 Good morning, and welcome to the first meeting in 2022 of the Finance and Public Administration committee. I also like to wish everyone a happy new year. We are meeting her 됐jwical today and I have a single agenda to give evidence to schools across to our evidence for two panels of witnesses to inform our consideration of the forthcoming independent report on Scotland's fiscal framework. Although the terms of reference and authorship of our report have yet to be agreed by the UK and Scottish Governments, we do not will focus on blocking grant adjustments. First, we will hear from Professor David Bell, David Iser and David Phillips. David Phillips will join us a little later, around 10.15 am. Our second panel will focus on arrangements for the Welsh fiscal framework approach to block grant adjustments with Dr Ed Poole and Good to Weef and the University of Cardiff joining us. I now move to our first panel of witnesses and welcome Professor Bell and David Iser to the meeting. We have around 70 minutes for this discussion and I remind members that broadcasting or operating their microphones will please allow a few moments before speaking to ensure that you will be here. Any members who wish to ask a supplementary question should type R into the chat function and any witness wishing to respond, please type in a R and I will bring you in. I now open up the session to members' questions. I will begin by asking our witnesses and perhaps Professor Bell to go first. What should the independent review cover and what should be the terms of reference of the independent report? That is quite a big question to start with. Clearly the independent review has to look over how the existing arrangements have worked, how they have gradually been introduced over the period and what has been the experience of the new fiscal arrangements. That comes down to a number of particular issues. It seems to me that a central focus will be the block grant adjustment and how it is dealt with, whether there is any possibility of finding alternative mechanisms that might be more satisfactory. Having said that, it is fair to say that people will have racked their brains and not come up with anything that is satisfactory to both the UK and Scottish Governments and also meets the Smith commission principles. That is a vanishing late well, in fact an empty set. The block grant adjustment would certainly be a focus of that and looking at alternatives. Clearly other issues include the transparency of the whole system, because it appears to me that, although the Scottish Parliament and Scottish Government are now in possession of very significant fiscal powers, both over tax and welfare, it is not the case that this is well understood by the Scottish people and transparency and the better understanding of how this whole system works. It would be good having said that. It is very complicated. It has been said that, unless you have called David, you will have difficulty understanding it. A third issue is data and the availability of relevant data to make forecasts of the block grant adjustment and of the tax receipts and of the welfare receipts and how that can be improved. Another issue is intergovernmental negotiations around the whole fiscal framework and how that can be put on perhaps a harmonious and regular basis. Borrowing is another issue that it seems to me that difficulties have been encountered. Obviously there have been difficulties associated with Covid, but also just difficulties around reconciliations and forecasts, which have potentially stretched Scotland's borrowing capability. That seems to be something that needs to be looked at. I do not know whether that is a long enough agenda, but it would be quite an extensive agenda for the review. Given a very tight timetable, if it is to be completed by the end of the year, it will require a lot of work on all the relevant parties' parts. It remains to be seen whether a satisfactory outcome can be arrived at within the time available. David Izer, do you want to comment on those two questions that I asked? What should the independent review cover and what should the terms of reference be with independent report? The independent report, as you say, has agreed that the independent report will focus on the block grant adjustment specifically for devolved tax and for devolved social security. In that context, what the independent report will need to do is articulate clearly the different roles that the block grant adjustments play. It will then need to identify a range of different potential block grant adjustment mechanisms that could be used. Those will obviously include the index per capita method that is used at the moment, the comparable method that the UK Government has always expressed a preference for, and the Welsh model that uses the comparable method but adjusts it differently for different tax bans, and various other methods that have been mooted that control for demographics and other sorts of fiscal risks. What the report will then need to do is set out the risks and advantages of each of those different block grant adjustment approaches. Those are the risks and advantages of the different methods, both to the UK Government and to the Scottish Government. It will need to do that with clear illustration and using scenario analysis. It is clearly a report that is being commissioned jointly by the two Governments. I hope that there will be an interim report that is publicly available and, of course, the final report that should be publicly available, too. I hope that there is scope for input to that independent report from the public and experts and so on, as the process goes ahead. That is the independent report. That sits alongside a wider review of the fiscal framework. David Bell has picked up many of the things that that wider review will need to consider. As a very minimum, it will need to consider the adequacy of the Scottish Government's existing tools to manage forecast error risk—the forecast error borrowing powers, the Scotland reserve drawdown limits. It