 Fyster, wrth hyn, a chyfyddoedd, yn gweithio i'r pryd yn 2017 y Oeddeniaeth Gwneudol Cymru. Felly, rydyn ni'n cael ei wneud i'r dysgu i'r cymdeithasadau a'r cystyried cyfnwysau. Rwy'n beth i'r Robert Short oherwydd rydyn ni'n amgylchwp. I have an apology from Madame Tomkins this morning. The first item of our agenda is to decide whether to take item 4 in private. Members agreed. The second item of our agenda is to take evidence from the Office of Budget Responsibility and reports on economic and fiscal outlook and devolved tax forecasts, both of which were published alongside the UK autumn statement in November. We are joined for this item by the Chairman of the OBR, Robert Chote, and a very warmly welcome, Robert, to the meeting. Robert, I don't know if you've got a short opening statement you would like to make, or if you wish to do that, please feel free. Thank you very much indeed, convener. It's a great pleasure to be here. Perhaps just by way of introduction, as you say, the last set of forecasts, which I know the clerks have circulated details to everybody, were alongside the autumn statement on November. The next set of forecasts that we produce will be alongside the UK budget on March 6, so we haven't done any updates of the material since then. If you look at the differences between the forecasts that we published back in March of last year and then the subsequent ones that we produced back in November, at one level, the big picture story of an outlook of relatively steady but unspectacular growth, certainly by the standards of periods of growth after a recession, remains in place. Obviously, the continuing major uncertainty around that forecast, and I think around anybody doing an economic forecast over a five-year or so period, is the outlook for productivity. This has been the defining puzzle of this economic recovery. The fact that productivity, which is the amount of output you get out of every hour that an individual works, has grown much less quickly than has been historically the case. That's not unique to the UK. It's, I think, probably more pronounced in the UK than elsewhere, but it has led to a greater sense of pessimism about the medium to long-term growth prospects of the economy, as I say, not unique to the UK. Obviously, the most newsworthy thing that happened between March and November was, of course, the referendum vote by the UK to leave the European Union. That creates its own set of uncertainties around the forecast, both in terms of the ongoing response to the vote itself and the uncertainties around what will eventually emerge from the negotiations. I think it's very important to remember that the uncertainty surrounding Brexit has not displaced or replaced the existing uncertainty about the outlook for productivity, the outlook for the global economy. It's come on top of that, and I think it's easy to forget those underlying senses of uncertainty by focusing too much on Brexit. Indeed, if you look over the coming years and decades and the performance, the long-term growth performance of the economy, the productivity performance of the economy, surprises people on either the upside or the downside, interminable PhD theses are going to be written on whether this was to do with Brexit or whether it was to do with the resolution or the evolution of the underlying productivity puzzle. So, I think that's important to remember. In addition, I think it's also, obviously people are very focused at the moment on what the flow of new economic data coming in tells you about the immediate response to the no vote, whether the economy is holding up or not. I think there's a great temptation, obviously, for people to fixate on either the weak bits of data or the strong bits of data, depending on whether that supports the previous argument that they've had. But I would be very cautious about placing too much weight at this stage on the monthly numbers, the quarter numbers that we get out of the Office for National Statistics on the performance of the economy at this stage. We are dealing here with the very early drafts of economic history and experience shows that that can be substantially rewritten. You only need to look. There'll be particular focus, I think, over the next few quarters on the performance of business investment. Go back to 2009. There are huge variations in not merely the forecasts of what was happening to business investment, but the estimates of what actually happened after the event. I think in the second quarter of 2009, the estimates of the change in business investment on the previous quarter ranged from an increase of one to a decrease of 11 or 12, and it's now put at minus five. That gives you some sense of the changes there. It's tempting occasionally to look at economic forecasting and treat it as a spot-the-ball competition. Well, it isn't like that, or if it is like that, it's the spot-the-ball competition in which you have to be prepared for the judges to change their minds repeatedly about where the ball is, and often many years after the closing date of the competition. I think you have to have that sense of wearing us. Maybe just one remark on the devolved tax forecasts before going to questions. Obviously, we produce our forecasts in November. It's been possible now to compare those produced by the Scottish Government in the December draft budget. For example, if you look at income tax, the largest one, the differences between our forecasts and the Scottish Government forecasts are small in comparison to the uncertainty that lies around either one of those forecasts over the horizon that we're looking at. I would not regard those differences as being significant or worrying. They will reflect things like differences in modelling approaches, differences in some of the information that people have been able to take on board, difference assumptions about the performance of growth and earnings over the next few years. For LBTT, rather larger differences, but that I think is only to be expected given the nature of that tax and the same is true for the rest of the UK equivalent. It is of its nature a much more volatile tax, bigger movements in housing transactions, housing prices than you get in wages and salaries. I think that the key thing from us, and I know that this is a shared objective that we have with the Scottish Fiscal Commission, is to be able to look at those numbers and to be able to highlight for people why there may be differences there. But, as I say, I think that one has to expect those differences. It's not something to worry about and it is another symptom or manifestation of the uncertainty around economic and fiscal forecasting that I referred to earlier. I was going to ask you at the beginning to talk about how difficult the science of forecasting was and what that would mean for us in terms of a committee, but I think that you have exploited that very well in terms of your description on the spot the ball. For us, where it's spot the ball or finger on the air to work out what's going on, for us in Scotland the issue is what are the variables going to be and the difference between what happens in the rest of the UK and Scotland. I'm not sure if you could provide us any insight in where you think the challenges are for us in these potential variables compared with what might happen in the UK performance, compared with the Scottish performance. Given the uncertainty around what the numbers actually mean. I would come back to the fact that any uncertainty about the differences in performance between Scotland and the rest of the UK are probably dwarfed by the uncertainties around the performance of either in isolation. I think again coming back to the productivity issue, the biggest and perhaps most important uncertainty for both us and for the Scottish Government now and the Fiscal Commission in terms of producing forecasts in the future is the outlook for productivity growth and what that implies for growth in average earnings, which is obviously a key driver of the income tax forecast. We've had this period of very weak productivity performance since the financial crisis. We are assuming that potential productivity growth and potential growth in the economy as a whole does pick up over the next five years but doesn't get back to its historically average rate at the end of that period. However, nonetheless, making that assumption of a pick up is sufficient to get average earnings growth year on year in the UK for an hour forecast up to three and three quarter per cent by 2020 or thereabouts. I think that the Scottish Government has a figure of slightly above four per cent here, whether that's actually a genuine difference or a difference in exactly which year on year or month on month comparison it is. I'm not sure, but we're both engaged in part in an act of faith that we get back to something more like the performance of the past rather than the recent very weak performance being the new normal. If that is the new normal, that's bad news for wages, it's bad news for living standards and it's bad news for the public finances as well, so that I think would be a key one. I think that the Scottish Government's approach at the moment in the forecasting is essentially to take our forecast for the UK as a whole for average earnings and then to use their own modelling techniques to discern any differences that are important for Scotland. That seems a very sensible approach. Obviously, the Fiscal Commission will have decisions to make about how much of a forecasting exercise they undertake on their own on the macroeconomic side. But that I think is the major underlying uncertainty there. I think that it's interesting that in terms of the differences in modelling approach the Scottish Government in producing its income tax forecasts has taken an interesting approach of looking at an approach that sort of disaggregates by different ages whereas for us we are more troubled both in the income tax forecast and in the LBTT forecast. The difference between London and relatively high-end properties and income movements and the rest of the UK as distinct from Scotland versus the rest of the UK story, which is one reason why we have different techniques, but that will be an important issue as well. If I had to underline one key uncertainty both in terms of the performance in both Scotland and the UK and in any differences, earnings growth and productivity growth would be a key one. Obviously, there are clear similarities between the OBR forecast and the Scottish Government's forecast, but those forecasts are more optimistic than forecasts from renowned companies and organisations that seem to be projecting lower forecast growth than either the Scottish Government or the OBR. Do you have any sense of why that might be? If you look at our forecast for GDP growth this year and out over the next five years, we are somewhat more optimistic than the Bank of England's most recent forecast back in November and we are somewhat more optimistic than the average of outside forecasters pulled by the Treasury. There are some people who argue that we are nonetheless nowhere near optimistic enough and that great opportunities present themselves and that will show up in a much stronger growth performance. I think partly it depends on when these forecasts were made. Obviously, if you are averaging a whole lot of outside forecasts, some of them will be relatively old, some of them will be relatively new. If you take the particular impact of Brexit on the potential performance of the economy over the near-ish term in the next couple of years or so, the judgment that we have basically made is that you would see some slowdown in the economy partly reflecting the impact of uncertainty on business investment, business is likely to cancel or to delay some projects and also we have seen a sharp fall in the pound since the referendum that pushes up import prices and would therefore be expected to squeeze consumer budgets in particular through this year and into next year. That means that even if consumers continue to spend in cash terms, what they were going to spend anyway, it makes less of a contribution to real GDP growth because you are buying less stuff with every pound that they are spending. I think some of the more pessimistic forecasts were in addition assuming that there would be a hit to business and consumer confidence sufficient for consumers to increase their precautionary saving. I had to tighten their belts out of a sense of anxiety and that in some cases firms would engage in more aggressive job shedding because of the potential impact of Brexit. We have not taken that view. We have focused more on some delay or cancellation of investment projects and the squeeze via higher prices but I think some of the gloomy of views, and this would certainly be true of some of the gloomy of views published ahead of the referendum, it was assuming a more aggressive reaction by consumers and businesses than we have and the evidence suggests to date that there has been. You have covered some of my questions already because it was about productivity, the assumptions around the productivity growth because you said in your report that it was the most important uncertainty. I saw a tweet by Danny Blanchflower and he said that the OBR really must explain its assumptions around why they think the productivity puzzle will be solved in the next five years and your comments on Brexit there as well. It seems to me that over the next five years, it is relatively short term, we have a lot of impacts around Brexit, some of which we are not really sure what will be yet but certainly we have already seen business investment is down. Do you not think that that would play into productivity and therefore assuming that productivity growth will return in the short term? Why did you make that assumption? We have taken down the forecast for productivity growth over the next five years partly as a result of the Brexit vote. The link that we have emphasised in our last report is that if you have less business investment there is less capital being provided to businesses and that in itself leads to weaker productivity growth so we have that chain operating there. The Treasury in their analysis ahead of the referendum also emphasised the fact that they assumed that if you had a less trade intensive economy and most people are assuming that at least over the sort of time horizon we are looking at here, maybe not over the much longer time horizon that you would just get less imports and exports than you otherwise would have done as we moved