 Good morning, and welcome to the 30th meeting in 2023 of the Finance and Public Administration Committee. We have received apologies from Michael Marra, Daniel Johnson, and as his substitute. We have also received apologies from Michelle Thompson and Audra Nicholl for attending as her substitute. I would like to welcome you both to the committee and, as it is Audra's first time attending, I invite you to declare any interest relevant to the committee. Thanks, Cadrewer, there is nothing to declare. We have one public item on the agenda today, which is an evidence session with the Deputy First Minister and Cabinet Secretary for Finance on the Scottish fiscal framework, independent report and review and on VAT assignment in Scotland. Ms Robison is joined today by Scottish Government officials, Matthew Ellsby, Deputy Director of the Fiscal Policy and Constitution and Al Caldwell Corporate Treasurer of the Scottish Government. I welcome you all to the meeting and I invite the Cabinet Secretary to make a short opening statement. I'm pleased to have the opportunity to attend committee and discuss the recent fiscal framework review. The agreement with the UK Government to publish an updated version of the Scottish fiscal framework on 2 August fulfilled a key commitment in the First Minister's policy prospectus. Since being agreed in early 2016, the fiscal framework has been thoroughly stress-tested as Brexit, the pandemic and now the cost of living crisis have unfolded so it was right to review arrangements and consider improvements. This new agreement with the UK Government includes a balanced set of changes which strengthen the financial management tools available to the Scottish Government and provide the Scottish Parliament and Government with greater long-term funding certainty. That said, I want to be clear that the review was not as broad in scope as the Scottish Government would have liked. That reflects that the scope and process for the review and its outcome were subject to agreement with the UK Government. Nonetheless, under the circumstances that revised agreement represents meaningful progress and a good outcome for Scotland. The adoption of the index per capita block grant adjustment methodology on a permanent basis is a significant win for Scotland. The independent report authors estimated that the use of the index per capita methodology for calculating income tax block grant adjustments alone could be worth around £500 million a year by 2026-27 when compared with other methodologies that were considered in 2016. The agreement also provides a substantial increase in the Scottish Government's resource borrowing powers to manage tax and social security forecast errors, doubling from £300 million to up to £600 million per year of borrowing capacity, greatly improving the Scottish Government's ability to manage and smooth funding volatility driven by forecast error. Similarly, the removal of drawdown limits on the Scottish reserve is also an important development, providing a significant increase in reserve flexibility and improves the Scottish Government's ability to manage funding across financial years. The agreement to upgrade borrowing and reserve limits in line with inflation ensures that the effectiveness of those powers will be maintained in real terms, making Scotland's financial management arrangements more sustainable. Taken together and within the context of the narrowly scoped review that was on offer, those are meaningful improvements to the framework and the financial management tools available to the Scottish Government. That said, we should not lose sight of the scale of the fiscal challenge in the aftermath of the pandemic, the on-going cost of living crisis and the urgent need to tackle climate change. While the changes to the framework are welcome, they are not of the magnitude required to offset this broader fiscal challenge. This requires action by the UK Government, and I hope that the Chancellor will heed calls from the Scottish Government to take action on public services, fuel poverty net zero and the cost of living as part of tomorrow's autumn statement. I also want to be clear that I understand the concerns expressed by the committee about the process surrounding the review and its timing. The Scottish Government's preference had been for a process involving broad stakeholder involvement. However, when a window of opportunity emerged earlier this year to conclude an agreement with the UK Government on changes to the framework, I was mindful of the value of securing borrowing powers ahead of the £24.25 budget, and that we are dealing with the UK Government is likely to go into election mode soon. Within that context, I judged that it was appropriate and prudent to conclude a deal when it became possible to do so. I hope that the committee will recognise the improvements that were secured through the revised agreement, and I look forward to discussing the detailed arrangements. I thank you very much for that very helpful opening statement. I think that the committee was quite taken by surprise by the announcement. I recall in the 11 to 16 Parliament, when the fiscal framework was still being constructed, what a torturous process it was. I have to say that, if I hadn't been for the First Minister and Deputy First Ministers of the Day digging their heels in the very last minute, we would have ended up with a framework. Indeed, we would have ended up with one that would have cost this Parliament several billion pounds over years, and a deal was struck. I think that we expected that to be a much more drawn-out process, and you've obviously touched on the process there to some extent. One looks at the delegation of powers, for example, over taxation. We still see that the UK Government has control over national insurance, VAT, quite a lot of income tax, co-operation tax, excise duties on cigarettes and tobacco alcohol, fuel duty, savings and dividends, et cetera. I'm just wondering whether or not any of those were proposed by the Scottish Government. Obviously, we'll talk about VAT assignment in a minute, but I'm just wondering how far the Scottish Government tried to push the envelope. I appreciate that you said you had an opportunity, but it's not a negotiation of equals clearly, but I'm just wondering where you're pushing in addition to the areas that you've mentioned in your opening statement. You're right that there was a window of opportunity that was open to us, and it's fair to say that the former chief secretary to the Treasury, John Glenn, was keen to conclude matters in advance of any potential changes to personnel in Treasury. I think that we understood really that this was a window of opportunity that may not remain open for very long. The narrow scope of the review was made very clear to us, so, of course, over time we have demanded and requested and will continue to do so. Additional financial levers devolve the devolution of further taxes, but it was made pretty clear that the scope for a deal, an arrangement, was on the very limited scope that was set out, which I've covered in my opening remarks. There was a judgment to be made of, do you then just accept the narrow scope in order to get some tangible gains, or do you continue to argue for a widening of the scope? My judgment was that what was on the table was limited, there was nothing else going to be put on the table and therefore it was prudent to secure the gains in a negotiation on the narrow scope that we have eventually managed to do. Those are judgments, and it was my judgment that, despite the narrow scope, there were still substantial gains to be made. I am being very diplomatic in terms of the responses that you are giving. I think that it seems to me that, correct me if I'm wrong that you are presented with, more or less, a take-it-and-leave-it situation with very little wriggle room, and, as my mother would say, half a loaf's better than no bread. Is that the kind of approach that you were effectively presented with? I wouldn't want to underestimate the gain made around the adoption of the index per capita block grant adjustment methodology on a permanent basis, and I have set out my opening statement that that could be worth around £500 million a year by 2026-27, when that was something that clearly was important. I was very mindful of the potential negative tax reconciliation quantum for 2425. We are in a different space in terms of the quantum, but, at the start of that process, we did not know what the quantum was going to be, and that would have had a material impact on our budget next year. Therefore, being able to get that increase from £300 million to £600 million was very important. Of course, now that will be able to cover all of the