will also need to cover the capital borrowing limit and the issues around dispute resolution. It will also need to consider the extent to which the Scottish Government should have additional budget management tools beyond those that it currently has. The scope for borrowing powers is not just to deal with forecast error, but to potentially borrow powers to deal with other sorts of budget uncertainties. I reiterate what David Bell said. There is a lot to be covered in the review as a whole, but we know that the independent report will focus just on the block grant adjustment mechanisms, although there is a lot to cover just in that independent report. Yes. Before I touch on the block grant adjustment a wee bit, just to follow what you said there, David Eisen, you talked about using the word adequacy of the fiscal tools. I am just wondering in terms of borrowing, do you think that we do have adequate fiscal tools at this point in terms of borrowing limits? For example, should the limit be raised? Should it be a link to inflation, et cetera? What would you think the limits need to be best a wee bit and increased flexibility for Scotland? Currently, the Scottish Government has different sorts of limits for different sorts of borrowing. If you take the capital borrowing, one of the obvious issues is that that limit is fixed in cash terms. There is no obvious reason why that should be so. As a minimum, the review should be considering how that is indexed over time. Should it be indexed to some measure of inflation or the size of the Scottish budget? That is the extent to which the limit itself capital borrowing is adequate or not. On forecast error borrowing, the current limit is £300 million a year. We have already seen in the very short space of time that we have had the new fiscal framework in place one year in which the reconciliation amount was more than £300 million. That said, it is very early in the process, so it is difficult to know whether that was, in a sense, a sort of bloke one off or whether we will see reconciliations exceeding £300 million on a regular basis. There is some analysis by both the Scottish Government and the Scottish Fiscal Commission that suggests that we may well see a need for forecast error borrowing exceeding £300 million on a fairly regular basis. On the basis of that analysis, it would seem that there is probably a pretty strong case for that forecast error borrowing limit to be extended. Quite how much it should be extended is a sort of tricky question. At the moment, it is temporarily extended to £600 million anyway because in 2021 we had the triggering of a Scotland-specific economic shock, which temporarily over the next three years raises that limit to £600 million. £600 million probably feels adequate at the moment, and there may be a good case for saying that that should just remain permanent rather than being a temporary limit. The third issue is capital borrowing forecast error borrowing. There is a third issue that is to what extent should the Scottish Government have the ability to borrow to fund discretionary spending. That is something that it cannot do at the moment. In a recent report that David Phillips and David Bell and myself produced, we argued that there was a good case for the Scottish Government to have some ability to borrow modestly to fund discretionary spending, to deal with unforeseen events that arise during the year. I think that it would be sensible if that is an issue that is covered in the fiscal framework review. Hi. Good morning. I want to say that I would very much echo what David Bell and David Bell said about the scope of the independent report and the review. On the point about the degree of flexibility for the Scottish Government in terms of capital borrowing and discretionary resource borrowing, I would add that it is important to recognise that at the moment there is no specifically English borrowing in the system. When the UK Government borrows, it borrows either to fund UK-wide spending on things such as defence, pensions, debt interest payments or to fund England measures that lead to Barnett consequentials for the Scottish Government and the Welsh Government. What that means is that any problem that the UK Government automatically gives money to Scotland and an extent to which additional Scottish borrowing power is on top is on top of UK borrowing. Of course, it is paid back by the Scottish Government, so it is not free money, but the extent to which it is made use of suggests that it is seen as being worthwhile and valuable. One of the reasons why we say in our report that we think that any borrowing powers in relation to discretionary resource borrowing should be modest is that we think that, making it larger than that, making it substantial or moving towards a prudential borrowing regime for capital, we would need to think about the equity issues across the UK, given that those powers would not exist at an England level. Of course, we could say that that is not a Scottish issue and that is for the UK Government to decide for England, but that is one of the factors that we thought about in our report, how that would play up against the fact that there is not an England-only borrowing regime at the moment. David Bell, yourself and the other two have produced a paper in November 2015, and I quote from that as follows. You said that it is impossible to design a block grant adjustment system that satisfies the spirit of the no detriment from the decision to devolve principle at the same time as fully achieving the taxpayer fairness principle, at least where the Barnett formula remains in place. We have now moved on over six years since that paper was published. I am just wondering what your thoughts are now about trying to develop a fair block grant adjustment system. Has it become easier? Has it become more difficult, more complex? What is your view on that, Professor Bell? I think that my views are probably the same as the truth of the other two, David. Those sentiments have not really changed. It is still difficult, if