from last year, and there is equally a very critical report from the European Court of Auditors. There are very big problems, both about policy, objectives, implementation and enforcement. I do not know enough about the sector to have developed policy views on what to do. 86 per cent of the farming land is classified as a less favoured area, and 86 per cent of the farming land in Scotland is classified as a less favoured area. The Scottish Government has not continued payments for less favoured areas. Do you think that there is a UK-wide approach that that less favoured area status would continue, given that it is being phased out in England currently? I am not an expert, but I have seen the Scottish Government documents that indicate that the payments per acre in Scotland are way lower than in other parts of the EU, and the overall monies coming to the UK have changed through time and the way that different areas are classified. If you start with a blank slate, I suspect that you would not go down that particular route, but, as I said in my last answer, I think that this is an opportunity, in a sense, for the UK, and maybe Scotland, for good reason, is able to set its own policy, because the circumstances in Scotland for farming are quite different. I want to express that, because it is a big figure, and 86 per cent of the land is less favoured. Clearly, there are different priorities for agriculture in Scotland and in England. That is true. I would take them to the next level. What exactly is it? Is it to keep rural communities able to continue? Is it to protect Scotland's scenery? Is it to protect biodiversity? I would start at that level and then go down from that to discuss whether some of the land should be classified, because there are lots of Scotland that are not that productive per acre. You have to have some system if you are going to support at the aerial level. You have to have some way of dealing with that. I guess what I am saying is that Scotland may be being disadvantaged at the moment, but this is an opportunity now to think very carefully about what the whole system is trying to provide. Economists of a free market disposition might be inclined to reply to your question by saying that agriculture should stop in those areas. There are very big social and economic issues. Clearly, Scotland is a much bigger proportion of the UK land mass than it is in population times. There are very clearly big issues. Although it is not a large part of the Scottish economy, it is much greater political significance. I guess that that is what I am getting at. It is not that the system is perfect just now, as you have clearly said. The system is not perfect just now. There is an opportunity to create a better system. What I am getting at is where should that happen? We were reassured that agriculture would remain with Scotland after Brexit. It would seem that Scotland would be the best place to design a new system for Scottish farming. What the Scottish Parliament has now got is the execution. The policy is actually Europe. Post-1999, what the Scottish Parliament and the Scottish Government got was the execution of a system set at a higher level. The big policy question is whether the policy in future will be set at the UK level or at the devolved level plus England. As David Bell has already said, that will feed into trade negotiations because one is going to have very significant I suspect arguments between potential trade partners in terms of state aids and subsidies. I find it impossible to believe that a significant part of the policy responsibility will not stay at the UK level because of the importance that people are attaching to trade negotiations. There are all sorts of things about trade negotiations. One of them is going to be about things such as animal welfare, genetic crops and so on. There are all sorts of things going to enter into those trade negotiations. In terms of trade negotiations, we have been repeatedly told that you cannot have a free trade arrangement and subsidised farming. That only happens in the single market of the European Union. That is not strictly true, but what it illustrates is how strength in negotiations matter. I looked at a website that the Canadian farmers maintain, the Canadian equivalent of the NFU. The trade deal that has been done recently between Europe and Canada shows that the agreement brings down tariffs on food between Canada and Europe, but the EU, the big negotiator in that negotiation, has not agreed to cut the CAP. We certainly have heard of that. That was the case. They are going to maintain payments to farmers, and they have said to the Canadians, yes, we will take our tariffs off, take it or leave it. The Canadian NFU, equivalent of, argued that there is not all that much in it for us because although we are much more efficient producers, we will be competing against wheat from Saskatchewin and we will be competing with wheat from Italy, where the farmers are getting direct payments. The question is, will the UK be a strong party or a weak party in terms of the negotiations that it enters into? What will it be prepared to give up in order, for example, to get access to the other country's car market? That is really why the Scottish Government has, in a way, to be in a position to understand what is going on. Throughout the discussion this morning, there have been a few issues that have been raised, one of which has been discussing quite a lot about agriculture and public procurement, and recent comments regarding the CETA was brought into the discussion. The CETA deal became more interesting and worth considering between the parties when provincial procurement became part of the considerations. In terms of the UK's bargaining power of 65 million people against 440 million and against 318 million in the US, does that have that negative opportunity of opening up wider aspects of the public sector, including the NHS, when it comes to any trade and negotiations? I doubt if the NHS will be included, but I think that some of the issues will probably become part of the debate. State aid is almost always part of trade negotiations, so if I am an investor willing to invest in your country, I want to be sure that you will not subsidise a competitor that will drive me out of business and cause me to lose my investment. Public procurement also tends to be involved in trade negotiations because access to some countries, the state sector, is a very large sector. Again, I will only invest in your country if I have free rein to tender both in the private sector and in the public sector. The negotiations with Europe are unlikely to go into the NHS because there is already a clear understanding of what state aid means and what public procurement means. However, if we enter into a deal with the EU, one should not be surprised if the rules on state aid and the rules on public procurement do not change that much. One of the things that concerns me on the transparency front is that one of the advantages of the Office for Budget Responsibility is that it is within the Government information perimeter, so it actually gets access to government information. When it came round to the autumn statement, the Government refused to release to OBR the letter of comfort that has been given to Nissan. I suspect that we will see a lot of guarantees and a lot