to a new trade regime, that that in itself means less innovation and less productivity growth. There is another potential channel there. In terms of going back to the broader question, Danny's question, which precedes the referendum anyway of why do we assume that there is a pickup of productivity growth at all, I think the challenge for forecasters at the moment is that you are looking at two very different periods of history, a period of decades in which productivity growth was relatively strong and then a very weak performance since the financial crisis and as I say not unique to the UK. So in terms of what you forecast for the next few years, essentially everybody has to wait how important the much longer period of relatively strong performance and the shorter period of subsequent relatively weak performance is as a guide to where you are going to be in the future. Perhaps not entirely. Surprisingly, we go somewhere between the two. We assume that things won't remain as weak as they have done since 2008-09 but that they don't get back to the sorts of productivity growth rates that you saw previously. So I would dispute the notion that we are assuming that the productivity puzzle is solved. We assume that there is some return towards the sorts of rates of improvement that you've seen in the past. Part of the reason, again, for that in-between judgment, is that there is considerable uncertainty over what the explanations for the productivity puzzler. If you knew why it was that productivity had been so weak, you could then make a much more definitive judgment about whether you thought the next few years were likely to be different. There are a range of alternative views out there that we're not measuring these things properly, that it is the weakness of business investment, that it's something to do with the buoyancy of trade at a global level. Is it to do with the fact that there are just simply less good, potentially profitable ideas out there for people to invest in? The Bank of England, in particular, has thrown a lot of person power at this question and have concluded that there is no single defining explanation for this, but lots of individual things can explain part of it. Our view is that it's too pessimistic to assume that we never get back to anything like the 2% productivity growth that we've had in the past. What's the evidence for that? It is a judgment of going somewhere between the two of those. What we do do in the report and what we did in this one is to show the implications for the public finances if the recent past is the new normal or if we get back to the performance in the past. Not entirely surprisingly, if the recent past is the new normal, that is not good news for growth in tax receipts for the public finances and would make it much harder for the Government to hit the fiscal rules that it has set itself. It does, to some degree, remain an act of faith that we get back to something more like normality, but we are certainly not assuming that we recover the level of productivity that you would have expected prior to the crisis. Over the horizon, we are looking at not even the growth rate. I was going to touch on a number of issues, but I understand that variations in levels of productivity exist across the UK, with the recent rates of productivity in London being higher, and there are variations in productivity across sectors. Can you talk us through your forecast breakdown productivity levels on a regional basis or a sectoral basis, or if they do not go into that level of detail, can you give us some kind of flavour of what your view is in terms of productivity levels across different parts of the UK going forward and across different sectors, please? I am afraid that I would have to leave that to others. We produce a macroeconomic forecast at all in order to produce a forecast for the UK-wide public finances supplemented by the additional requirements to do devolved tax forecasts for here in Wales. We do not produce a forecast that is disaggregated by region within England, for example, or by nation, or indeed by sector. It is not something on which I could give you, it would just be armchair theorising, but I would leave it to people who have looked at that in more detail. That is not to say, of course, that that is not a very important policy issue, but, obviously, from our point of view, we are looking at aggregate tax receipts and aggregate spending for the UK public finances as a whole, so it is not something that we work on specifically. I was just interested in some of what you were saying in relation to jobs, and I think that the phrase that you used was, if I can get it, we did not at this stage forecast that Brexit-related uncertainty will prompt more aggressive job shedding. I'm just wondering if you can explain why you haven't looked at the possible implications there. One of the documents that we've been using to inform our discussions over recent months is the Fraser of Allander report that suggests that, even under a situation in which we stayed in the EEA but came out of the EU, the impact would be something around the order of 40,000 jobs lost in Scotland. A drop of £1,000 in average wages. The consequence of that is not about people being cautious and saving more. It's about them not having enough money for the things that they need at the moment. Can you say a little bit about why you haven't included any kind of scenarios around the employment impact of the Brexit situation and the different paths that we might come into? Well, one issue in terms of the approach that we've taken to the Brexit policy as a whole and the assumptions that we've made. We're constrained here by the remit that we've been given and the legislation that's been set out for us, which requires us to focus on the forecasts that have to be produced on the basis of current Government policy and we're not allowed to look at different policy options. That's the reason why, in advance of the referendum, we didn't produce a forecast of what would happen if there was a no vote. Subsequent to it, we basically had to decide whether we would try to predict the precise outcome of the negotiations and use that as it were as your definition of current Government policy and base the forecast on that. Clearly, as you say, some institutions have produced different forecasts for different potential trade regimes. Whether any of those particular models ends up being one that the UK ends up with or whether the UK has a quote-unquote bespoke or just a different one, only time will tell. The decision that we took was that rather than to pretend that we could predict exactly where this was going to end out, we would make some relatively broad brush assumptions consistent with what external studies would suggest would be true of a wide variety of the outcomes. That is basically to say that over the five-year horizon that we're looking at that you would have less trade, somewhat less immigration, less investment than you otherwise would have done. That's what we've explained clearly in the report and that's how we've proceeded. As things get clearer, we can change that. How quickly things will get clearer enough for us to change it is a matter of change. In terms of unemployment and the labour market specifically, we do have unemployment rising relative to what would have been the case in the previous forecast. That's partly because, as I say, you have this weakness in business investment, the squeeze on consumers, which means that some spare capacity will open up in the economy and there will be some additional unemployment as a result of that, which would be typical of when an output gap is referred to in the economy opens up, but that you would expect to close down. Over the longer term, we are assuming that there is weaker productivity performance and that otherwise would have been a weaker potential GDP and that that pulls that down. When we said the quotes that you said about we've not assumed more aggressive job cutting, in a sense that's a sort of tautologist's statement, we've made an assumption and we obviously haven't made the assumption that's more aggressive than that. As I say crucially, we have focused in the scenarios that we've put in on what happens if you end up with a weaker productivity performance and that has considerable implications for the public finances but more importantly for wages and for living standards. The question that you are required to operate under the assumption of current UK Government policy, does that also apply to their immigration policy? The UK Government's policy is to bring net migration to the tens of thousands. Some of us think that that's a bad idea and probably unachievable as well but are you assuming that that will actually happen and what the economic consequences of that would be? We are assuming that, again, obviously we don't know what the migration regime the Government is going to either choose or emerge from negotiations with is going to be so again we've made a relatively… Sorry? You know what their policy objective is. We know what their policy objective is and that policy objective has obviously been there for some time and our forecasts, while they've taken the objective, we've taken on board the objective, we've never assumed that they would succeed in getting migration down to that sort of level. And we continue not to assume that in the projections that we've made in this forecast. So we have, I think, net inward migration settling down at around 185,000 a year rather than the high tens of thousands. So basically on both of these two aspects, if the UK Government achieves what it intends to achieve, the two more big heaps of bad to work into these figures? I mean, I think one point to bear in mind is that how bad you think the implications of the economy are depends on whether you look at GDP for the economy as a whole or GDP per capita. Obviously the effect on GDP per capita is smaller because obviously the economy will be smaller if there are fewer people contributing to it. The size of the economy per person in it would not be affected to quite the same degree, but it is conventional certainly in the analysis that we've produced. You see the same thing in analysis of the United States by the Congressional Budget Office that over a sort of, you know, a near but quite long time horizon, lower net inward migration is bad news for the public finances, primarily because net inward migrants are more likely to be of working age than the rest of the population. Now, obviously if you run that on over, you know, those people get older eventually and, well, all the time, but the fiscal implications will evolve over time. But generally speaking, you know, and we again show the variance here, if you have lower net inward migration, the outlook for the public finances is less good, but it's not our job to say what migration policy would be. Obviously Governments set migration policy not only with an eye to what this means for the public finances, and if they want to take a view that has negative implications for the public finances, they could take other tax and policy spending decisions to offset that. So we're not saying that you need to have this particular level of net inward migration to deliver a particular outcome for the public finances, nor are we saying this is the level of, you know, we do not believe you should get net inward migration down to the high tens of thousands. That sort of policy advice is beyond our scope. We're just trying to say what we think the most likely outcome will be under those different circumstances. Thank you very much. Ivan, is it a bit of a mystery to us? Thanks, convener. I was just going to follow up on some of the stuff Patrick had spoken about there on population. You've got a number of 185,000 that you're using. The data that we've seen—I don't know if it's the same data that you're using—the ONS population forecasts are growing by more than 400,000 a year over the next five years. The vast majority of that is going to be inward immigration. I think that there's maybe about 75 per cent, and that's going to be inward immigration, which I think is consistent with where we've been over the last number of years. I'm assuming that your 185 number is some kind of step down. You've got a line in your forecast that projects a public sector finance impact to that lower migration, which actually gets up to about £6 billion difference by 2021, which is obviously significant even with that step down. It was really just to drill some more into that. You talked about GDP versus GDP per capita, but as you also rightly said, at the end of the day it's a GDP number that drives the public sector. Finance is not the per capita number. I suppose that the question is if you've done any modelling at all on the assumption that the Government has got any chance of hitting its stated objective. It seems a bit strange that, given that 17 million people voted were led to believe for lower immigration, that's a stated Government policy, but you're saying that neither of those matter because there's no chance that hell of them are happening anyway, so we're just going to ignore that. It seems a bit strange. I leave it to you to say whether 17 million people voted for that is what they voted for. I think the difference view, differences on what the level of migration ought to be as distinct from its composition and the degree of control that the Government can exercise over, differs amongst the people who voted the way they did in the referendum anyway. More generally, the approach that we take basically to make the forecast tractable is, as you imply, to pick amongst the variant population projections that are produced by the Office for National Statistics. We try to pick the one that looks most consistent with the current stated Government policy and other external and other influences on migration flows. At the moment, we are using the ONS's principle population projection variant, which assumes that net-inward migration starts relatively around the levels that you've seen in recent years and then moves over five years towards a more long-term average. When the ONS produces its population projections, they are not doing a detailed study of whether they think that the regime is going to deliver particular outcomes. It is a more mechanistic approach that basically says the most recent past is the best guide to the near future and the longer the history is perhaps a better guide further on and that we take that on board. As we said in the report, in the absence of the