not impossible, to simultaneously satisfy all of the Smith commission principles. The eventual decision around the comparable method was a compromise between the Scottish Government position and the UK Government position. Given that it seems to me that if none of the methods will benefit overall the Scottish budget, if there continues to be a relatively long-run decline in income tax revenues, which is that the key element of all of this is income tax, the other VGAs, while important, are less important quantitatively. It seems to me that the key issue for Scotland is concerned in whatever the indexation method is concerned. It has significant differences in economic performance, and that has distributional issues. It is not just overall economic growth, it is how tax revenues grow in different parts of the income distribution that is really important. It seems to me that there will continue to be issues around VGAs that are somewhat larger than the tax revenues that Scotland is generating and, in consequence, a downward pressure on the Scottish budget. I agree with what David Bell said in his comments just now. I think that it might make sense to explain a little bit why we thought those were in conflict and then say a little bit about what I might imply looking forwards. The No Determin principle was the idea that there should be no either cost or benefit to Scotland just from simply the act of devolving tax revenues to Scotland. At the point of devolution, you devolve 10 billion of revenues, you take 10 billion off the block grant so that there is no net effect of just devolution. What matters is that it is in performance after devolution. It was our view and the Scottish Government's view, but a reasonable benchmark going forward from that point would be to say that, if Scottish revenues per capita per person keep pace with those in the rest of the UK, there should be no detriment from that either, if we are getting the same percentage growth rate in revenues per capita, that is a good benchmark against the rich to assess whether, if we do better than that, we gain, if we do worse than that, we lose, but if we keep up, we should not lose out. The reason why we said that was in conflict with the taxpayer fairness principle was that the Scottish population is growing less quickly than that in England. Therefore, if you are saying that we will make sure that Scotland does not lose out from devolution as long as its revenues keep up per capita, if the population is growing less quickly, to do that, you need to transfer some of the revenues in England to make up for Scotland's slightly slower population growth. That would mean that you are not satisfying the taxpayer fairness principle, which says that, once taxes are devolved, the revenues should stay in the countries in which they raise. That is why we said that there is a fundamental conflict between those different principles. What that means is that we need to think about which principles are priorities going forward. My view would be that, if there is a fiscal union between Scotland and England, it makes sense for there to be some degree of fiscal transfers from areas in which there is faster revenue growth to areas in which there is slower revenue growth. The taxpayer fairness principle is probably de-prioritised and prioritised as currently the no detriment principle. What I would say is that, given a fiscal union will involve transfers between different parts of the country, when the taxpayer fairness is less important, the no detriment principle one is potentially more important. Where that can become more difficult is that the more you argue for further fiscal devolution, fiscal powers, the more you move further and further away from a fiscal union. You might say that the taxpayer fairness principle becomes more important because less of a fiscal union is less rationale for transfers between parts of the country. That leads on to one of the issues that we touch upon in our latest report, which is that, if tax revenues grow less quickly in Scotland than they do in the rest of the UK than they do in England, which has been happening in recent years for income tax, should, as at the moment Scotland, the Scottish Government, bear all the risk of relatively slower growth in per capita revenues? Or should there be some form of insurance against that? That is one of the questions that David Isaacson said that we should be discussing in this review of the block ground adjustment mechanisms. Okay, thank you for that. The time is marching on and your six colleagues want to come in, so just one more question from me, and it is regarding an issue about the transparency that David Bell touched on, so it might be that Professor Bell wants to answer this one. The Institute of Chartered Accountants in Scotland highlighted the example of a lack of clarity around the role of block grant adjustments in relation to the land and buildings transaction tax additional dwelling supplement. It noted that someone suggested that this tax was introduced in Scotland only because, without the introduction of a similar tax to that in England corresponding block grant adjustment would be such that there would be a reduction in the block grant. The Institute of Chartered Accountants commented that the block grant adjustment is wrong in principle or that there is a great confusion over it. I am just wondering whether Professor Bell can comment on that. I will answer that briefly, but it is an important point. In a way, the design of the fiscal framework is such that there are block grant adjustments for each tax that is being devolved for each welfare benefit and so on, which means that it is quite difficult to change the structures radically, even modest changes in the structures of taxes. Perhaps I would say that there is even more scope to consider changes in the way that welfare benefits are structured. Once you start to try to do that, it becomes more and more difficult to decide what is the appropriate block grant adjustment. If you no longer have a particular