negative tax reconciliation for next year. Those things were uppermost in my mind, while accepting, if we were starting with a fresh negotiation, clearly other matters, some of which you have mentioned, would have been on the table. However, in order to secure some immediate benefit, that was my judgment. That is what we concluded. It was very much a negotiation that was with a limited window of opportunity. Index per capital was crucial in securing the deal way back in 2016. It is important that it has been consolidated, so that is a significant gain. In relation to inflation linking the capital borrowing, that is also clearly important. One of the things that concerned me when I looked to the projected increase in capital available that there would result over the next four years was that it seems to be tied to the GDP deflator, which, of course, bears absolutely no resemblance whatsoever to inflation in the capital sector. Even if those limits go up by the amounts that are actually predicated, it will still mean a real-terms reduction in capital available to the Scottish Government, will it not? Clearly, the capital outlook is really challenging. You are right to point to that. That is for a number of reasons. Essentially, the capital budget has not been inflation-proofed, and that impacts on our capital availability with an almost 7 per cent reduction over the foreseeable future. That has a huge impact on infrastructure investment, but, again, there was no option in terms of other mechanisms to be used. That was not on the table. It comes back to what was on the table and the limitations of having at least a recognition of capital budget growth. That limited gain was important, but changing the mechanism was not on the table. That was against a world in which there was no inflation-proofing in the capital budget, so any indexation is better than nothing. The choice over which mechanism to use while the GDP deflator is what is used to index most of the public sector costs, and it is for the way that the Treasury will view any costs across the public sector. There was not really any conversation about using a different method of indexation, but I do not think that the Treasury would have countenanced using anything other than the GDP deflator anyway. Potential borrowing is obviously something that we have spoken about over the years. It is available to local authorities, and it has always seemed bizarre to me and many others that local authorities have actually appeared to have more flexibility in terms of borrowing than this Parliament. That point has been made on a number of occasions. I think that there is scope and need for some discussion of these fundamental issues. Would we have liked to have got into that space? Yes, but as I said at the start, when you are in a negotiation, you can only negotiate the parameters of the other party's willingness, and it was narrow. A judgment had to be made, but those issues very much remain on the table. It is not acceptable that, as you have pointed out, compared to local authorities, the issue of potential borrowing is markedly different over the powers of local authorities compared to the Scottish Government and compared to other devolved administrations across the world as well. Those matters remain very live, and we would want to get them into the space of a further negotiation. However, as I said, that was very limited in scope. I will ask a couple more questions, and I will open out to colleagues around the table. First, we have got a summary of changes to fiscal framework, and they are all pretty straightforward. I think that the committee has got a good grasp on more of them. Colleagues will ask no doubt for further clarification. However, just in the coastal communities one, that is a one that seems to be a bit vague about. The previous situation was that a baseline addition was made equal to the UK Government spending on CCF in the year immediately prior to devolution. It is now going to be absorbed into Barnett with no immediate impact on funding, and the word there is obviously immediate. I am just wondering what that will mean as we move forward, particularly someone who actually represents a coastal and island constituency. The Coastal Communities Fund is essentially an England-only fund where the Treasury adjusted our block grant in response to the England-only spending. We received roughly £5 million per year in respect of the Coastal Communities Fund through the 2010 to 2018 period. That was a flat adjustment of a block grant, so that was not quite the same thing as Barnett. That is just a flat, straightforward increase to our block grant. The Coastal Communities Fund has been disestablished in England, but that adjustment to our block grant remains, so there is no sort of impact on our overall funding. What the fiscal framework is basically trying to do here is just tidy this up and be clear that that adjustment to the block grant remains in perpetuity. If England was to do something similar to the Coastal Communities Fund in future, that would incur a Barnett consequential, and we would get funding alongside that at the same time. All that is really about tidying up a bit of confusion within the fiscal framework, but it has no impact on our funding position right now. If there was to be additional funding in line with something like the Coastal Communities Fund, we would get a Barnett consequential in response. That is great. Thank you very much. The only question that I am going to ask now is about VAT. Last week, we took evidence on VAT assignment. In fact, we were around table with a number of organisations such as the Scottish Fiscal Commission, for example Audit Scotland. We took only 50 minutes from a 75-minute session, and the reason why we took 50 minutes is because it became very clear that no-one seemed to think that that was in any way a good idea. We feel that it was—perhaps I might not be speaking for everyone, but I am pretty sure that I am, though—that it was added into the Smith commission so that it could appear that the Smith commission was going to move towards 50 per cent of taxation being devolved at some point. That was thrown in as part of that mix. When we looked at the intricacies and the nightmare that would be assignation, for example, HMRC gave us a briefing on volatility, as many others did. It appeared to us—for example, the Fraser Van der Institute, SFC—that this is, frankly, not in Scotland's interests to secure an assignment of VAT. The volatility would be huge, the benefits would be zero that we could see because you would not have control of the policy, you would not have control over VAT levels at all. It was, of course, a way of getting around the fact that, when we were in the European Union, you could not devolve VATs to substate legislatures as well. I am just wondering whether or not the Scottish Government is A, going to, frankly, abandon the policy of looking at assigning VAT, and B, whether it will still consider whether VATs can potentially be devolved in the future. I want to know what the Scottish Government's position is now with regard to that. It seems to us that a lot of work has been gone into that over a number of years from Scottish Government officials. I feel for the people who have been doing that work, but it is a dead end as far as we can see it. That is the unanimous view of the committee and the people who attended the round table last week. Let me agree that I am very clear that the uncertainty associated with the proposed approach to VAT assignment, along with the point that you have made about the no additional fiscal or policy powers being granted to manage it, is an inherent and currently unmanageable risk to the Scottish budget. I think that a lot of the work that has gone on has tested some of that. The fiscal framework review was an acknowledgement of the complexity and the risk, and the concerns need to be addressed by both Governments. The process has, following the review, met officials following the conclusion of the review to establish where both Governments stand on the matter and discuss the next steps. There will be another meeting early in the new year, where, frankly, evidence from the committee will be part of the discussion. Are the conclusions about the VAT assignment now in a place that is so clear of the recommendations by all the experts and the evidence heard at this committee? The outcome of those discussions will be considered at a future meeting of the Joint Exchequer Committee, and my intention would be to keep the committee updated around that outcome. It is not a process that would need to come to a position that is acceptable to both Governments in terms of what happens next, rather than only one