Brexit vote, we would probably have moved to a higher net-inward migration variant from the ONS simply because the most recent inflow rates have continued to be relatively high. The decision not to do that partly reflects, again, the assumption that most external studies say that or suggest that the outcome of negotiations would be moving to something with a, given what the Government said, as you say, more likely to be a tighter than a looser migration policy. In addition, and perhaps more important in the nearer term, is that you assume that the pool factors, the degree to which people are attracted to come to the UK is less than it otherwise would be because the economy would be weaker and for other effects well. The fact that you have taken a lower net-inward migration assumption than you otherwise would have done is not simply or mainly a judgment about the fact that we assume that they are going to introduce a particular migration control regime that is going to let fewer people in but that you are also more likely to see a smaller inflow in any way because of the relative performance of the economy. The best way to reduce immigration is to crash the economy, because no-one would want to come here then. There are not words that we used. The only thing that is saying is that the ONS assumption is effectively ignored Brexit because they have said that this is what has happened in the past and we believe that that is the best guide to what is going to happen in the future. I suppose that it comes back to my question, have you done any number crunching on an assumption that immigration would be in the tens of thousands and what does that look like? If you go back to the previous economic and fiscal outlook that we produced in March, we did indeed do a set of different scenarios based on different outcomes for net-inward migration. That was not specifically on the basis of different policy regimes, but the way in which the ONS produces different population projection variants for different migration rates is simply to take the principal rate and then say, well, let's assume that the end point is 60,000 higher or lower, draw the line differently and then that comes out. We've been able to use that to show some of the differences. It was that analysis that we published in March that we've basically deployed again here in illustrating the potential impact of not moving to the higher migration point in this forecast. As I said, generally speaking, if you assume lower net-inward migration, the mechanical effect on the public finances is that it's weaker because of the... I don't know how small it is in the year number. It's not our lowest tens of thousands number. No, no, and if it was lower than that, as I say, you can see from the March forecast the sort of difference that it's made. So, yes, exactly. So you can look at above and below. Thank you. Thank you. Good morning. Good morning. I want to ask a couple of questions, if I can, about your projections for income tax, particularly in relation to the devolved taxes, which, as you will imagine, is of a great deal of interest to this committee, given that the budget we are about to scrutinise will contain for the first time the full devolution of income tax to Scotland. Now, the Office for Budget Responsibility has published its own assumptions, and they are suggesting that the Scottish share of UK income tax revenues is expected to increase, albeit fractionally, so they are expecting a relatively higher growth in Scottish income tax compared to the rest of the UK. I'm wondering if you had a view on that, whether you thought the OBR were correct in that assumption. We wouldn't have made it otherwise. I mean, that is the assumption that we made. As you say, I think that the difference, the share is relatively stable if you look over this period. The way in which we look at the share going forwards is to say in particular, so are there particular sets of policy measures that are likely to have an asymmetric effect between Scotland and the rest of the UK that is likely to move that share? Now, generally speaking, if you have policy measures that affect the top end of the income distribution or the bottom end of the income distribution to a greater degree, then that's going to have a different impact in the UK, in Scotland and the rest of the UK simply because of the differences in income distribution. A measure that changes the personal allowance and takes people out at the bottom is going to have a higher proportionate impact on receipts here than it will do in the rest of the UK. Changes at the top, if you increase taxation at the top, it's going to take more proportionately out of receipts in the rest of the UK than it does here. It's those sorts of adjustments, but as you can see here, or you can see from the report there, these are relatively small differences over time. Another thing that we do in the forecast that we produce is that we can make different assumptions about whether earnings growth is going to be higher for people on relatively high incomes versus on relatively low incomes or higher or lower. Again, because of the differences in income distribution, that can have an impact as well. In terms of the specific plans that have been put out in the draft budget, as I understand them, we're talking here about raising the higher rate threshold less quickly and the personal allowance in effect using a zero-band more quickly than would be the case in current UK policy. That's obviously going to have offsetting effects on revenues, not raising the higher rate threshold as quickly as we bring more in, raising the personal allowance by more will bring less in. Obviously, when we produced our November forecast, that wasn't Scottish Government policy firmly at that stage. When we produce our March forecast, we will be able to incorporate that, and we will produce an explicit estimate of the net effect on receipts of making that change relative to continuing to stick with the UK policy line. My guess at this point is that the numbers are not enormous, and as I say, there are offsetting effects at the top and the bottom, but we'll look at that more carefully when we get to the next forecast in March. OK, thank you for that. Perhaps I could just follow this up, because I heard everything you had to say. Your forecast, though, are suggesting that although the difference is marginal, the Scottish income tax revenues will grow faster than the rest of the UK income tax revenues, relatively. Are you saying that you think that income tax revenues per capita in Scotland will therefore grow faster than the rest of the UK? I'm not sure what the answer to that question would be. I can get back to that. I don't know over this period what's happening to the relative population growth over this period. If I can dig that out, I can get back to it. OK, thank you. That would be useful. One of the challenges that we have in relation to the Scottish economy is that we know that the Scottish economy relative to the UK economy has, over recent years, not been performing as well in terms of GDP growth. Unemployment in Scotland is relatively higher and employment is lower than the rest of the UK, which is why suggestions of faster income tax growth in Scotland relative to the rest of the UK seem out of kilter with what's happening elsewhere in the economy. I have just one further question that I can, convener. Have you looked at all— It's interesting. It certainly makes the comparison with Wales. The performance of Scotland versus the rest of the UK in things like unemployment rates is not actually that different, I don't think, and in employment rates it's rather more different. It's lower in Wales because of lower activity rates, whereas the employment rates in Scotland as for the UK as a whole are not that different. They bounce around, but on the devolved publication that we produced on page 10 it's clearly a lot more similar in Scotland than the rest of the UK than it is in Wales in the rest of the UK. Maybe we have ambition to be better than Wales, at least. However, the final thought that I had was on that very point. Have you done any work to look at what would be the improvement in the income tax take in Scotland if the Scottish economy grew at the same rate as the average for the UK, or if employment and unemployment rates in Scotland matched the UK average? No, we haven't. That would be outside the scope of what we would do. You might be able to infer some of that from the dates that we published, but we are focused on the approach that we take of generally having a UK forecast and then looking at the share and whether there are reasons to expect that share to move. That's the approach that we're taking. If you look at the Scottish Government's approach, it's a different sort of bottom-up forecast, looking at the different sources of income, differentiating by age, and from their point of view it may be possible to take their forecast and say, well, if you shifted the particular assumed employment or activity rates at different ages that you could do that comparison, I suspect would be slightly harder with the methodology that we use, but that's off the top of my head. As we've been discussing, economic growth is always important, particularly relating to productivity, but we're particularly interested in this committee because of the changes in relation to devolved taxes and the block grant adjustment and how differential growth rates can affect that. It's interesting that I'm looking ahead, although the growth rate in Scotland is lower in terms of the forecast and your forecast. Over 17, 18 and 18, 19, the trend is broadly similar, but when you get to 1920, the Scottish Government is forecasting just a small increase from the previous year of 0.1 per cent, but the OBR is forecasting an increase of 0.4 per cent, getting up to 2.1 per cent. The UK growth rate forecast for 1920. What I'm interested in is the jump from 18, 19 of 1.7 per cent to 2.1 per cent. What has driven you to make that forecast? At the UK level, this comes back to the assumption that, in the near term, we assume that there will be a weakening in activity in the economy because of the squeeze on consumers and the weakness of business investment, although there is clear significant uncertainty both about the size and the timing of that effect. If that happens, you open up a greater margin of spare capacity in the economy, i.e., there's some potential that could be used up before the Bank of England would worry about the potential inflationary implications of having the economy motoring at that sort of rate. If you have a situation in which you create a bit of a hole in the economy to start with, you then end up with a period of stronger-than-long-term growth as that hole is filled in again. You would normally get this story quite dramatically illustrated in the wake of a recession when, let's say the economy normally chugs along at 2 per cent a year, you then have a recession. It's then not unusual to have the economy growing by 3 or 4 per cent a year for a couple of years, whereas you climb out of the hole on the other side. What has been very unusual about this recovery is that you've not had that period of 3 to 4 per cent growth and you've essentially just got back to the previous trend. In other words, the whole potential path of the economy appears to have shifted lower. In microcoulson, that's what's going on here, you have the economy able to pick up a bit because, in the nearer term, there's greater spare capacity created by the short-term downturn. In terms of the difference between our forecast and whatever the Scottish Government is assuming for growth in the Scottish economy, I don't know what they're assuming precisely, but as I understand it, they have a bespoke version of the National Institutes economic model. They take our assumptions for what is happening in the UK as a whole, feed that into the model and generate some Scottish specific numbers that come out of that. What the mechanics of that are and whether those would be systematically lower than the UK number that we provide in the first place or whether there are other specific elements, you'd have to ask them. We produce a forecast for growth across the UK as a whole. They take that, the same would be true of earnings growth, stick it into their own model and generate a Scottish number out of that. As I say, I don't know what the mechanics are of the differences between the two. I'm not asking you to... It's obviously the Scottish Government forecasts that matter for them. I'm not asking you to speculate on why there's a difference. I'm just interested in your trend and you've described the situation. You get into something of a whole and then there's a period of above-trend growth while you climb out of it. Can I ask you about the growth of incorporations? I think that, if I recall correctly, there is a comment in your report about that. Obviously, for the UK, given that they'll still get a tax take-out of incorporation growth, although it will still impact on their income tax and there will still be a negative outcome from them, I suspect the situation in Scotland, if that trend is the same here, it's somewhat different, given that it will impact on our income tax and actually the Treasury might get some gain out of it perversely. Do you think that there's a... Have you got any views and the impact that that might have on Scotland compared with the rest of the United Kingdom, given also that we've got a smaller number of higher tax? Yes, it's not something we've distinguished at that level. Obviously, we're taking into account in the forecast of Scottish income tax receipts that we produce. It's based on a share of the UK forecast and one of the reasons we've revised down the UK forecast is by looking again at this trend in incorporations, which, as you say, seems to have been rising more quickly than we had previously assumed. There's a debate about how much that is to do with the particular tax advantage for people of being companies that's distinct from employees or self-employed versus whether it's more underlying structural trends in that there are certain industries in which it is just more efficient whatever the tax arrangements happen to be to organise yourself in that sort of way. We've put that into the UK forecast, so, therefore, it will feed into the Scottish forecast. In the UK corporation tax forecast, there is an offset there. Clearly, there is a loss to the Exchequer overall because you assume to the degree that it is tax incorporated. It's