benefit but you have changed it to something that does not resemble it in any significant way, how on earth do you work out a block grant adjustment? You have to assume that the previous instrument continued to exist and the estimation of what the appropriate block grant would be seems to me to be very difficult. I wonder whether the whole idea of block grant adjustments, to some extent, restricts the ability of the Scottish Government to redesign parts of its tax and its welfare system. In a sense, I think that is what ICAS is picking up there. In relation to that specific point that is made by ICAS, there is a basic principle about what is going on here. I know that it can sound irrational, but what you have to bear in mind is the interaction with the Barnett formula. When the UK Government introduced second homes levy or whatever it was called, that has effected a tax rise on stamp duty land tax in England. A tax rise will generate additional spending, and that additional spending will generate a Barnett consequential for the Scottish Government. In that case, that tax rise would not have applied in Scotland. The fact that the block grant adjustment is increasing makes sense in the sense that it is ensuring effectively that the Scottish budget is not benefiting from a tax increase that applies in England but that has not applied in Scotland. It is then up to the Scottish Government to decide whether or not to introduce an equivalent tax or to raise tax equivalently in Scotland. In this particular case, it decided to follow suit and introduce the additional dwelling supplement in Scotland, and it subsequently decided to increase the additional dwelling supplement to 4 per cent in Scotland when it remained 3 per cent in England for a while. There is a rationale to what goes on. Sometimes the rationale is lost because it is complicated and you have to think about the interaction with the Barnett formula, but it is that interaction with the Barnett formula that makes the block grant adjustments seem a bit more logical, if you like. There was a logical principle behind what was going on here. It was not just that the Scottish block grant was being cut and therefore the Scottish Government had to respond to maintain its budget at a particular level. I am going to open up to colleagues now, and the first member to ask questions will be at the list and followed by John. My first question, if I may, is to David Phillips. I was very interested in what fell all the different principles behind the Smith commission and because of that, there might have to be choices about priorities made. Obviously, those choices are a political decision for the Scottish and UK Governments. Would it be your view that, in the independent review, it would be possible to flag up what the costs and benefits would be of choosing different priorities? I know that it is not going to be the job of the independent review to recommend what the policy is, but do you think that it should be part of the independent review that looks at the different costs and benefits of the different priorities that should be chosen? I echo one of David Eisen's comments in response to the earlier question, which is that it would be feasible to, as part of the independent report and potentially part of the wider review, to do a conceptual look at what the different principles guide in the current framework are and how they fit into the different conceptions of what the purpose of the union is. As I said, the tax payer fairness one, where money stays in the country that is raised, makes more sense if you are moving towards a looser union. The no detriment principle makes more sense if you are seeing a stronger fiscal union, as does some sort of insurance against what happens if you see a decline in earnings per capita or an increase in earnings per capita. Revenue sharing makes more sense in a stronger fiscal union, but it is a qualitative principles-based discussion about the benefits and costs and trade-offs of the different options. I do also think that there is hope for quantitative modelling of the different options, both using historic data so that what would have happened in the past if we had these different options in place. You might see in the next session some of the work that Gitto and Ed have done at Cardiff University, looking at the different options for Scotland, but also looking at future scenarios. When we did our initial look in 2015-16, we did different things. What happens if revenues go faster, go slower, what if populations go faster, go slower and so on and so forth to look at the effects. That sort of analysis is very informative. You can see the different options over the space of just a few years, leading to hundreds of millions of pounds of difference in the Scottish Government's budget. Just to be clear, you are recommending that that should be done in the independent report about the region, but also in the independent review on the wider issue? Yes, because it links up to the other aspects of the fiscal framework. For example, in the short term, if you have different trajectories of revenues in the short term and there is less insurance against, for example, revenues going faster or slower in Scotland in the short term, then if you have less insurance via the block management, you might want to have more borrowing powers, so that they can be self-insurance by borrowing and reserves. That is why I would have it as part of not only the focus work of the block management adjustments, but of making sure that the interactions between that and the wider review, so things such as borrowing powers, reserves and future resolution, are focused in that as well. That is very helpful, because I think that this is very important and permanently to the overall principle behind exactly what we are trying to achieve, namely the best outcome for Scotland and the best outcome for the UK. That is very helpful. My second question is that there is probably growing consensus around the political spectrum that there is a case to examine