of letters of comfort. What those letters of comfort say and what the potential fiscal cost is in future I am concerned about, but I would have thought that other countries will be asking questions as well. A lot of what is now more up front than state aid might start vanishing under the carpet. That opens up—it could be argued—the issue of discussions between the devolved Parliament's assembly and the UK Government through the GMC in terms of that issue of transparency and what has been discussed on the agenda and how effective those discussions are. Would that be a fair assumption? I am not sure that the UK Government will be terribly concerned about the devolved Administrations in this context. Given the fact that it was the Conservative Government that set up the OBR in 2010, I think that one has hit a particular sensitive point when one starts denying information to institutions once they have set up themselves. My final question is to go back to the issue of when it comes to trade negotiations and anything will be on the table. The speech that the Prime Minister gave at Lancaster House towards the end of her speech was a number of areas that were actually on there by one of which was on fishing. For the UK to attempt to get some type of trade deal, it is a legitimate issue to consider that fishing might once again be considered to be a bargaining tool and a bargaining chip to get some type of deal to allow EU member states access to fishing waters in Scotland and the UK. A trade deal is about all trade. There is trade in fish, there is trade in agricultural products, there is trade in manufacturers and services. The deal, it seems to me, could probably cover in tortuous detail all aspects of potential trade between countries. I think that there is also an issue of historic rights that predate the setting up of the EU as far as fishing is concerned. Those will have to be dealt with in the very large agreement, if it happens. It is not going to be a short one. The only thing that I would have to add is that I would have thought that a significant part of the output of the Scottish fishing industry goes to Europe. Judging by the Murray lorries that are obviously European, that is where the seafood is going. The question of access to markets is going to be a very important one for the fishing industry outside the common fisheries policy. On Stuart McMillan's first point, I mentioned the NHS trade deal, SETA. My understanding of where difficulties often arise with trade deals is not in what is specifically included, but what is not specifically excluded. For example, the Scottish NHS is not specifically excluded from SETA. We are yet to see what the consequences of that might be. There is an issue there in that the devolved parables and assemblies are governments of the UK that do not have a role within the UK's trade negotiations. Is that not where the risk comes to our public services, where they have not been specifically excluded? I do not have sufficient knowledge to comment. I am not sure. With any of those deals, there always has to be an overarching body that arbitrates when there are disputes, for example, in relation to Scottish NHS. That is why take-back control is a bit of a problem. Any trade deal that you do with a third party will have to agree a form of arbitration to resolve any disputes that you may have. In terms of just the number of disputes that are resolved, the European Court of Justice is just, I think, by a factor of at least 100 deals with more disputes than does the WTO. If I am in the WTO and I want to object to another country's trade practices and we are both members of the WTO, I have to raise that with my Government. Then my Government has to be willing to take it on. They have to engage with the other countries' Government, and it takes a long time. They do not deal with that many disputes. If you are in Europe, you as a company can raise a dispute because of other companies' practices in France or in Germany and so on. You have a resolution mechanism. We have not talked about it very much, but it is almost the most important. One of the most fundamental aspects of any trade deal is your agreement with the other country about how you deal with disputes. A very quick supplementary question from Lewis. I would just want to follow up what Stuart McMillan asked about fisheries. The one thing that we have not touched on today is the European maritime fisheries fund, which is the one area payment that Scotland has the greatest benefit from. I think that we have established from today's evidence that agriculture is bound to be drawn into trade deals and therefore there will be an impact on agricultural subsidy. Structural funds are much less likely to be drawn into trade deals and therefore they are much more can be determined autonomously here. Where does the fisheries fund fall in that spectrum? Is it likely to be direct support for fisheries exports and also for fisheries restructuring to be part of a trade deal, or is it likely to be domestically determined? The deal that Norway has done to gain access through the EEA to the single market specifically excludes fisheries and agriculture. That approach is possible and means that you have less things to bargain with when you come to making the deal. Effectively, Norway has to accept what the EU does in respect of setting the rules around trading. It has to accept the free movement of people. It has to accept the free movement of capital and the free movement of services. We would have got a different deal if it had put fisheries and agriculture into the pot. I am not clear. Probably the EU thought that this is a relatively small country and that these issues do not matter all that much. At the moment, it is pretty unpredictable whether it all depends on the bargaining position that the UK Government takes, but, again, for the communities that are concerned about that issue, there is an argument that they should have an input to any debate around what is in and what is out. Can I finish off by pointing to page 9 of your paper, Professor Bell, where you say something that could suggest that a lot of our conversation today about the transfer of funds and so on is rather immaterial, because you suggest that the UK could choose to use the money that it saved to pay off the budget deficit. You say that £8 billion would be what the UK would gain if it was no longer contributing to the EU budget. There would be an argument to put that into the £59 billion budget deficit. How likely is that, do you think? I think that that is possibly less likely than before the referendum, although, as David has pointed out and the IFS has pointed out, the fiscal situation remains dire. I think that the UK Government, although it is not entirely clear, is taking the view that it wants to be seen to be benefiting all parts of the country. I am thinking of Northern England more than Scotland, Wales and Northern Ireland, but one consequence of that might well be a retention of something like the structural funds, and some form of agricultural payment might be a reduced one. In order to maintain that argument, the economy should not be just run for the south-east of England. I do not really have anything to add. Thank you both for coming to see us today and giving your evidence. We will now suspend briefly to move into private session.