because people know that they will be paying less incorporation tax than they would have been paying an income tax, and, therefore, there's that loss. Part of the loss of income tax receipts is, as you say, offset on the corporation tax receipts. To what degree that matters for Scotland specifically because you're seeing the hit on the income tax side whereas the corporation tax side presumably would feed through some way into the block grant adjustment from which we steer very clear. Those are deep waters. We haven't looked at the Scottish specific implications, but, certainly, our Scottish income tax forecasts reflect the judgments that we've made on incorporations in the UK forecast. It's a bit you said that you're going to steer clearly, BGA, because it's an obvious place that question needs to go. If there was an agreement, a physical agreement in the physical framework, for instance, I'm no detriment. If we've got a situation where policy levers of the UK government have introduced have encouraged people to choose incorporation to avoid paying the income tax, if that is the issue that is going on, they do get some gain but they lose more on income tax but Scotland loses entirely from that because people move out of income tax. I just wonder, and it's maybe something for our adviser to think about whether or not there's a physical framework issue there in terms of no detriment. Yes, as I say, judging that is not for us. I can see why that would be an interesting issue. You would come back to the question of how much of the trend in incorporation is a response to changes in policy versus the fact that there's always been a differential in the relative tax treatment. Whether what is relevant to that no detriment debate is the impact of the underlying policy difference or the impact of the way in which that difference in the relative tax advantage has changed since a particular date versus how much of the underlying trend in incorporation is actually down to the fact that it's just a lot easier for people working in business services or media, et cetera, to arrange their affairs in that sort of way. I can imagine hours of entertaining debate on that very subject. It's too complex for me to even think about. I don't know why I put my head down that road. It's another detail around your OBR tax forecast. Don't model the UK Government's commitment to raise personal allowance to £12,500 and a higher rate threshold to £50,000 by the end of the UK Parliament. What impact does that lately have on the forecast for the block grant adjustment and, therefore, the Scottish budget, if you're able to comment on that? Again, we're constrained by the fact that we produce the forecast on the basis of currently defined Government policy. We have an issue here for the UK, as indeed we do with Scotland, and I think it's something that we need to keep under review, of when do you regard a policy as being firm enough for our point of view to include it in the forecast? We have always taken the view that we need to have a very clear statement of what exactly the Government is intending to do and when it intends to do it. We take those things in the UK context on board when they appear in the Treasury's budget documents, not when ministers stand up and say, we have an aspiration to end up here or there, when it's concretely put into a budget. It matters, in particular, when you're going to... What the path is towards that particular objective you may have for some year in the future, not just where you end up there. We can occasionally provide illustrative numbers of what the difference it would make if you end up at that end point, and I think we have done that in the past on the income tax commitment. We have a section on policy risks in here, which I think includes that. We don't include it in the central forecast. We specifically ask the Treasury, at every forecast we do, is this firm policy? Are you including it in your scorecard of measures? If they say no, then we highlight the point that that commitment has been made but we don't include it in the forecast. There's an issue for us here, obviously. We've not taken on board in the November forecast any Scottish Government potential decisions on the de facto personal allowance or the high rate threshold. There's an issue about when that again becomes firm policy. I mean, I think I've viewed at the moment, if it's in the draft budget, then when we come to do our next forecast in March, that's a strong enough clear commitment that we put it in. Whether you're greater experts on how firm these things are at different points in the Scottish legislative process than I am, so maybe that's not the right thing to be doing and do tell me if it isn't. But that's basically the approach we're taking. I'm not sure it's the legislative thing, it's the issue. It's whether or not it can be achieved given that we've got minority government. I think it's the real issue we'll be at the end of the day. Okay, obviously sometimes things appear in budgets and then are dropped afterwards because there isn't parliamentary support for them, in which case we put it in when the Government makes a firm commitment and we take it out when they firmly commit not to do it. I know that we've still got this productivity conundrum that you talked about earlier, but I just wondered if the OBR had any views about what either the Scottish Government or indeed the UK Government could do, because both are responsible to help grow the productivity levels in Scotland in particular. Is there any particular view at the OBR about how that might be achieved or is it something again that you don't really tend to come on at? Beyond our remit to give advice. If you look at the sorts of things that other people have suggested, I think one of the arguments that the UK Government would have made around increasing support for infrastructure spending when they announced that at the autumn statement, I presume, was partly with an eye to what implications that could have for productivity growth. There are issues about whether the financial system functions well enough to ensure that capital is reallocated effectively away from what can otherwise become zombie firms to firms where there is the potential for greater innovation and for greater productivity. If you look at some of the explanations that people had for why productivity performance and potential productivity performance were so weak over the immediate period after the financial crisis, it would be the dysfunction in the financial system and the fact that you weren't seeing that reallocation of capital in the way that you might. Obviously, policy measures that help on that score were things that were mentioned then. Obviously, there's a long list of things that people suggest around education and training, et cetera, but it's not our... I would caution here. This does appear to be in part a global phenomenon. That should be borne in mind in thinking about what potentially domestic policy can do. If there is a broad trend globally that there is just less investment opportunities or the particular type of technological progress that we've been seeing is not as conducive to investment and GDP growth than it otherwise would have been, there may be bigger picture stories there that might not be particularly amenable to domestic policy. That's a pretty helpful caution. Willie. Robert, you kindly came to this committee during our awaidi. I think it was in August last year, and we were all pretty much into the dark then. It sounds as though from listening to the discussion that we're still pretty much in the dark now, and I loved your analogy with the sport of the ball thing, but it seems to me that it's much more close to being asked to... You're being asked to fill in a crossword without being given any of the clues here from the discussion. That could be easier rather than more difficult. You did say in page 9 of your submission that you've been given no information about the Government's goals and expectations because you, in any event, want to base your forecast on assumptions that we could not be transparent about. Given that we're in these early drafts of economic history that you mentioned in your remarks, is there a challenge for your own organisation to say, well, if you're not going to tell us what detail of your policy plans we're going to do best case, worst case assumptions or something, to give us all something to work on? Is that maybe a challenge for yourself to do that? Yes, I mean, we did, and obviously a number of other forecasting outfits in particular ahead of the referendum did take the view of saying, well, let's try to imagine a whole variety of different trade regimes and come up with different sets of assumptions, partly because we are required to reach a judgment whether on existing policy the Government has a better than 50% chance or not of hitting its fiscal targets. We, in effect, have to have a central forecast in order to make that judgment. We can't just say, well, it all depends on which of a whole variety of outcomes you end up with. So we are constrained to that and obviously we do what we can to show sensitivities, but it's not clear whether it would be consistent with our legislation and I'm not sure how informative it would be for us to make precisely calibrated estimates of what difference it would make if it was EEA versus some different trade regime when the uncertainty surrounding any one of those would be large relative to the significance of the difference that you might put between the two of them. One point to bear in mind is that, as I say, we felt it was important to formally ask the Government when we did the forecast whether there was anything additional they wished to tell us about their goals and expectations for the negotiations and they chose not to and just pointed us to some things that the Government had said already. As you pointed out in your question, I would have felt very uncomfortable if they had said, well, actually, we'd like you to take the following three things into account but we can't share that publicly. So it was really, we want to produce our forecast on the basis of assumptions that we can explain to you and to everybody else. So it was really a question for them of whether they wished to say more to everybody, not just to us. However, even if they had said in much more detail what they were aiming for, this is a negotiation and it's not necessarily a good guide to what the outcome is going to be. So it was partly as a result of the fact that the policy objectives and expectations entirely understandably weren't set out in great detail plus the fact that that wouldn't necessarily be a good guide to where you ended up that led us to stick with this relatively broad brush view. I don't think that we're likely to fine tune this forecast by forecast depending on the latest tweak that appears in speeches about where things may or may not go but we will keep that under review as we go along. Time for one more on the pound, Bruce. You also mentioned, Robert, the impact of the falling value of the pound and your paper also says the depreciation of sterling will boost net trade in the short term but what about the impact on importers? I know a company in Ayrshire where I'm from who are facing huge import costs. It's mainly electronics that they import. On balance, what's the effect here? Is it a more beneficial effect because of the falling pound or is that short term benefit only and what could we expect to see in the medium to long term if the pound stays where it is? It is a short term benefit in that sense. Over the longer term, if you're looking at what's the pattern of our share of world markets etc, you have the short term exchange rate effect and then the assumption that we've made in the longer term that growth in both imports and exports is likely to be weaker over the time horizon we're looking at than it otherwise would have been because of the transition to new trading arrangements, whatever those exact trading arrangements are. There is a net boost to economic activity, i.e. there is a net export boost in terms of the volume contribution to GDP growth in the near term that helps to partially offset the impact of weaker business investment and the squeeze on consumers but then over the longer term the trade picture is more affected by the assumption that it's a broad brush assumption that both import growth and export growth are weaker and we assume that they are weaker as they were in parallel. It doesn't change the net difference between the two. It's just that you end up with a less trade intensive economy than you otherwise would have done over this horizon. Obviously the story could be different over a much longer one. Robert, thank you very much for coming along today. It has been a helpful and informative session. Thank you for being so candid as well. It's been very helpful to us as the committee. I think there's a couple of things you said you would follow up particularly with regard to the question that Murdo asked you. Again, thank you very much. I now suspend this meeting to allow the change of our witnesses. Welcome back, colleagues. The third item on today's agenda is to take evidence from the Scottish Government's draft budget for 2017-18 from Derek Mackay, the Cabinet Secretary for Finance and the Constitution. For the record, I want to put on the committee's approach to this particular process until 2016-17, the previous committee's scrutiny of the draft budget tended to focus on the expenditure side of the budget and all elements of the draft budget were covered in a single item. However, as a result of the increased powers over the taxation being devolved to the Scottish Parliament, it is agreed that the scrutiny of the draft budget would take place over two separate oral evidence sessions, with one considering the revenue side and the other expenditure. This morning, we will focus on the revenue side of the budget and will have a chance to ask questions of the Cabinet Secretary for Finance and the Constitution on the expenditure at our next meeting on Monday 16 January. Mr Mackay is joined by some of his officials. We have Adrian Grieswood, who is the Deputy Director of Fiscal Responsibility Division, James McClellan from the Fiscal Adjustment Team Leader and Simon Fuller, who is the Acting Deputy Director of the Office of the Chief Economic Advisor. Welcome to you all. Cabinet Secretary, do you wish to make an opening statement? Some brief remarks, please, convener. Thank you for the invitation to speak to the