Government giving its view, so I am very aware of that. I would like to try to get to a position that is an agreed position of what we do with the issue, but I would not count on this in total agreement with you to take on that inherent risk without any of the policy levers. I just do not think that that was fully understood at the time, perhaps to be charitable, that the inherent risk was going to be totally borne by the Scottish Government and the impact on the budget. I would like to think that, in the light of all that evidence now, that a conclusion has come to that is pragmatic and sensible. The Institute of Taxation was also participated in, but the HMRC, in briefing before us, the session told us that the volatility in the current phonagies of the order of 9.81 per cent. It would be a real shock. Who knows where we could be. That is the highest that has been in the last 12 years. There is also the bureaucratic cost and the politics as well of who would gain and who would lose. The committee is clearly the view that it is not worth the candle for all the stress and distress that we have caused. We cannot see any real gain for Scotland in it, or the UK. I do not think that it would be a bit of a nightmare. That conclusion is really helpful. I am now going to open up to colleagues in the first two questions. Will they be listed before by Ross? Can I pick up the theme of the principles of the Smith commission, which is inherent within the fiscal framework in 2016 and now? The witnesses who have come to the committee plus, obviously, the three Davids, Isar, Bill and Philips are very clear that there are tensions within those principles, specifically the tension between taxpayer fairness and the principle of no detriment. Could I ask the cabinet secretary whether the Scottish Government accepts that there is that very strong tension? Secondly, out of those two, taxpayer fairness and no detriment, you would focus on one of them as the particular priority. You are right to point out the tensions that are inherent. Both are hugely important, clearly. Given the narrowness of the scope of the review and what we were focusing on in terms of the methodology on the ability to borrow to deal with tax reconciliation and the Scottish reserve, it is fair to say that that was very much in the no detriment territory of making sure that our position was protected as far as we could within that limited scope of the review. I was very aware that decisions around the methodology, for example, would make a huge difference to, as I laid out in my opening remarks, of the quantum within the Scottish budget taking into account the issues of population growth. The no detriment issue played in to a larger extent because of the issues and the narrowness of the scope of the review. It would be fair to say, and that is my honest assessment on that. That might not have been the case had it been a broader range of matters that we were looking at in terms of the review, but on those particular issues, that was what was foremost in my mind. It has just been flagged up a lot and, obviously, there are debates to be had about whether the Smith commission principles need to be slightly revised as we go into further fiscal frameworks, because I do not think that anybody has said that all the Smith principles can actually be achieved at the same time. I do not think that anybody has said that to us. Therefore, it is this balance that the cabinet secretary has set out this morning of deciding what your priorities have to be in that choice. As we go into a possible five-year period when we have to look at the fiscal framework again, I understand that both Governments would have a facility to make suggestions whether the Scottish Government would make suggestions about trying to revise the Smith commission principles. That is a fair comment and fair assessment. That is something that we would have to consider. The principles were a negotiation, weren't they? Compromise is what emerged at the end of that negotiation and a set of compromises from a political negotiation. I think that, going forward, we have probably learned from that. I think that one of the areas that we have just been talking about in terms of VAT assignment is the necessity to be really clear and careful about what is part of that negotiation. Some of those areas were quite last minute in terms of being inserted into the Smith commission. I think that the principles would need to be looked at. We would be in a completely different era with a completely different set of arrangements. We would have to look at that in the round. I think that you make a fair point. I think that it is a case to be made, and it is being put to us by some witnesses as well, that these were different economic circumstances when they were first set up. There is also an on-going relationship between the UK and the Scottish Government, which maybe determines that over the next period things could perhaps be looked at again. Just on that point, cabinet secretary, you were very complementary about the Scottish Government's relationship with the UK Government. I think that it was only 27 September in the chamber where you spoke warmly about the improved relations between the Scottish Government and the UK Government. I think that you actually cited John Glenn. Is it the case that you feel that those negotiations are in a better place than they were before? Let me be candid. John Glenn might be a bit of an oasis in a desert of being able to do business with someone who was very clear about his objectives and was quite open and straight about it. I have to say that officials and the Treasury officials were in a very productive space, and that comes back to the window of opportunity. I think that John Glenn recognised that that window might only be open potentially as long as he was in the position, if I can be as blunt as that. Sometimes it is about relationships and you can find a negotiation. That works both ways, obviously, but when you find a situation where there is clearly a willingness on both parts, despite the limitations, just to get business done, then that was where we found ourselves in that situation. Obviously, John Glenn has now moved on. I have not met the new CST yet, hoping to do that and to have a call with her in advance of the autumn statement. In the midst of the rest of the very difficult relationship that we have with the UK Government, it was in my experience of having dealt with a number of ministers, a bit of a breath of fresh air, and I hope that I am not making him blush by saying that. Not at all. I think that it was good to hear that, if you do not mind me saying, Cabinet Secretary, because that has not always been the case. Particularly when it comes to financial discussions and especially the fiscal framework, I think that it is very important—the public think that it is very important—that Governments work together to get the best deal for Scotland. From my perspective, can I just put it on the record? I thought that that was very encouraging. I would like to return to the convener's line of question around the changes to capital boron limits. Given the point that has been made around the extent to which capital inflation has gone far beyond not just the GDP deflator but the measures of consumer inflation as well, and I apologise if you covered that in your answer to the convener and I missed it, but was there any discussion of even backdating a year or two to apply even the GDP deflator? As you can imagine, we pushed on a number of fronts to try to get the maximum benefit and deal, and we were successful in something in others. Getting indexation was better than nothing on capital, but, clearly, we would have wanted that to have gone further. Capital is the biggest challenge that we are facing. I will lay out the full implications of that for Scottish budget and infrastructure projects, but it is a real challenge and, of course, links directly to the economy and economic growth around being able to invest in Scotland's infrastructure. It is crucially important and will be a major impediment to growth. In the context of what we were able to achieve, we got as much as we were going to be able to achieve in that space. We were just not able to expand the basket of measures that we were being looked at. What was the rationale presented to you by the UK Government for that specific relation to capital borrow limits? Without breaking confidence, it is useful for the committee to understand the extent to which there were competing objectives in terms of public policy, balance of where power lies, et cetera, versus the politics, the partisan politics of this. Balance is an important word there. In a negotiation, there is always