the forecast errors issue, because we have had people in front of this committee fairly recently who have had some concerns about our ability to forecast well and the time delays between some of those forecasts and whether we get it right. Could I ask whether there are aspects that we need to address that are not just about the timing of different forecasts, particularly Scottish Fiscal Commission against the OBR ones? Is there extra data that we should be working on to improve our forecast ability? Professor Bell, do you like to answer that one? It does seem to me that the Scottish Fiscal Commission is trying to put together as much data as is currently available. The real-time income tax data is helping quite a lot, but we do not have a long run of data yet and we have very unusual circumstances over the past five years in terms of the impact of the pandemic and, to some extent, Brexit. That has made the development of a stable model over this period of time that we could rely on in terms of its forecasting capability very difficult to put together. If I can add a sort of addendum, it is relevant for this question, but also to what David Phillips just said, one of the issues that increasingly occurs as you add to the number of fiscal instruments and their BGAs, as has been the case over the past five years, you have to wonder how they interact, do they move together or do some of them move against each other. The overall borrowing requirement that the Scottish Government might need is partly dependent on that, because if one tax goes up and the other tax goes down, the need to borrow is much less than if they are both going in the same direction. That issue further complicates the already difficult issue that the Scottish Fiscal Commission faces in terms of forecasting. We will have John Swinney to be followed by Daniel Swinney. Looking at some of the material that we have, which I do not know if you have seen, from our next panel comparing Wales and Scotland, it seems that, on the whole, they are looking pretty positively at their financial output, and, by contrast, we are looking pretty negatively at ours. Under all the scenarios that they look at, whether it is the comparable method or an IPC, our budget is going to go relatively down in the coming years. Have we really got to see some kind of change in this, or will the Scottish budget continue to suffer? Specifically, should we be looking at some of the things that the Welsh have done, like splitting the different tax rates for the food block grant adjustments, and perhaps asking for—they have got 5 per cent bonus on the Barnett formula, because the Barnett formula, as I understand it, is designed to cut the needs-based Welsh and Scottish spending over time? So, should we be following the Welsh model? I do not mind, so I will start with David Phillips. Thank you very much, Mr Mason, for the question. I think that I would make a couple of points in response to that question. The first point is that part of the relative decline in Scottish revenues compared with the block grant adjustment over the forecast period is because the block grant adjustment is based on UK revenues, which includes freezes in the higher-rate threshold, which has not yet been built into the Scottish forecast, because the Scottish Government has not made policy beyond 2022 for income tax yet. I would expect there to be a small—based on current forecasts, at least, if the Scottish Government were to also freeze its higher-rate threshold, as is happening in England and Northern Ireland and Wales, I would expect that gap between them to be somewhat smaller. I think that it is worth bearing in mind that the differences between the forecast not only reflect differences in underlying performance but also differences in policies that have been penciled in for future years. On, I guess, the more substantive questions about what options should Wales go for, sorry, Scotland go for in terms of its fiscal framework and in terms of the block grant adjustments, I did look at the work that Edwin Gitter put together. What that shows is that there would be a benefit to the Scottish Government if there were set foot adjustments by income tax band, such as the business in Wales, but if, in order to secure that, it needed to move from the index per capita to the compaddle method, that would more than offset the gains from that. In Scotland's case, the protection from the slow population growth, at least historically, has been more important than protection from the fact that more of the taxes come from the basic rate and therefore it is more exposed to the basic rate income tax trends and less exposed to the higher income tax trends. If we had to choose between one or the other, in its per capita, it would make more sense than the Welsh model. However, if we could combine the two, that might be seen as the best of both worlds, whether the Treasury would concede that. That is another matter. On the question of the Barnett floor that is put in place for Wales, the 5 per cent uplift on top of the population increments that Wales now gets, I think that that was very much in the context of the work of the Hawthorne Commission, which suggested that of the three devolved nations, Scotland, Wales and Northern Ireland, Wales was the one that, in the early 2010s, was underfunded, relative to what a needs system would suggest. That does not hold for Scotland or Northern Ireland on any formal basis. It would probably turn out that Scotland looked like it was relatively overfunded, relatively to the rest of the UK, not necessarily absolutely. Therefore, although it would benefit Scotland to get a 5 per cent uplift, I think that it might be a harder case to make to the Treasury for Scotland than it was for Wales. Okay, thanks. That is helpful. I think that we are probably going to be pressed for time, so maybe the other two want to come in later, but if I can just move on to something else. I note the point in your report, I think that it is page 5 recommendation 1, that the idea of funding guarantees