committee on taxation specifically. Obviously, this is a significant draft budget with the different and new relationship that we have with our spending plans as it relates to the revenue generation from these new powers. We all want to ensure that Scotland remains attractive to live work and invest in to ensure that we have resources to sustain our public services. We are holding true to our principles around certainty, convenience, efficiency and ability to pay in terms of our tax proposition. I believe that there is a transparency of our position having outlined our forecasting methodology and many of the assumptions that we have made. I appreciate the work of the Scottish Fiscal Commission, who has been through our forecast and I appreciate the work and effort that they have put in. The draft budget document outlines the position on the fiscal framework and a clear chapter on tax, including looking at a number, as I say, of the assumptions. We all know that this is complex, the new process from the fiscal framework. The budget process is complex but, hopefully, accessible and are key decisions as proposed. It includes freezing the rates in relation to income tax and proposing to increase the higher-rate threshold in line with inflation, which we believe, as with all our taxation, our position is responsible, balanced and progressive on business rates. I haven't insisted on a revenue-neutral revaluation that has implications, but I have proposed to cut the poundage, raise the threshold for large business supplement as well as small business bonus. The position is clear on council tax, not necessarily a matter for the budget, but I have clearly listened to this committee and others on the position around council tax and attainment and on land-building transaction tax, maintaining the rates and bans and landfill tax rates have been uprated in line with RPI inflation. That is the key point from the position that I have set out to Parliament. I am happy to take questions. Cabinet secretary, this is a historic budget. You will be the first of our Scottish minister to have the privilege—that is the right word—to propose rates and bans for Scottish income tax. Obviously, with that privilege comes challenge and responsibilities. It means that your budget is now much more dependent on the performance of the Scottish economy relative to the UK economy. I wonder, therefore, if you could give the committee some insight into how this has changed the way the Scottish government has approached this year's budget process and the draft budget and your plans for future years, in particular to what extent does your budget process need to focus much more now on longer-term macroeconomic issues such as productivity growth. That is something that this committee has been taking a fair bit of evidence on over the course of the past few weeks. That is a fair question, convener. I am sure that all parliamentarians were always interested in issues around sustainable economic growth and all the factors and determinants around that, but because of the relationship of no longer just largely being a spending Parliament tax and spending, the relationship would be more significant. Ministers and all parliamentarians have had to think more deeply about that relationship and the decision that we are taking around our tax powers and spending as well. Ministers will have had to and have considered their portfolio decisions and how we can stimulate and support the economy and our population and public services to ensure that we arrive at the right decisions to deliver that sustainable economic growth and also a focus on population and all the other factors that the Government has to consider now in arriving at policy decisions and also understanding the drivers and forecasts that inform this work. Of course, we are highly dependent on the forecast, but I suppose what matters more will be the out-turn figures, because we are working to forecast the actual out-turn that will be assessed to determine what Government essentially receives at the end of the day with all the adjustments that will take place that we all hopefully understand as a complex nature of this. The key point is that the ministers and Government is clearly minded to look at all the issues and considering how we are helping to grow the economy to ensure that there is a positive cycle of return to have the resources to spend on public services, the relationship that it has rather than diminishing resources. For many years, the Scottish economy has grown in productivity terms in the UK economy. That is not the case in the last couple of years, particularly because of the impact of North Sea oil downturn. What additional measures are you introducing to help to grow that GDP level in Scotland? I believe that the economy is certainly still a shared issue. The UK Government has control over a great number of economic levers, and then there is what the Scottish Government can do. What we have been trying to do in a range of portfolio areas, whether it is on business rates, as I have described, having a competitive regime, is going to help us to grow the economy. I believe that the economy is certainly still a shared issue. The UK Government has control over a great number of economic levers, and then there is what the Scottish Government can do. What we have been trying to do in a range of portfolio areas, whether it is on business rates, as I have described, having a competitive regime around small business bonus and changing the thresholds in the large business supplement, cutting the poundage for everyone, reducing that poundage level. I believe that there is also a supportive package on business rates and non-domestic rates. On the commercial side of land and build and transaction tax as well, I think that it is very competitive. Other elements of support for the business community, for example the Scottish growth scheme, or specific interventions where the Government has taken an approach that it might not have done in the past to support individual areas such as steel or shipbuilding, are just two examples. Focusing on the enterprise agenda as well, the economic strategy around exports and growth opportunities that exist there or supporting tourism, the market there is significant in growing in Scotland as well. In all our portfolio areas, we are trying to support that economic growth to try to improve on our position to realise the economic opportunities that exist to grow the tax receipts. Of course, there are vulnerabilities at the moment and you have touched upon oil and gas, which has had a profound impact right across tax receipts and the economic growth forecasts for Scotland. Of course, it has had an impact on the productivity challenge as well, which has improved since devolution relative to the rest of the UK, but much more to be done there as well. There are also very specific business interventions and I am also trying to support the economy through research and development, attracting fund direct investment as well and trying to ensure that Scotland is an attractive place to live, work and invest through every measure that we can. Adam Tomkins is here and unfortunately Adam is not so well today. He would probably want to ask you about the city deals issues because he has raised that with a number of people already and obviously I have an interest from a sterling perspective. In terms of the Government's approach to the city deals, how important do you think they can be to help to drive the Scottish economy forward in future years as well? I would describe them as quite organic and there is no certain formula as to what proportion you pay and how they have emerged by way of numbers but what has happened as well as engagement with the appropriate partnership or local authority, UK Government and Scottish Government, we then work together to arrive at a deal in the end, which has differed from area to area. I think that they are quite potent in delivering and unlocking economic growth. It has largely been around infrastructure for the first big one, which of course was Glasgow and Clyde. That collaboration, which I was involved in, is local government minister at the time but it was largely around infrastructure but there are employability strands with it as well. Good partnership working, local leadership, locally led projects largely, which is supported by finance, with all the checks and balances coming through the assurance framework between the UK Government and the Scottish Government. Arguably, it has unlocked resources from UK Government and Scottish Government into projects that should make a difference. There is a methodology, particularly the most advanced one, on how we assess the economic benefits of that. I think that it can deliver further sustained economic growth and we are absolutely encouraging further talks on all the other city deals. Budget provision materialises when the deal is done and then you factor in when resources are programmed to be released. My last question is about GDP issues. You said yourself that the responsibility for GDP in Scotland is a joint responsibility between the UK and the Scottish Government. Have you outlined what the Scottish Government's approach has been? Have you asked any particular aspects of the UK Government to help them to boost the Scottish economy in the GDP that you think might be useful? I touched on in debate some of the work in the oil and gas sector specifically around tax relief and incentives for further exploration and support around decommission. I think that there is a range of things on that sector specifically. There is a wider debate about the appropriate use of borrowing to support capital investment. I welcome the capital investment change of heart from the UK Government on further capital investment because I believe that capital investment has sustained large parts of the Scottish economy through a very difficult period. We have got on-going capital investment plans, infrastructure plans and so on. I think that there is a wider look at appropriate borrowing. We had a position around current budget balance, specifically on oil and gas. There is support that could be given there to support that sector by way of examples where I have engaged with the chancellor. How many of us want to pick up on AI productivity issues before we go on to wider tax issues? As Bruce has mentioned, we had the OBR in this morning. We were exploring with Robert Chow the productivity growth rate because it is such an important assumption that underpins the growth forecasts going forward. The OBR is assuming a return to productivity growth of 2 per cent in five years. I believe that the Scottish Government forecast follows that as well. As Bruce has said, Scottish productivity had been growing at a higher rate a few years ago compared with the UK one. Do you have any comments on where you think Scottish productivity rate is going, whether it will mirror the UK, whether it will be behind or even ahead? Our experience has really been down to oil and gas, specifically that is what has impacted on the Scottish economy most. Now that the forecasters are saying different things, they are all different forecasts because we are using different methodology and different drivers and determinants. It is not necessarily a reflection on the Scottish economy, but I think in part about the different forecasting methods and models and determinants that are being used. I think that we would all want to drive up productivity. Some of that is around not just jobs and not just a number of people in employment but quality jobs as well and improving research and development and, as I say, fund direct investment. All of that will help improve the overall structure and distribution of employment and more efficiency from that as well and further expanding the sectors that can help contribute towards productivity. We are all agreed that promoting economic growth is very important. I am just interested in some of the forecast figures. As we said, we had the OBR earlier. In terms of their forecast growth from 1718 through to 1920, it rises by 0.3 from 1718 to 1820. Between 1718 and 1819, the Scottish Government forecast goes up from 1.3 to 1.6, which is quite similar to the OBR increase. Between 1819 and 1920, the only increase is by 0.1, whereas the OBR has an increase of 0.4%. I just wondered why the growth was tailing off at that point. I believe that it is largely the methodology rather than any major event, but for the detail of the difference—we have our forecast here—we can explain some of the detail around the difference. It is not that we are suggesting economic growth necessarily within its self-be slower or less successful. It is around the assumptions and the methodology that is used to arrive at the different figures. Simon could probably assist with that. I watched your evidence earlier on from Robert Trotten. I think that was helpful. I think that he was able to helpfully point out that we used different models. Of course, it is all forecasts. Maybe Simon could assist with that understanding. What I would add to what the cabinet secretary has said is that, when we are doing our forecasts from about 1819 onwards, we are assuming that Scotland's economy gradually returns to its trend rate of growth of about 2%. It rises from about 1.6% in 1819 up to about 2%, which is a bit longer on average by the end of the forecast period in 2021-22. Obviously, there are a number of judgments that underpin that about some of the short-term effects on winding and us returning to longer-term trend levels of growth and productivity and wages and such like. As the cabinet secretary said, the model that we use is different from the OBR's model. It is based on different underpinning assumptions, but the manner in which the model operates is slightly different. A combination of those differences in the underlying modelling framework, perhaps some of the different judgments that the OBR has made in their longer-term forecasts will explain the difference. From my point of view, I would not want to put words in the OBR's mouth as to why they have assumed a larger growth in future years, but we have essentially assumed a gradual return to our long-term trend from 1819 onwards. I understand that different models will give you different results and there are different assumptions. The explanation that we got earlier was that the UK economy having some slack in it and basically there have been holes in parts of it would slowly start to grow. What their forecast is showing is like a steady