a balance of who gets what out of a negotiation and what came out the other end. We had to get enough to satisfy some of the fundamental red lines that we had, and we had a number, but clearly so did the UK Government in terms of how far it was prepared to go and not be seen to go too far, because, obviously, there are those perhaps in the UK Government that maybe did not like some of the outcomes of the fiscal review itself. Therefore, everything is a negotiation, but they had red lines too, and that was one of them that they were not going to budge on. We got a clear sense, and the Treasury officials pushed boundaries on those with each other before John Glenn and I would get in the room to look at where the boundaries were in terms of what was acceptable. I guess that balance of what came out had to be a balance, otherwise it would not have been agreed. Unfortunately, that made compromise on our part as well, and that was one of those elements. Can I add two points to that? First, the Treasury and the Chief Secretary throughout this set out their key constrainters, their fiscal rules, and that basically any borrowing, any additional fiscal powers on our side would score against their fiscal aggregates. The Chief Secretary throughout was very clear that this would affect the UK's fiscal position. That is what confined negotiation is, and that is where, although we pushed in places to have greater powers, ultimately they see this as a zero-something because anything they give us is a loss to their fiscal position. The other thing to mention, just on capital borrowing, is that throughout all of this we had in mind that any additional capital borrowing powers effectively still scores against our resource position. If we borrow more through capital, it is a resource cost in later years, so there is always a consideration of, if we were to increase our capital borrowing powers, what would that mean in practice for our resource position? That is why indexation and a steady increase over time was a bit of a prize here, because that was a sustainable position to end up on. It is more manageable. It is helpful for us to understand that, from the UK Government's perspective, it was not just about the well-trodden constitutional ground of where power lies. It is also about the current UK Government's policies in relation to debt and deficit and contribution to that. Given the point that you have just made, though, Matthew, about the impact of capital borrowing on the resource budget, neither of those budgets are particularly positive for the Scottish Government over the next couple of years. What is the practical effect of the gradual increase in the capital borrowing limit in terms of what Parliament should expect to see? The expectations are that capital budget is not going to be particularly rosy picture. Does that fundamentally alter anything? It has already been discussed. It is nowhere near where capital inflation is at anyway. We are already at the point where we cannot do everything that we thought we would have been able to do a couple of years ago. What should Parliament expect the effectiveness to be on budgets over the remainder of this parliamentary term at least? I think that probably at the margins would be a fair assessment. It helps, but it is not going to make a major impact on our ability in terms of the capital picture. In terms of strategic priorities for capital spend directly from the block grant versus what goes on on borrowing, is there any shift in Scottish Government priorities there, i.e. what would the Government consider in terms of capital projects as appropriate for borrowing, as opposed to just coming straight from the direct capital grant? Is that position essentially unchanged as a result of that as well? There are no specific projects or earmarked as this is funded by borrowing and this is funded by the block grant. Borrowing still represents about less than 10 per cent of the capital budget in totality, so just by practical reality it cannot be assigned to specific projects. As I said earlier, part of the budget process will require me to come forward to set out what we are able to do in terms of the remainder of this Parliament but also in terms of the infrastructure investment plan going beyond the longer-term horizon. We have also been looking at innovative financing models to try and do something to fill some of that space but that is not without its challenges in terms of resource costs. There are no easy answers. My plea again would be tomorrow that there is an opportunity, the autumn statement, that there is a change of direction on capital. That would be very welcome and something that was in my letter to the chancellor that there needed to be more support for the capital position. Thank you. That's me, convener. Thanks. Thank you. Apologies. Are we aside to run our clerks? They are just about the letter. Actually, I've received a letter about the clerks' hand. Sorry, Dan, it's before bye, John. Yes, thank you very much, convener. I'd just like to follow on really just from that line of questioning. Matthew Ellsby stated that essentially that the treasuries in going position was that it was looking at this within the context of its own borrowing. That being said, it doesn't state its borrowing parameters on the basis of an index of inflation. It's as a percentage of GDP on a rolling five-year average and it states its overall total borrowing against GDP. Indeed, that's how all economies will look in broad terms at the year-to-year quantum of borrowing and, indeed, their overall debt. I'm just wondering if that was explored. Likewise, more broadly, is there not a risk to both Governments, in a sense, because if the principle of taxpayer fairness is fundamentally ensuring that policies pursue or cognise of how they impact tax receipts, that if the Scottish economy underperforms or overperforms the UK economy, we could either be left with a more generous borrowing allowance than was intended if we underperform, but if we overperform in five years' time, even a half per cent annual overperformance compared to the UK, we could leave that quantum looking considerably smaller than it did at the point that it was agreed to. I'm just wondering if that was explored, actually, looking at this from within the parameters of the treasuries' own fiscal rules and, secondly, that risk to both Governments if you just index against inflation rather than the economy. Matthew, do you want to come in on that? It's fair to say that there is no risk inherent in every decision. I guess that our starting point was to minimise that risk for the Scottish Government and it came out of the review that it does. Matthew, on that specific point. Yeah, I think in this it's important to sort of distinguish between the resource and the capital borrowing policy and how that differs and how that is set up and what it's meant to do. On the resource side and the tax reconciliation is extremely narrow, we can only borrow to cover the forecast error and that is something that treasuries have been pretty adamant on since day one. We did explore with treasuries whether we could have more generous borrowing requirements there, particularly on things like the tenor length of our borrowing and that sort of thing, but in those places the treasuries said, basic said and said no. But that is a different case for fish to what we look at on the capital side, where we have a bit more flexibility about how much we borrow, what we borrow for, the length of virtue payments and that sort of thing. On the resource side, we absolutely bear the risk that if the Scottish economy grows less quickly than the rest of the UK's, that will be reflected in our tax receipts. Our borrowing isn't there to address that risk, our borrowing on the resource side is to address the risk around forecast error and reconciliations and the fact that things will move around at different points during the year. Whereas on the capital side, there's an understanding that there may be a need to borrow to invest in significant projects at certain times, but we will have to repay back that we have some flexibility over how we do that. But on both of those things, even if you're looking at forecast error, that will ultimately actually be driven by the size of tax receipts, not by inflation, but both those borrowing pots, for want of a better description, are indexed against not even inflation but the GDP deflator. It just strikes me that even on the treasuries on logic, they're not indexing against the right thing. I think that there's a reasonable point that getting any indexation is better than nothing, but you could argue that indexing against tax receipts might be better, indexing against block