should not continue. I understand the logic for that, but I am just wondering how we deal with that. The problem seems to me that Westminster announces expenditure, but we do not know whether it is new money or existing money. If they would even just tell us how much of it was new money, so if they are spending £5 billion on London Crossrail and we are going to get £500 million, at least if they would tell us that 250 of it is definitely new money, we could bank on that even though it is not technically a garden tea. I am just wondering if there is some way around that issue, because otherwise it just takes us ages to find out if we are getting new money. David Phillips, if you are ready to go. I think that there are two things that I have to say. First, I completely agree that they see better information from Treasury on what is new money and what is not new money. We had a short report on this back in 2020, where some other plan for growth, with plan for jobs, was rebadged old money and it was not clear from the statement, so I definitely agree with you on that point, better information on what is new and what is from existing budgets. The other point that I would say is that our report suggests that there should be some discretionary borrowing powers for the Scottish Government as well. One of the reasons for that is that that would allow the Scottish Government to not only respond to empathy and events, but to respond to issues like that. The reason that we had the packages as a whole, which was saying better information, some discretionary borrowing powers and, if there are any late cuts to budgets at the supplementary estimates stage, the ability of the Scottish Government to borrow to carry it out forward so that it does not need to make the cuts straight away, we thought that that would give the flexibility or the ability to plan what the guarantees does without the potential unfairness of the guarantee being more than Scotland should get, potentially being unfair to England. That is what led us to that conclusion. I get the point about the unfairness. If I can, just one final point, your report seems to be quite positive, I think that page 45 and 46, about the idea that we should have more flexibility about capital budgets being available to transfer to resource. At the moment, we are allowed to put resource into capital, but we have not been. Especially during the pandemic, that would have been very useful. I am right in saying that you feel that that would not really damage the UK in any way, and it would give a bit more flexibility to the Scottish Parliament. Yes. In essence, the answer is yes. We make the point in the report that there is a case for the Scottish Government to be able to have greater ability to flex its budget during the year in response to unforeseen events. Part of that is through modest additional discretionary borrowing that we have talked a bit about. Partly that is through increased drawdown limits from the reserve. Partly that is about the ability to transfer budgets from capital to resource. That third one is probably, in a sense, the previous two probably give better scope for flexibility, and if you were going to waste some additional flexibilities, those first two might be better options to start with. Essentially, our report makes the case that the Scottish Government should have better ability to flex its budget during the year through these mechanisms. At the scale that we are talking about, the changes would provide useful additional flexibilities to the Scottish Government but would not pose any major fiscal risks to the UK Government. There is no fundamental reason why the UK Government should object to the extensions to flexibility that we are talking about. Liz Smith was cut off on a prime earlier on, so I will allow her back in for a question before we move on to that. My third issue is about the exogenous situation, which we have experienced as a result particularly of Covid. In your report, you are very clear that in such circumstances there may have to be minimum funding guarantees, which I think that everybody has agreed has been a good thing, but you also say that that cannot continue on a long-term basis because obviously it would have an inherent unfairness within it. You set out that there is potential in the exogenous shock situation to have enhanced borrowing powers. Can I ask you how exactly that would work for the time of that exogenous shock? Would there be a time period for that enhanced borrowing? How do you see that working? We have discussed that quite a bit. It seems to me that there is a lot of difficulty in identifying what we would call an asymmetric shock rather than an exogenous shock. An asymmetric shock is one that hits Scotland or Wales and in the rest of the UK the economy carries on unperturbed. There is a question about timing. For example, you could say that the decline in the North Sea industry is a sort of slow burn rather than an immediate shock like the pandemic was. There is a question about how you recognise the differences between those. Funding guarantees worked well during the pandemic, but that was partly because it was not an asymmetric shock. That is the point that we make. Covid-19 affected Wales, Scotland and Northern Ireland, England to pretty much the same extent. The Barnett consequentials were at about the right level. We do not have a methodology for first recognising the exogenous shock, which you would have to be able to do before you decided what the borrowing regime that you would then bring in to deal with it was. It seems to me that that is also an issue that the review could be asked to have a look at. Thank you very much. Thank you. Sorry, there is a little issue with me being unmuted. It is important to try and establish critically the purpose and effect of each of the measures around the block grant adjustments. I think that that is where the bulk of the discussion and debate is likely to be. I just really wanted to clarify a few things. If we look at the comparable method, that