growth over a period from 1718 through to 2021. What I was particularly interested in was in the figures between 1819 and 1920, where the UK figure has grown by 0.4 and the Scottish figure by 0.1. I am not really clear from your explanation about the model and the assumptions. You said that overall it would grow to 2 per cent, but why in that particular year does it seem to have stunted somewhat between 1819 and 1920? It would be difficult for me to explain why we have assumed a gradual growth for that period, which is simply that when we go from 1617 up to 1819, we have a relatively fast increase of growth. We assume growth increases from 1 per cent up to 1.6 per cent, which over that period is faster than the OBR's change of growth will be at the UK level. That is the period in which we think that some of the output gaps and some of the spare capacity in Scotland will close. After that, we think that the rate at which it closes will gradually slow down to a longer-term average. That is what we have been assuming. It may simply be that the time period over which we think that the change will occur differs from the OBR. I suspect that, for example, if you look over a slightly longer period, 1617 out to 2021 as a whole, the overall evolution might be fairly similar under both forecasts, but there will just be slight judgments in the time periods under which different assumptions and different events occur. In some ways, a lot of value has been looked at looking at changes from year to year, but it is sometimes quite difficult to point to one single event that drives a difference in forecasts from one year to the other. It is sometimes easier and more informed to look at the longer-term change over a three- or four-year period, which we have driven more by with fundamentals. Do you have an idea of the question? I was on income tax forecast as a supplement to James. Do you want me to leave that to later? If we are going into income tax areas now, we will go into mud at this stage. Good morning, Cabinet Secretary. I was very taken with what you said earlier about the need to recognise the underlying performance of the Scottish economy as a key driver for the tax take going forward. This is a change from where we have been historically. You have taken the position in this budget to create a tax differential with the rest of the United Kingdom in terms of income tax, and you will be aware of concerns that have been raised by business organisations among others. There is a risk that this sends out a message about Scotland being the highest tax part of the United Kingdom, and the impact that might have on the ability to attract investment, for example. I do not want to get into the politics of that. What I want to do is look at the context of that decision. Spice has told us that your budget for next year will be up £501 million in real terms on the current year. Is that a figure that you would agree with? There is, in this one year, a real terms increase as a consequence of the decisions from last year, from March in terms of resource, and then capital, which was announced by the chancellor in his bottom statement. There is a real terms increase for one year. Taking into the context over a 10-year period of real terms reduction, as you know, takes this to a figure of 9.2 per cent real terms reductions over the 10-year period. For completeness, Mr Fraser. I was just going to get on to that, cabinet secretary, but thank you for accepting that you have an extra £0.5 billion in next year's budget that you did not have in the current year. As you mentioned in the historical context, let me take you, if I can, to your budget document. There is a very helpful table at Annex G on page 169. It is a very long table. It takes you eventually to a summary on page 172, which gives the total Scottish Government budget from the year 2010-11 through to 2017-18. In 2010-11, the starting point of the Scottish Government's total budget was £34.2 billion in rough terms. It dips a bit but then comes back up. Your draft budget has a figure of £37.95 billion. It does not look to me like there is a cut there, cabinet secretary. In terms of the total period over when the Tory has come into office, there is a real terms reduction in terms of our discretionary spend. With respect, the table in your own budget document is showing for the period that you are talking about from 2010-11 to 2017-18, the budget goes up from £34.2 billion to £37.9 billion. Where is the cut? Mr Fraser, I will say to you again that there is a real terms reduction in terms of our actual real terms spend in terms of the financial power that we have. Why is your budget document telling me something completely different? It is not. Those figures are accurate in terms of the out turn. Hold on a second. This is your budget document that you have published. There is a table in it that tells me that, in 2010-11, the Scottish Government's total budget was £34.2 billion. In 2017-18, your draft budget is showing a figure of £37.9 billion. How is there a cut or have you got your sums wrong? No, I haven't. There is a real terms reduction over the period from when the Tories entered office of around 9.2 per cent in terms of our spend. You have repeated that three times but that is not what this table demonstrates. I am telling you what the overall reduction is. How can we believe anything that is in your budget document if there is such a fundamental error in the presentation of the figures? It is not a fundamental error. These are the deal figures that we have expressed to you. Where are they in this table? The department of expenditure limits are covered within the position that I have outlined in the draft budget. As you will be well aware of finance secretary, the expenditure limits are only a part of your budget. The figures contained in this table are the total budget figures, which are showing a substantial increase in your spending power since 2010-11. Is that not the case? I have covered a point about the total managed expenditure and how the spending power of the Government has been reduced since the Tories entered office. I was able to cover that in the announcement to Parliament. That is the position that we have had to reduce the position from 2010-11 over a 10-year period. I have explained the point between the resource and the capital for the forthcoming financial year. That is a real-terms increase, but it is set in the context of reductions since 2010-11. Any of your officials perhaps? I think that we have had a lovely ping-pong here. The cabinet secretary has made your point, Patrick. I thought that Mr Fraser was touching upon the income tax position. It is quite important that Mr Fraser has mentioned divergence in terms of tax. It has put out quite a negative message about position on tax. Of course, the position that we have put out is that we are not passing on the tax cut for some of the richest in society. We are not passing that on in terms of the higher rate threshold. That is the right thing to do, but 99 per cent of adults would pay no more tax given their current level of income than in 2016-17. The message that Scotland has high taxes has been put out by the Conservatives. That is unhelpful when, in fact, it is the wider package that is important around taxation. Of course, there is quality of life in Scotland as well. That message should not be put out by the Conservatives, because Scotland continues to be a good place to live, work and invest and do business. Good morning, Cabinet Secretary. I wanted to talk about tax as well. Perhaps from a slightly different perspective from Mr Fraser, what are the objectives of the Scottish Government income tax policy? In terms of how we have arrived at our tax position, we look at the expenditure, the policies that we want to achieve, the manifesto delivery and the new tax powers that we have within that to help balance the position. We have taken a fair and reasonable approach on taxation to use our powers responsibly. We do not believe that it has been the right thing to do to pass on the Tory tax cut in terms of the higher rate threshold, but to give certainty and stability in terms of the rates. At this time of uncertainty, we have the continuity on the rates and bans, but ensure that we are able to generate more income through a different position on tax from the UK Government. That will generate, following the work of the block grant adjustment around £79 million. I am not really interested in the UK Government income tax policy for their jurisdiction. I am interested in the Scottish Government policy for Scotland in terms of income tax. You have talked about raising enough revenue for your manifesto commitments as an objective, and you have talked about stability. You have not said anything about progressive taxation and closing the inequality gap in Scotland. Is that part of the objective of your Government's income tax policy? Is progressive taxation SNP policy? Does the zero change position on income tax rates and bans reflect the fact that your view is that income tax policy is sufficiently progressive at present? I think that what we have put through the manifesto on which we were elected is our current proposition, but our income tax policy, of course, has taken year to year. I did cover in my opening remarks the principles that we follow around ability, proportionate to the ability to pay as well, and as part of that, of course, progressivity is part of that. We will continue to look... Do you think that income tax is sufficiently progressive at present? What I have said is that our position on income tax remains under review, and we have, for example, on the additional rate said that we will look at the evidence around this and the assumptions and the analysis to ensure that if we were to take a different approach, for example, on the additional rate that we wouldn't lose any income as a result. Our position is as outlined in the draft budget from the manifesto through the course of the election. That is what we are putting forward. I know that Mr Harvey says that you are not particularly interested in what the UK Government does, but there is a relationship with the block grant adjustment to ensure that we raise revenue. We do not take unnecessary risk, but I say again that, of course, progressivity is certainly part of the mix and it will remain under review. Why is it a good idea, for example, for there to be only one income tax rate between the personal allowance and £43,000? We are not proposing to change the bans and rates at this time. I do not believe that the structure that we have inherited, and yes, the Government can change, is absolutely perfect. I think that we, I think the public, I think that taxpayers face a lot of uncertainty at this time and around the principles of certainty and convenience efficiency and progressivity in terms of ability to pay are all important. I think that we can have further discussions about what the income tax structure looks like in the future, but what we have proposed, we believe, commands the support of the people through the election. I recognise that you have inherited this. You can put it that way, but those are now your policy proposals. Those are the rates and bans that your Government is proposing for the future. Why is it a good idea that only one rate exists between that personal allowance and the high-income threshold? Why would it not be a more progressive idea to reduce income tax for low earners or even for average earners and increase it modestly? For those who are on higher incomes up to the high-income threshold. I know that Mr Harvie has different proposals on income tax, as do the other parties, which include, for others, raising the basic rate. We are not proposing to do that. We are proposing to freeze the rates that we feel is fair at this time. We feel that the current proposition gives us and taxpayers certainty and reliability in terms of income. Yes, this Parliament is now empowered to change the rates and bans and the thresholds, if it so chooses. What we are putting forward, we believe, gives stability and certainty, and by not passing on the tax cut through the higher rate threshold as proposed by the Conservatives, we believe at this stage is the right balance. You keep using this phrase passing on. There isn't any passing on involved. There is the setting of Scottish income tax policy by your Government and by a rate resolution that would be passed by this Parliament. That is something that is set here in Scotland now. It is not about passing anything on. You have talked about increasing the threshold on the higher rate by inflation. That is the maximum of what you said was to be considered in your manifesto. You said that you are increasing by a maximum of inflation. Why are you doing the maximum of what you set out as something worth considering in your manifesto? What we are doing is in line with inflation is to say that we will take tax decisions year to year, and that is the position that we have put across at the moment. That is the figure in line with inflation. That feels like the right thing to do in a balanced way, because it feels like the right thing to do. That is our judgment of what is fair and balanced. Mr Harvey has a different view on the structure of income tax. We feel that that fits within our manifesto commitment and that commands the support of the people is fair and gives certainty at this time. Why increase the higher rate threshold by inflation, but not the additional rate threshold? If there is a principle involved in sticking to inflation, surely you would do both, not one and not the other. We did not have an additional rate threshold within the manifesto, so what I am delivering is the manifesto that I was elected on. I am asking for reasons why, rather than references. One of the reasons why is that the change on the threshold for the higher rate would generate more income than the change on the threshold for the additional rate, because of the number of people who would be paying that. Sorry, you are saying that increasing the threshold increases the revenue, surely it decreases the revenue? In terms of the block grant adjustment position relative to the rest of the UK, that was my point about what we do is relative to what the UK Government does on tax policy. Sorry, are you saying that increasing the higher rate threshold by inflation will increase the revenue from higher rate taxpayers? What I am saying is that, because of the block grant adjustment, what we do is relative to what the UK Government, in terms of what it