grant adjustments might be better. Ultimately, there's going to be risks inherent in any indexation and it's down to where that balance of risk sits. On a related point, this is a bit of a pet hobby horse of mine from my previous tenure on the committee. I've always had this fear that the way that the block grant adjustments are calculated becomes risky as time goes on. Fundamentally, you're indexing back to 2016, and when you're in fiscal year 2017, that's fine, but the moment you're into fiscal year 2021, but let alone 31, that becomes an increasingly synthetic exercise. Was that even explored as something that will need to be reviewed and revisited in future years? Especially when you hit the 10-year mark, I think that trying to unwind all the different fiscal decisions made by both UK and Scottish Governments, trying to benchmark and then calculate block grant adjustments, becomes so prone to human error or it certainly becomes a very synthetic exercise. Was that something that was explored in the discussions, even if it's for future negotiations? I think that you make a really important point. I guess that it comes back to the next phase of negotiation that needs to look at those issues. The point that was made earlier on when the establishment of those principles and agreements was in a very different economic climate and the economic shocks that we've seen since then expose some of those matters in the longer term. The next phase of negotiation, I think that we need to look at those in more detail and expose them to the true light of what we know over that longer period of time, rather than the earlier years of devolution, which were economically reasonably stable. I think that this is one of the places where the independent report helped to frame our considerations in this as well. You'll see in the Scottish Government's evidence to the independent report that we were getting into the space of other fiscal insurance mechanisms that we should think about and to the extent to which block grant adjustments are sustainable in the longer run and to the extent to which you can disentangle policy effects from block grant adjustments. I think that in one particular place the independent report was helpful in shutting down some of those lines of inquiry, where we were looking at are there options to re-base, are there options to reset our block grant adjustments over after say 10, 15, 20 years? I think that the independent report and the contributions of the authors was quite helpful in basic shaping that. It is very difficult to do that mechanically, and it is very difficult to come up with ways to look at that. I do not want to pretend that where we got to in 2016 was perfect, and there are obviously challenges with that. I do not know if, in 2017, we will have this sort of mechanism in place, but I think that the contribution of the authors was helpful in saying what are the things that would be quite difficult to do in a way that was fair to both sides and where you could not reach the Smith commission principles. Just finally, and I think that this is perhaps something for the committee to explore, and I am very mindful that I am just a substitute member. I think that it has certainly been questioned by some just the timing of both the release of the independent report and the final negotiations. I understand, Deputy First Minister, your explanation that it is very technical. I concede that there is probably a limited audience of interest, but none the less what we are talking about is that the fiscal envelope available to the Scottish Government, which is a fundamental importance to everything that we do, I just wonder if there has maybe been some thought for the Scottish Government that perhaps we should have a period to allow for scrutiny and discussion, because those are complicated matters. Perhaps, I think that we have had quite an interesting and constructive discussion so far this morning, that that can actually help analysis. Going forward, will the Scottish Government undertake to have the possibility of scrutiny? At the very least, independent reports enable them to be digested, because having them concurrently does undermine that ability to scrutinise. I think that all would definitely want to reflect on the process. I guess that what I would say is that my predecessors had engagement with the committee and stakeholders around the early days of the review, and then the independent report was jointly commissioned, which I think was important, for its credibility and acceptance as part of the process. We had the rapid opportunity to conclude matters where the CST made it very clear that he wanted that to happen in a confidential space. I would not have had any issues at all with having further engagement with the committee or stakeholders, but given the CST's very clear position, that would have been very difficult. Sometimes, in a confidential space, you can get agreements that might otherwise be difficult, so those are balancing acts. Going forward, our clear preference would be to have the engagement that preceded the actual agreement being reached, which was very much not just with the committee, but with external stakeholders as well. Being able to do that in a more open and transparent way, that would be my preference. Do you acknowledge that what you have just set out explains why essentially the sequence happened from an intergovernmental perspective, but that has not necessarily accommodated a parliamentary process that one might want? I accept that. Had we held out to say that we are not going to make this agreement unless we can have, I just do not think that we would have got the agreement. Maybe to start off with a few points that have already been raised. You have said that we need to have a more fundamental review at some point. Theoretically, there was a general election in January and a change of government. Could we start the fundamental review in February? You can be assured that our key asks around a number of matters will be put to any new government emerging after the general election, not just on fiscal powers but on things like the internal market act, on the way that Governments interact, on respect to gender, on getting back to a position of more respect. The days of the memorandum of understanding seem a very long way away, and a lot has happened. The internal market act particularly is a real impediment to devolution and an erosion in so many respects. It makes the day-to-day interaction with the UK Government very difficult. That is not just a Scottish Government position, I hasten to add. It is also a Welsh Government position. I think that there is some work that is important around what is the devolved administration's relationship with the UK Government rather than it being a party political issue. I think that there is a more fundamental issue of the relationship between the devolved administrations and the UK Government. The balance of power has shifted my view away from the devolved administrations in so many respects. I think that there is an opportunity to reset that and refresh it. The element of the fiscal powers that we have been talking about this morning is one part of that. That is helpful, and I am sure that that will return to us in the future. The way that this is being done, the fact that, last time the fiscal framework was set up, everything was on the table, as far as I could see. John Swinney came back and told us what was happening and we debated it, whereas this time it was just a limited amount that was on the table. Something has changed there. Just going back to the VAT, you said that both Governments would have to agree for it to be dropped or for it to go ahead. Is that the case? Could Westminster impose it on us? I think that they would want to be fair. I think that they understand the risks. I do not see any appetite for a unilateral imposition of VAT assignment in that space. In the light of all the evidence and organisations from the HMRC to all major influential organisations that are all saying the same thing, I cannot see any Government wanting to impose something that they would do so in the full knowledge of the harm and risk that it would cause. I think that what I was getting at earlier on was what we ended up saying about VAT assignments in terms of post the review. We will obviously be discussed at a future joint extractor committee. I guess the point that I was making would be that what I would foresee is some kind of joint position of what we do with VAT assignments going forward. On the bigger picture in all this, I take your point and a lot of the experts last week we had were also quite positive about the agreement and the method of the fiscal framework going