seems to be essentially isolating the ability of a Scottish taxpayer to pay tax in comparison to the average UK taxpayer. On top of that, essentially what we have in the IPC is a factor to offset the ability of Scotland to grow its own population relative to the rest of the UK. What Wales has is an isolating each of the tax bans, which in a sense is offsetting its ability to change the make-up of its tax base. Is that a fair summary of what the three different methods do? Secondly, I note in your report that you are saying that essentially review of block grant adjustments is a political, not a technical decision. I think that I understand that. Is the political decision therefore the extent to which the devolved Governments have the ability to influence those things, both the size of their population and the extent to which their citizens are able to pay tax and, secondly, the structure of that tax? Is that a fair summary of what those models do and, secondly, what the political drivers towards those models might be? Yes, Daniel. I think that that is a really quite good summary of what those different options do. You are right. The compiler model protects from starting off with lower revenues per capita, because rather than having to get the same pounds per person increase, you need to get the same percentage increase. The IPC method then gives protection on top also for if population growth is slower, or the Welsh method gives protection if you would expect different growth going forward because of the structure of your income tax base. That is a really good summary of the different approaches. In terms of the politics going forward, there are two aspects to it. There is a question about what you think is sort of influencible by the devolved Governments, the extent to which they can impact the performance of the economy, impact population growth. There is also a question about the degree that there should be risk sharing and redistribution across the UK, which is a set of political issues about the function of the union. The more one thinks that the union really is about redistribution according to need and about insurance against shocks that hit different parts of the country, that would push you towards a system that would potentially ensure the devolved Governments are against more of those different kinds of risks. The extent to which one is moving towards a system of fuller fiscal autonomy with more things devolved, you might think that fewer of those should be protected against. That is why we discussed it being a political issue. The other reason why we hired the politics of thinking about the block grant adjustment was because the more one starts to put in mechanisms to ensure against different types of risks, for example the risk that even to protect the population growth and for the different starting tax distributions, what if revenues per capita grow less quickly in Scotland just because the economy goes less quickly? Should there be protection against that? When you try to do that, you need to do some ad hoc adjustments. Politics will get involved there. If it seems a zero-sum game, it can become quite politically contentious. Again, we thought that some sort of culture change around the way that devolved and the central Governments interact on fiscal payment issues would be needed to avoid that becoming just a constant source of tension between the Governments. That is why you thought politics was just as important as the technical side of things when thinking about block grant adjustments. I pressed R at the same time as David Phillips. David Phillips said the things that I would have said. It is about principles and politics. An example of that is when you are talking about should the indexation method be IPC or should it be the comparable method. IPC, the method that is currently in operation in Scotland, as David Phillips said, protects the Scottish budget against the risk that the population in Scotland grows more slowly than the population in the rest of the UK. The politics is that the UK Government will say, but hang on a minute, when it comes to the Barnett side of the equation, that does not fully adjust for population. Scotland can and indeed has over the years benefited from relatively slower population growth than in England. Why should we protect the Scottish budget from slower population growth on the tax side if Scotland can benefit from slower population growth on the Barnett formula side? There are principles and there are politics, but your assessment of the different methods is right. There is the IPC that protects the Scottish budget against the risk that the population grows more slowly in Scotland. The comparable method does not provide that protection, but the Welsh model provides that. Both IPC and comparable method protect against the lower tax capacity of the Scottish and Welsh economies, but the Welsh method that has different adjustments by band also protects against the different initial distribution of the tax base. I reiterate what David Phillips said to an extent. The more that you introduce different protections into the mechanism, the more you complicate the system a bit more, but you also introduce more and more of the questions about how on a minute, if you want all of the protections on the tax side of things, is that not inconsistent with what is going on on the spending side of things and should not be there to introduce more assessments of need on the spending side of things? There are lots of different trade-offs to make, and it is partly about the principles of which risks the Scottish budget should be exposed to, but there are lots of politics in there as well. Looking at the two different models, and this follows on a little bit from some of the questions from John Mason and the answers there. Even if you apply the Welsh model to Scotland, although that model applied in Wales does see its budget projected to increase, it does not do the same thing in Scotland. It means that the decline is not as severe, but we will still be in a worse