does, and therefore the figure that we arrive at, the two have a relationship to each other. That is why I have used the language of not passing on the Tory tax reduction in terms of changing the higher rate threshold to a higher level than is the case in Scotland, and that is what generates the difference. You are accepting, though, that freezing the threshold would generate more revenue than your policy proposal of increasing it by inflation. Yes, it would. Finally, can I just talk about those higher rate taxpayers, of whom of course we all have an interest to declare, because we are higher rate taxpayers? We are all better off because of the UK Government's decision to increase the personal allowance. The poorest people in society gain nothing from that, but everybody up to the £100,000 mark where that personal allowance starts to decline is better off because of that change in the personal allowance. There has also been pay settlements, of course, since your manifesto was written, and higher rate taxpayers, including ourselves, are seeing incomes increase by inflation or above. They are going to be better off again if we increase the higher rate threshold by anything at all. Why do we need to look after higher rate taxpayers in that way when we are not giving a tax reduction to lower earners? We believe that we are supporting lower earners through our position on freezing the basic rate, and that is our position. I know that Patrick Harvie has a view on what the UK Government is doing on that, but our position is not to increase the rates for basic rate in Scotland. In terms of the higher rate, I have set out the position on the thresholds. Your budget document says that your increase in the higher rate threshold of income tax, when combined with the increase in personal allowance, means that low and middle income taxpayers will be protected. How on earth are low and middle income taxpayers protected by an increase in the higher rate threshold? They are not at all affected by it. We are not putting the tax rate up, is my point for basic rate. The sentence is not about the basic rate. I am quoting specifically. The increase in the higher rate of income tax threshold, when combined with the increase in the personal allowance, means that low and middle income taxpayers will be protected. They are not in any way affected by the higher rate threshold. Patrick, I have been pretty keen to give you a bit of space. This is the last answer in this session. I put it simply that basic rate taxpayers are protected and that we are not putting up the basic rate of tax. That has been proposed by other parties but not by this Government. Ash Denham. Some of this may already have been touched on but you have decided in this budget not to increase the additional rate. Obviously, this is a time when public finances are under pressure. I am wondering if you could explain some of the factors that fed into making that decision. I think that the key issue is an understanding as if we raised the additional rate, would it actually generate more income and get the benefit of a tax increase? It is an increase, albeit from the richest in our society, but the point of it is to ensure that we raise the income. The analysis was that there was a risk that, if there is a movement of 5 per cent of Scottish taxpayers through whatever mechanism we no longer have that income, the policy would be counterproductive and we would not be raising any income. With that assessment that led Government to the opinion that increasing the additional rate at this time was not the appropriate thing to do, however, that policy does remain under review. We will ask the council of economic advisers to look at the issues and the assumptions and what could mitigate the risks around that so that we could be in a position in future to make a judgment around what any increase might actually be. It has been mentioned that the Government of the First Minister has said that it supports an additional rate of tax of 50 pence, but for the reasons that you have outlined, the behavioural impact and negative effect that you are not proposing this year. For you to support a 50p tax rate in Scotland, does it require, as things stand, a chancellor to propose a 50p tax rate for the whole of the UK? I would make the point that, first of all, all members have to understand the block grant adjustment and the outcome of the fiscal framework that decisions are no longer in isolation in Scotland, just around what we decide to do around tax equals what we spend. It is all in relation to what happens with the UK in terms of tax for tax and the block grant adjustment. If the chancellor was to make a different decision, it does not feel as if it is the kind of decision that Philip Hammond will be making any time soon, I have to say, on the additional rate, then we have to look at our position, because tax decisions will be taken year to year and in the context of what the UK Government is doing as well. It has to be taken in that context to ensure that we actually raise revenue. There is a political judgment around what is acceptable and what is required to fund public services, but yes, my colleagues and Westminster in the past have opposed the reduction to the additional rate. We will keep that position under review in terms of the Scottish budget, based on the analysis around what it would generate, but it is not a dismissive point to say that what we do in income tax has to take into account what the UK Government is doing. If they decide to put the figure up, then our decision also has to be taken in that context, but I do not feel that this particular Government will be choosing that as their first tax option. A number of experts have said that it is difficult to accurately quantify behavioural effects in terms of tax without actually introducing those tax changes. You have said that you will not introduce a 50p tax rate for the 17,000 richest people in Scotland this year, but you have not ruled out for the rest of the Parliament. The worry for me is that there is no intention of doing that at any point over the next Parliament. In terms of the analysis that you have looked at, it could raise up to £100 million, but in terms of the different effects, you have said that it could raise £50 million or it could cost the Scottish Government £30 million. In terms of the impact of a 50p tax rate on your analysis of that, you are saying that you are waiting for analysis and evidence. What exactly are you waiting for? What has to change in the analysis that you have in order for you to support a 50p tax rate for those in and over £150,000 a year? I think that any reasonable person would want assurance that it will actually generate income and then more certainty around what level of income that that might generate. As I say, income tax decisions and all tax decisions will be taken year to year in inner manifesto. We made it clear that the position on the additional rate would remain under review, and it will. Based on the advice that we receive around the scenarios, around the certainty of a tax collection, around the best analysis on tax behaviours and minimising avoidance and ensuring through HMRC that we have absolutely got assurance around the residency and that we can't just have that movement of taxpayers elsewhere to avoid any increased Scottish rate, then all of that will be borne in mind. The first position would be, is there certainty around how much it would raise and is that positive to Scotland? Then, of course, all the other decisions that are taken into account and determining a tax policy is also what you spend and what is required to balance the books. Can I just clarify something? In response to Asked Eminem, you said that there was a 5% reduction in additional rate taxpayers in Scotland paying tax in the rest of the UK or whether that would reduce the income, the revenue to the Scottish Government. My understanding was that you modelled two things. It was a 5% reduction that would have resulted in a 50 million increase in revenue. The information that I have is that the analysis published in March showed that for 2017-18, losing only 1,000 around 5% of additional rate taxpayers would mean that a 50p additional rate would not raise any extra revenue. You said at the start, Cabinet Secretary, that you take progressive decisions, but is it not the case that, because you have shied away from using the new tax powers, we now know that councils have got less money and will therefore need to make cuts and that will affect local jobs and services because you have not been prepared to use the tax powers of the Parliament progressively? I think that local government has a very fair settlement. I will continue to engage with the Convention of Scottish Local Authorities on that. I have also written to each local authority on whether they accept the offer that I have made to them or not. The deadline for that is 20 January. I believe that, when you look at the total package for local government services, it is very strong and a fair one. Local government, like other public services, will be dealing with a financial situation with increased pressures on services and all the extra pressures that come along with that, such as UK Government decisions, for example, the apprenticeship levy, but on the actual settlement to local government, I think that it is a good one and a strong one. I think that we have got the balance right. If it was such a bad deal for local government, I am sure that COSLA would have rejected it. I am not going to go through the local government expenditure side, because obviously we have a separate session on that. My point is that this session is about revenues and you have made certain tax choices and based on that you then have to map out your budget based on what you have raised. As a result of you limiting how much you look to raise through taxation, there are cuts. Even SNP politicians have acknowledged that councils will have less money to spend, so as a consequence of the decisions you have made around taxation, there are going to be cuts in the budget and people in local communities are going to suffer because of that. Do you recognise that? There are more resources for local government services and when we get into expenditure, I am quite happy to cover that on an authority-by-authority basis, if Mr Kelly so wishes to do. I will be able to show how the package of support to local authorities is a fair one and will support local services. I think that the package is a fair one between the non-domestic rates, the council tax position and the government settlement and the extra support in an area such as the attainment fund targeting on education as well. It is a fair settlement and I think that it will be supported by local communities because for local government services there will be more resources as a consequence of the draft budget. Let me put it another way. What drove you to reach your taxation decisions which have raised an amount of money? I would argue that it is limited. You would argue that it is adequate. What was the thinking behind that taxation policy bearing in mind that there are consequences for the rest of the budget? A Government's first point is surely its manifesto on which it was elected. Of course, we are a minority Government and any budget will have to get the support of Parliament but our first position is to look at the manifesto. That is then covered through the programme for Government and delivering on those commitments and those policies. In doing that, we look at our tax position and what we had to put to the people we were doing around revenue. We work on it simultaneously to produce a budget that considers our commitments and our policies around revenue and taxation, ensuring that there is enough resource to adequately fund our public services and meet our commitments. Also, in viewing taxation, we do it in a fair way that still ensures that Scotland is competitive, attractive and is delivering a fairer country. You did not stand on a manifesto of cuts to local jobs and services, so surely you should set your tax plans accordingly? I have been able to express and I am happy to do it in more detail when we cover expenditure and how we have put more resources into local government services. That includes the work in the integration joint partnerships around health and social care integration. I assume that there is support for Parliament around that integration journey on social care and through the changes that we have made on council tax as well and the ability to raise council tax by 3 per cent. All of that will mean real money, real cash support for local government services. I say again that local government has had a good affair and a strong deal from the draft budget. I am not dismissing that there are challenges within the public sector. I think that we all face challenges in these difficult economic times but I think that the settlement is a strong one and one in which we have looked at the issues before us and given a large degree of protection for local government. Can you outline for us some of the other examples of how taxis in Scotland across the border are actually less than the rest of the UK? I am thinking about things like the council tax, for example, which is 12 per cent lower in Scotland than it is in England, and it is 32 per cent higher apparently in Wales, things like that. The tuition fees is effectively a tax. Business rates are lower in Scotland, and prescription charges are effectively a tax. The notion that Scotland is the highest tax part of the UK is really nonsense when you look across the broad horizon of some of the elements that really impact on the money that is in people's pockets. Even on income tax, the income tax proportion for high rate earners is 10 per cent, so I would not accept the charge that Scotland is the highest tax part of the UK. Certainly when you take it into the context of everything else and of course the quality of life policies, the social contract issues, some of which you have touched upon, so you are not higher taxed if you need free personal care or if you want to be going through university or if you happen to be sick and need a prescription just by way of some examples. Even on council tax, even after the changes that this Parliament supported around the multipliers and any potential council tax increase, it will still, on average, be lessen as the case in England, which I think does show that Scotland remains to be attractive. Looking at the totality of tax and spend policies that we