forward, IPC and so on. However, I have to say that I still have some concerns personally and two of them would be one, we always seem to be competing with London and if our economy has to keep up with the rest of the UK and on the whole we do keep up with most parts but every part of Europe I think struggles to match London and is there not a fundamental kind of bias against us. We had figures mentioned last week in relation to Barnett and how that is also squeezing our finances and the suggestion was that in the past we got 129 per cent of the rest of UK spending, now we are about 125, it is probably going to fall to 120, it might fall to 115. When I put all of that together, are we basically being squeezed and squeezed going forward in the longer term? Is that what we have got ourselves tied into? I think that there are huge issues relating to population growth for Scotland in relation to elsewhere in that are the key levers over migration and some of the key economic levers lie elsewhere so being able to address that fundamental issue of population growth without levers is very difficult and of course it impacts on how the block grant adjustment is applied so if you take tax take and the growth in tax revenues due to tax policies set here in Scotland and actually the sides are from HMRC data that there is a continuing strong performance there but that is all put through the block grant adjustment machine based on population growth and what pops out of the other end is what we know to be the case. It is a challenge, it would require a pretty fundamental change and that is something that would need to be part of a bigger, more fundamental review. The Barnett squeeze, without a doubt, is definitely reducing, I will bring Matt in or say more about that if you want. There is a point also if you look at the Crown Estates so one of the arguments that we made quite strongly about the Crown Estates for example was that the investment and focus on the Crown Estates over many years had been particularly focused on London and the South East without any investment or focus on, and I am talking about the pre-devolution period and early, without any focus on the Crown Estates in Scotland. We have made that a success story in terms of being able to focus on investing in the Crown Estates and particularly offshore wind and the fact that we ended up that was part of the negotiation here, I think was a recognition of that success, which post 2016 and the agreement reached then, the success of the Crown Estates since then I think has been recognised by the UK Government. The point that we made was that that underinvestment in the Crown Estates in Scotland compared to London and the South East had to be part of the understanding of where we ended up on the Crown Estates position. To some extent we had to compromise a bit, but we landed that point perhaps reasonably successfully. That is not just an issue for Scotland, it is probably an issue for other parts of England as well in terms of the relative economic performance to London and the South East. Of course it has major consequences for us in terms of the funding adjustments that are made as inherently as part of the fiscal framework. We were never going to be able to unpick any of that as part of this review, but it is very much an issue of what next, but it would mean some real fundamental look at how the relationship between our budget and UK finance is really constructed. I do not have much else, but I wanted to come in now. Just on your points on London, it is absolutely a risk and it is absolutely something that we need to watch. It is also early days and we are still working with a fiscal framework that is relatively new and we are still trying to work out what the long-term direction of London and the Scottish economy is going to be over time. The important thing to bear in mind is that it is not about the absolute level of wealth in London in the South East. It is the extent to which growth in GDP changes in England relative to Scotland. What we do know is that it is not clear cut. Since 2007, we have seen GDP per person grow by about 10 per cent in Scotland relative to about 6 per cent in the UK. It does vary and it is not completely clear. It is something that we will only have a clearer view when we have lots more data on this, but it is absolutely right to say that this is a risk and something that we should note. I am sure that it is on the table at least in the longer term. We will be looking at it. I think that just a couple of other specific questions, if I may. The £600 million resource borrowing. We have been told by some that that might not be enough because the forecast was, thankfully, that did not happen, but the adjustment might have been greater than that. Again, it was a negotiation and we would have wanted that to go further than £600 million, but, essentially, that was a landing space and a compromise. We had to make a judgment of whether to settle on £600 million. In the light of my concerns about the negative tax reconciliation, you can see why progress was progress in relation to that, but, yes, we would have wanted that to go further if we could have negotiated that. We looked at what impact the borrowing powers would have on the likelihood of not being able to meet an income tax reconciliation. Before, with the £300 million limit, we assessed that there was a 14 per cent to 27 per cent risk that a negative reconciliation would not reach those powers. That has now reduced to a 2 per cent to a 13 per cent risk. There is still some risk in there. There is still the possibility that they do not cover an income tax or any tax reconciliation, but they are significantly improved. It is worth saying that that is within the current devolution settlement, and if we were to take on that assignment, those borrowing limits would not be enough to address that sort of risk. I have no intention of doing that clearly, but the point as well about the big negative tax reconciliation that we thought we were facing next year, which is reduced, thankfully, was, of course, very much related to the forecasting during the pandemic. The figures that Matthews set out around the percentage risk put it into a space of, it would not be anticipated that you would have a negative tax reconciliation of that magnitude very often. It was very much related to that set of circumstances at the time. I accept that, although the 13 per cent at the higher end of your list is every once seven or eight years, so it still could happen. My final point then was that there is no idea of a Scottish specific shock and provisions for that has now been dropped. Can you just say anything about why that is? I think that because of the changes to resource borrowing, being able to borrow up to £600 million was regarded as being able to beacon some of that to the normal state of affairs in terms of the fiscal framework, but Matt, I do not know. I might be bringing Neil on this one as well, but it is absolutely true that the new powers are effectively overwrite the existing settlement. There is a question of should Scotland have particular powers during an economic shock. What we did find in our previous experience was that the previous powers did not really work particularly well, and the reason was because of the timing and the fact that we were not able to tie particular borrowing powers to the year that the shock actually happened. I think that it feeds back into the earlier discussion that actually what we need is a look at the fiscal powers more generally, but even with further tweaks of levels of resource borrowing, that does not change some of the fundamental weaknesses of being able to respond to an economic shock, whether it is a Covid pandemic or any other. It is a very limited levers, and even with tweaks to some of the levels, it would not suffice. I have one point. The Scotland-specific economic shock powers on resource borrowing and reserve are effectively in the revised fiscal framework on a BAU basis, so there is no need for it in that context anyway. I just want to go back to the VAT assignment. Just to be very clear, notwithstanding the concerns raised during the round table and by experts and the concerns raised today by members of the committee, is it still the Scottish Government's ambition that VAT assignment does go ahead? Our ambition would be for VAT, but with the levers and policy levers to be able to manage that. The problem with VAT assignment is that you are assigned the revenues, but you have none of the levers in terms of being able to deal with risk. You get the risk, but none of the benefits. If VAT is devolved with all the controls over VAT, that is a very different proposition, but that is not what is on the table. The problem with assignments is that you get all the risk and none of the benefit of being able to use it as a tax leaver to raise revenue. I have explained earlier on that the evidence now is so compelling that the discussion of the UK Government needs both Governments to reach a position on what we do with VAT assignments going forward, but we will continue to want the devolution of VAT in full with the policy levers attached to be able to manage it. You have made clear during the discussions that you have had with the UK Government that you have had to work within the parameters of negotiations, that the UK Government has had a clear position and that you have worked within those parameters. Taking that principle forward and the negotiations that you have, how can you overcome some of the concerns that have been raised and perhaps the concerns that you have if you are still operating within those parameters? I think that that is what we need to resolve with the UK Government around that. Do we continue to try to find a way to mitigate the risk? I think that a lot of work has been done on that and I think that the conclusion is that it is very difficult, or do we agree that it is just not feasible to be done as an assignment without the policy levers? I guess that there could be agreement, which is highly unlikely, but we would get the devolution of VAT with those policy levers. The third option is that we agree that it is not feasible to go forward with it on the basis of all the risk that is agreed. In the light of the evidence since 2016, which would not have been understood at the time in the way it is now, there is a decision that the risk is too great. That decision has not been made yet, so I think that I would want to leave the space at the Joint Exchequer Committee to come to some conclusions over that. There will be a joint conclusion. I will come to that in a second. The methodology that is developed by the Scottish Government and the Treasury and the HMRC is the model that has been used, which has been based on the VAT total theoretical liability model. Is that model in itself part of the discussions? Yes, but the question is if, could any model remove the risk of having the assignments but no levers to be able to manage the risk? The point was made earlier on by someone that, in the current fiscal climate, that risk would be at its optimum had we gone forward and the impact on the Scottish budget would have been profound. No one so far has been able to find a model that would de-risk that if one exists. Theoretically, but in the light of that so far, with all the wise heads that have been looking at this, they have not managed to find a way. I come back to the point that there needs to be a joint conclusion of what we do next. On the basis of the need for a joint conclusion and working with the Joint Exchequer Committee, what do you see as the timescales around that? Obviously, it cannot be an open-ended, elongated process. There must be timescales that you and your colleagues are working to. There is a further meeting of officials in the new year to look at where we have got to. I mentioned earlier that the evidence that is being heard by the committee will be an important part of that. The outcome of those discussions will be considered at a future meeting of the Joint Exchequer Committee. It may well be that officials—the best outcome, I think—will be that officials working together with Treasury officials put some joint recommendations to us. That would be the best space. Then a decision is made. As I said earlier, I am happy to keep the committee updated. Will you say recommendations on how obstacles can be overcome or recommendations on—this is not going to be workable from both sides. Let's park this, essentially. That would be what we would be looking for, what the recommendations would be to ministers in terms of the conclusions that officials have come to in terms of what the art of the possible is. We are not at that stage yet. We need to get let that process go through. As I said, we require—I guess what I was saying was that that would be the optimum that recommendations are made to ministers that we can jointly agree to. I have been listening to the information shoot this morning with great interest, and the cabinet secretary all know that I am a convener of the Justice Committee, Criminal Justice Committee, and we have recently been undertaking our pre-budget scrutiny process. I think that it is safe to say that the evidence that we have heard during that process has reflected the significant challenges that we are all familiar with, but particularly in and around the capital budget. I would say that that is particularly difficult for the prison service and the fire service. In some of the evidence that we have heard, what has been indicated is that yearly increases in budget are just no longer meeting the needs of parts of the sector, and that obviously brings it at risk. Last week, we had the cabinet secretary for justice and home affairs in giving evidence, and she spoke about it, and I quote, I think that there was a need where possible to have a longer term spend to save vision. Without hijacking the finance committee into a mini criminal justice committee, just in general terms, given the context of the fiscal framework review, is there any scope to start thinking about more of a spend to save approach? I think that, particularly given that the cabinet secretary spoke about financial management arrangements, they were more sustainable on the back of the review. However, the capital budget is still challenging and not inflation-proofed. There are a few issues in there. The first one is that we cannot escape the fact that capital budgets, unless something changes tomorrow, will decline. Therefore, the purchasing power of what can be developed and built with that reducing capital availability is constrained. Therefore, we will need to prioritise and set out our proposition in the budget. We are keen and recognise very much that modernising and improving the prison estate to ensure that it is fit for purpose is a priority. We know that the pressures on the prison estate at the moment are challenging to say the least, so we recognise that. You touched on spend to save and I guess that that is part of the reform agenda that I am taking forward on behalf of the whole of government. That is to look at ways of doing things differently, whether it is on resource or capital. One of the issues that we are looking at at the moment is the public sector estate. It is a wider sense and we are looking at what we do where and why. One of the challenges of future investment in the net zero space is a requirement to bring public buildings up to scratch in terms of net zero emissions, but there will be some buildings that do not make sense to do that, given the cost, but that will require us to think about co-location and where things are done, taking into account patterns of home working, office working, having changed since Covid. All of that is being looked at in the work on the estate strategy and then just looking more widely at the reform of public bodies and fiscal sustainability. One of the issues is the balance of workforce and where that sits and the affordability in terms of the size of the workforce and what the workforce does going forward. All of that needs to be taken forward carefully, and we need to make sure that what we end up with over this is going to take time, it is not going to happen in the short term. It is a sustainable set of public services that are able to continue to provide high-quality service, but they may look and feel a bit different than they do at the moment. The prison estate and the justice system is one part of that. That thanks, cabinet secretary. Certainly, in our evidence sessions, the opportunities in and around reform were covered. As you say, particularly in the context of the Scottish prison estate, where a big part of the capital budget is supporting that reform process in terms of modernising the estate and, I suppose, that would apply to Police Scotland, where they have their estate strategy and looking at trying to modernise and upgrade their estate as well. I suppose that just really brings me on to my next question. It may become the pixel phone. Audrey, it is about the fiscal framework. I know that you have only had one hour's notice of the meeting, but you are moving a wee bit away from the subject matter that we are discussing and deliberating over today. In the context of the new fiscal framework, as part of the parliamentary budget scrutiny, my question is how the new framework should inform and perhaps change the way that committees approach their budget scrutiny going