have, we have struck the right balance, but we do believe in a social contract where you are contributing to society, but you get certain social benefits at the point of need. Dean Dricka, you were coming earlier in this area as well, did you? I was on tax forecasting if this is the right time to do it. I even was using supplementary directly what was just being done. I was going to talk about Wally's card, but I also want to touch on some of the stuff from earlier as well. You go just now, I haven't you? Thank you very much, convener, and thanks, Cabinet Secretary, for coming along today. I was going to ask you about support for business, but before I get to that, I just want to clarify on some of the stuff that was talked about earlier on when Murdo Fraser was talking about cuts to the budget. If I'm not mistaken, I think it's important that we clarify that. What Murdo Fraser was talking about was table 4, which is the total government spend, which isn't just the settlement from the Treasury. It also includes borrowing, tax revenue, et cetera, et cetera. That table is looking at cash terms, not real terms, obviously. Even when you take those numbers over that seven-year period, the numbers in that table will demonstrate a cut in real terms. The important number, which is what we're talking about, is a settlement from HMT, which is table 1.02, which shows that it's gone from £29.6 billion in 2010-11 through to £30.9 billion in 2017-18, which is obviously only a 4 per cent increase in cash terms. If you look at table 1.02, it's laid out very clearly in terms of the real terms change in that deal settlement from HMT. It's a 7.4 per cent reduction over the seven years to 17-18, and, as you correctly said, a 9.2 per cent reduction over the years to 1920. Would that be a fair summary of the reality of the situation? Yes, it would. I don't think that Mr Fraser is happy enough with that answer, either, but... I'll come back in if I can. I just wanted to clarify that for the record. Will the cabinet secretary respond first and then? That covers the points that Mr McKee has raised. I've covered, as I said, in the statement on which I have more information about the total discretionary budget that we have. We can argue about the relative cuts to Scotland's budget in terms of what we've received. Thank you, convener. Mr McKee said that if we look at the real terms figures, there's still a real terms cut. I don't believe that that's correct, because Spice very helpfully gave us the comparative figures in real terms for 2016-17 prices. Again, looking at total Scottish Government budget, this shows that in 2010-11, in real terms as of 2016-17 prices, the out-turn for 2010-11 is £37.229 billion. In your draft budget, the figure for total spend in real terms is £37.401. In real terms, your total budget is still up on 2010-11, which reinforces my point that your claims about austerity and cuts are somewhat lacking in evidence. Can I just clarify that myself? Is that figure the same figure that's on the table? Is it not on page 172, which includes AME, etc., in the number of annual managed expenditure, which you've no discretion? There's no discretion over AME. It's needs-based, and it's quite different from the discretionary spend that the Government has at its disposal. Mr Fraser knows the difference. It's still part of your total budget. It's quite different from the discretionary spend that the Government has at its disposal. I know that Mr Fraser is trying to level an argument that this benevolent UK Government has always been kind to Scotland and we deserve no more resource. I would argue something quite different. I'm simply demoting what the evidence shows us. Ivan, have you finished your question first of all? On you go. On that point, the total budget isn't the issue. The issue is a settlement from HMT, but it's a completely different number. The reason that the Scottish Government has managed to keep it on a level keel in real terms over the period is because of what they've done in other areas to generate revenue, but in terms of what's come from Westminster, it's a significant cut. The main point of my question was about productivity and growth as a key issue going forward. It was tasked by the Cabinet Secretary to give it a bit more detail, already touched on it, around support for business relative to the rest of the UK mate in Scotland, the most attractive place to do business, be that on business rates or be that on small business bonus or be it on LBTT from a non-residential point of view. I was able to cover some of the business rates decisions around cutting the poundage overall, not insisting on a revenue neutral revaluation comes at a cost, but it's the right thing to do in terms of that reduction for the poundage. Of course, there's the increasing of the thresholds for eligibility for small business bonus, and that's anticipated that it'll take 100,000 properties out of rates altogether. The changes to the large business supplement, and I know that others wanted me to go further. I wasn't able to do that, but the changes to the large business supplement, increasing the threshold there to 51,000, matching that, will ensure that around 8,000 properties are taken out of that. I think that that's a very comprehensive package on business rates. I describe separately the other initiatives around the Scottish growth scheme, around focus on attracting further investment, on recalibrating our economic strategy to target growth opportunities as well, and on-going capital investment has made a difference in difficult years as well, particularly around infrastructure spend. That continues, of course, with some of the major projects coming to completion. We've touched upon the city deal work, and there's other financial mechanisms that I want to continue with and explore, such as around tax incremental finance or growth accelerator models. There can be other issues such as guarantees that the Government has been able to provide, which has supported specific interventions. As I said, there will be further work to try and support our productivity, whether that is on digital or bespoke packages from the enterprise agencies for individual companies as well. As part of all that, we've got a particular direction of travel around the business pledge and part of that is around quality, living wage, accreditation and so on. I think that there's a range of measures that will support productivity, but a major impact, as we have discussed at this committee, has been the impact on oil and gas specifically, and not just leave, for example, the decommissioning opportunities to someone else, but to try and ensure that we have a strong part in that. Just a supplemental thank you, convener. Looking at economic growth, one of the key things that we need to do is to encourage companies to scale up, but the large business supplement acts as a disincentive for companies to grow beyond a certain size. After increasing the threshold, there are still 20,000 businesses in Scotland subject to the large business supplement, making Scotland the highest tax part of the UK for those companies of that size. By changing the threshold nine months after this policy was introduced, isn't this a recognition that this tax has failed and that it is damaging business, as the Scottish Retail Consortium has said? Mr Lockhart has very helpfully changed the language there of the Tory position to not being the largest, the highest tax part of the UK, but just the highest tax part of the UK just for properties of that size. In the context of this tax. Fair enough, Mr Lockhart, but I know that your language was probably more accurate when you were saying just the properties of that size. Apart from the fact that the poundage for those properties comes down because the overall poundage comes down so that benefits every rate payer paying on domestic rates overall. Ideally, in an ideal world, I would rather not have a higher level of large business supplement, but it would come at a cost and I would simply put it back to the Conservatives to say, well, what would you replace that with? Because it would come at a cost and it would require resources to be found from elsewhere in the budget or somewhere else in tax to pay for it. So I feel that the package that I've put across is fair and proportionate. Yes, it has protected small businesses and it will lift more businesses out of taxation. It is a poundage reduction for everyone and fewer people will pay the large business supplement, but those paying that would rather not have that differential rate. I feel that the overall package is very competitive and good for Scotland. Do you recognise that this could act as a disincentive for companies expanding beyond a certain level? After they expand beyond a certain level and start paying this additional large business supplement, that might not make an economic or business sense to scale up. On that, going back to your economic case and the vital needs for our companies to scale up, on the feedback from business, 13 organisations, earlier this year or last year, wrote a letter to you saying that this tax is damaging business. Isn't there a recognition on the Government side that this tax is damaging the expansion of business in Scotland? First of all, I would say that business rates would only be part of a decision of a company to either upscale or to move. I don't think that it will be a major impediment to business growth, especially taken in the context. Even if you just look at Scotland, it is less expensive, generally speaking, to do business in Scotland than it is in England. I think that it has to be taken within that context. All the other issues that will be taken into account when a business decides to grow, but many of those organisations that signed a letter around the large business supplement will welcome the change in threshold. That is part of the budget. I wonder if the Conservatives will be voting against that change in threshold, because I think that that has been welcomed, as have some of the other measures in my budget in relation to business rates. I do not think that it is a major impediment to growth. It has been collected, and it is within the wider context, a very competitive business rates position in which I am reducing the overall poundage and all the other measures that I have spoken about. However, I have reflected on the views given to me by the business community, and that is why I am proposing a change to the threshold. To go further would mean a tax rise elsewhere or a reduction in public expenditure, and I would be interested in what the Conservatives think that should be. Just in terms of the latest feedback from business, the SRC has said that this budget has fumbled the opportunity to reverse the doubling of the large business supplement, which it says is damaging business. That is the latest feedback from business in terms of the reaction to even the increased threshold. What was the rationale behind choosing 51,000 as the increased threshold? Was there a particular reason why 51,000 was chosen? 51,000, as it happens, matches the threshold in England, so that feels like an appropriate figure. That is the reason that I have chosen that figure. In terms of SRC's opinion on the wider package of business rates, I would look at the overall approach to taxation and you will find support from some, if not all, of the policies that I have put forward in the draft budget. I want to go into borrowing at some stage, but Willie, you used a supplementary to this area before growth schemes. It is still about productivity issues, so we will go in and I will come to Marie on issues to do with borrowing. On you go, Willie. Thank you. You have a supplementary as well, so I will let Willie go first. I will come to you with a supplementary on small businesses and then you can move on to borrowing. Cabinet Secretary, there was a discussion earlier in the committee meeting about growth schemes and the impact they could have in regenerating local economies. As you know, the Ayrshire economy lags behind the Scottish economy. It made a number of factors and there has been support from the Scottish Government on the Ayrshire growth deal. As I understand it, there has been no equivalent statement of support for the Ayrshire growth deal from the UK Government. Is that the current position, as you understand it, and will you give me an assurance that you will continue to press the case for Ayrshire with the UK Government to match the commitment that you have already demonstrated? I appreciate that Mr Coffey is probably advancing a constituency interest there, but I, in fairness, think that you did mention a stilling growth scheme. You have now then, convener, but in terms of the Ayrshire growth deal, there are talks on going. The Scottish Government is engaged and is interested. I did not see anything in the Chancellor's autumn statement. Of course, he pointed out to me that it is a statement, not necessarily a full budget. This year, of course, there will be two budgets. Maybe there will be mention in that, but we continue to work. I described it earlier on in my remarks as organic and bespoke. That will be another example of a bespoke arrangement, but we are continuing to engage as a Government on it, particularly my colleague, who has the lead here, Keith Brown, the Economy Secretary. I just wanted to welcome the protection that you have put forward for small businesses and ask you about the relief measures for rural businesses and renewable businesses. What impact do you expect that to have in terms of growing the economy? I wanted to ensure that we could, on the rural relief and on digital, at least match what the UK Government was doing so that we weren't at any disadvantage. There is further clarity to be given by the UK Government on exactly how that works. The policy intention is to match that. That is, of course, in addition to all the other measures that I have described earlier. Do you want to cover borrowing as well? We will talk next week about what we plan to spend our new borrowing powers on, but I just wanted to clarify with you that there are new borrowing powers available to the Scottish Government. Do you intend to use them fully? Yes, we intend to use them. In terms of our new powers from the Twent Scotland Act, we will use them to the max. Our proposal is to set out further spending plans around borrowing. We fully anticipate to use them to the cap of £450 million and mindful of the aggregate borrowing cap of £3 billion. We intend to use them over the course of the year.