forward. Probably, for most committees of the Parliament, it is fair to say that the fiscal framework will probably be something that is over in this committee's territory just because of its complexity. I guess that there will be a high-level understanding of some changes that are in the main beneficial, but it probably will not feature as a line of inquiry by committees that are looking at, for example, capital investment in the prison estate or in transport or anything else. I guess that where it matters is around the resource borrowing, the capital borrowing and the reserve drawdown limits that are taken together have some limited impact on the margins rather than on a game changer for the capital outlook of the Scottish public finances going forward. I suspect that it will be on the margins rather than at the centre. That concludes questions from the committee, other than myself. I still have one or two, just to wind up, surprise, surprise. Given that VAT assignment is a dead duck after eight years of deliberations, I am just wondering if we are, as our Scottish Governments, to pursue, for example, VAT devolution or, indeed, to look at how we can oppress devolution of other areas. Of course, it takes to a tango when the UK Government might not be keen, but, for example, the devolution of alcohol and tobacco duties has given a disproportionate income that would generate, given an overconsumption of both those substances. I am just wondering where would the internal market bill come into play there, given the fact that it touched on it in an earlier response? Or, indeed, if you were not, and I should say, what would your priorities be? Would it be a VAT assignment that would be national insurance, corporation tax or some of the other taxes that I have mentioned? Clearly, we have set out over the years many of our asks around fiscal powers, the borrowing power and the potential borrowing that you mentioned at the start of the session around the disconnect of local authorities, in many respects, having a more straightforward borrowing capacity than the Scottish Government. There are some fundamental asks. You add into that the other financial levers that we have asked for. VAT devolution would be one. Again, it is a much more expansive ask that requires a different political environment and willingness to look beyond the confines of what we have been looking at. I do not know whether that will be there or not, but we will continue to put forward the proposition that Scotland needs that basket of fiscal powers to be able to deliver on the ambitions on both capital and resource in a sustainable and affordable way. However, it recognises that the economic shocks that we have been dealing with are still dealing with in the midst of a cost-of-living crisis, and that the levers that we have are very limited. It is a good point at which to say, looking back, that we need to have a more fundamental review of the powers that we have. You make the point that it takes two to tango. It absolutely does. That is where we would have to find a landing space that is acceptable to both Governments. The Internal Market Act and the Use of the Internal Market Act is not covered by the fiscal framework and therefore was not part of the negotiations. However, it is a major issue of being able to bypass transparency and how public money is allocated in Scotland in areas for which the Parliament is responsible cuts to the heart of devolution. The Welsh Government, I am sure, is for that to be recognised. Is a reset required? That was a fiscal framework that was negotiated in 2016. The Internal Market Bill was imposed in 2020, so it will have an impact as we go forward if other areas are to be devolved. That is an area that we would certainly seek clarity on assuming. John Mason talked about a new Government, so it is whether or not Sir Ed Davy's new administration would be keen on having a better discussion with the Scottish Government. Will you test that? Yes, indeed. I think that we are in a position of fluxing away. Although there has been a settlement and there has been agreement that this will only come in once every five-year term, one thing that John Mason pointed out was that that five-year term could be appointed relatively soon—a year, 18 months at the most, I think. That is why I wonder whether the Scottish Government is looking at those issues now and is looking for the next stage in terms of fiscal framework and whether or not the Scottish Government is looking at other devolved administrations around the world. For example, a previous committee, which I have done, visited the Basque country in only about 6.2 per cent of its revenues handed back to the Spanish Government. The rest is all devolved. Many have got pension, social security. It is only really the monarchy, civil-guard and defence. It is reserved. I feel like everything else is dealt with locally. There are other models to look at. I am just wondering what is revende. I think that we might be able to reach in future. Whether you are having contact with other potential political parties, who could form a future UK Government with regard to that? We are obviously keen to take advantage of any new thinking to be able to get into a different space. We know that those things happen on two levels. One is Government to Government. We are preparing some of the groundwork. Some of that will be Scottish Government, some of it will be shared devolution space with the Welsh Government around key asks and getting on the front foot with what the proposition would be. Clearly, some of our priorities will be a bit different from the Welsh Government's priorities, but I think that there are some shared aims of resetting respect to gender issues to do with SOOL, IMA and so on. The Welsh Government is clearly in a different space in terms of fiscal powers, but it will enhance fiscal powers and it will enhance social security powers. The devolved nations are very much pushing in a direction of we want to see further power and responsibility devolved and levers devolved. The party space is a bit more tricky and communication happens through personal connections and more in the private space. Whenever there is an election and there is potential for a new Government to come in, there is an opportunity to be seized upon. However, I come back to your point about that it takes two to tangle. That would require new thinking differently. The opportunities for Government and the civil service to get in the room to talk about doing things differently in a different approach is led by the political willingness and the political signal to avoid a situation in which business just continues as usual, whether that is the Scotland office or whether it is the Treasury or any other UK department in the way it views the Scottish Government. Political steer and political appetite is going to be really important there, but there is an opportunity without a doubt. From the Scottish Government's point of view, we are keen to seize that opportunity because otherwise we do not get the maximum benefit of doing things in a way that are for the benefit of Scotland's public services and the people of Scotland. I could push more on that because it is quite interesting that the settled status of the Basque Country in terms of it, regardless of which Government is empowering Madrid, and yet that is not the situation that we have here. That requires a whole new reset and a whole new… The sky is the limit in terms of whether you can do things completely differently, of course, but you would have to get the other side of the negotiation on the same page with some of that, and that is obviously what we do not know what the appetite would be. Do you have any further points you want to make to the committee, anything that you feel that we have omitted or any points that you wish to make in view of the discussion that we have had over the past hour and a half or so? I do not think so. I think that we have covered the main points. I just really want to thank the committee for the evidence sessions and the very clear steer that you are giving us on VAT Assignment. I think that that is very helpful. Going forward, I will do my best to keep the committee as informed as I can. Thank you very much and thank you obviously to Matthew and Niall for their contributions. Also, that concludes the evidence that we have planned on the fiscal framework review and report on VAT Assignment. We will consider the next steps in private at our next meeting, so that also concludes the public part of today's meeting. The next item of our agenda will be discussed in private. We therefore have a five-minute break to enable the cabinet secretary, officials and official report to leave.