off position than if the devolution of income tax or current set-up had been put in place. It is fair to say that when the Scottish Fiscal Commission report came out prior to the budget, I think that it took everyone by surprise how significant the lag in income tax growth was in Scotland compared to England. That is the fundamental driver. My question is, why is that the case? Why is Scottish income tax going more slowly than not just the UK at all, but pretty much every other region of the UK? Indeed, it is slower than Wales, and what steps and levers are there available to the Scottish Government to address that? I take a couple of points in response. One of the points is that the exogenous shock that Ms Smith talked about earlier is, in a sense, coming through the gradual decline in North Sea oil. The fact that Scotland, along with its financial services, was among the few industries in Scotland that were producing additional rate taxpayers and high rate taxpayers. The top 1 per cent of the population of taxpayers pays 13 per cent of the total revenues. The slow growth in tax revenues is partly distributional, and it is partly to do with the Scottish Fiscal Commission's view that economic growth post-22-23 is going to be modest in Scotland. That also generates relatively smaller growth in tax revenues. Is that not the fundamental point? Regardless of what model you choose, that if you have a devolved system of taxation that, fundamentally, Scotland needs to be growing its income tax faster than the UK average in order to benefit? In a sense, it almost does not matter which of those models you use that the fundamental truth is that the overarching one? Yes, I think so. That is critical, although the indexing method does, as we showed in our 2016 paper, make a difference. In the long term, it seems that economic growth is key to the evolution of Scotland's total revenues. Can I ask one final question? It is a long-term sustainability method. Fundamentally, we are basing it off our comparison of what is happening in Scotland in terms of tax and welfare decisions compared to the policy positions in 2016 for the UK as a whole. The more time elapses, the more difficult that gets. In essence, it is more feasible because the UK has by and large pursued the same policies, the same overall method and the size of taxation and the welfare spend compared to 2016. However, the UK Government diverged significantly, so either increasing tax significantly or decreasing it, increasing welfare or decreasing it. The ability to project what would have happened from that 2016 position becomes more and more difficult, if not impossible. In five years' time, we are not going to have to have much more fundamental rethink. If it is not five years' time, will it be 10 years' time? I think that David Phillips wants to come in. Hi. I'm back on screen now. On that first point, because the block grant adjustment is based on actual revenues in England and Northern Ireland, when potentially England in the future, if there's tax division from Northern Ireland, because it's based on actual revenues, you can still make the block grant adjustment going forwards. As David Iyer was saying, there is fundamental importance to the fairness of the system. If, for example, income tax has substantially increased in England, because that would mean more spending either on UK-wide functions or via the Barnett formula, you need a bigger block grant adjustment to offset the money that Scotland gets via the Barnett formula, it is fundamentally important that you still link the block grant adjustment to what happens to revenues in England. I think that that system can continue to work in the future. The question then comes down to, though, is that, over the space of five, 10, 15, 20 years, if we were to see an on-going trend of relatively slower growth in revenues in Scotland or, on the other hand, relatively faster growth in revenues in Scotland, should there be some updating of the block grant adjustments to account for that? Is there some risk-sharing across the UK? That is one of the questions that we look at in our report. As I said, it comes down to politics and principles around what one thinks the role of the union is. If one thinks that it is a major risk-sharing union and redistribution from rich to poor areas, he probably would argue that, in the longer term, there should be such reassessments of the block grant adjustment to redistribute revenues from faster-growing to slower-growing areas. If one thinks that there should be a looser union or no union, that becomes a harder position to argue for. The real issue—we talked about that in the report—is that it is quite technically difficult to do that. Therefore, there is lots of scope for arguments about what elasticities to assume and what would have happened. That is why there needs to be, probably, a role for independent institutions in that aspect of the system. Countries such as Australia have the Australian Combat Grants Commission precisely to have an independent voice in what looks like a zero-sum game. Do you have any further questions or comments? David Phillips' response was exactly the right one. Indexing the block grant adjustments to growth in RUK revenues does serve a number of important purposes. It protects the Scottish budget from UK-wide shocks or declines in revenues. We will see that in 2020 and we have seen that in 2020 because of Covid offset by the fact that we have equivalent falls in RUK revenues. Indexing the block grant adjustments to RUK revenues also ensures that you get this taxpayer fairness thing going on. Scottish taxpayers are not benefiting from increases in tax in RUK and vice versa. However, you are right that, over time, if Scottish revenues fall because of a long-run decline in what is happening to the offshore sector, it does not feel particularly fair that, as a result of tax devolution and a result of the trends that neither the Scottish Government nor any other Government can do a great deal about, the fact that that has disadvantaged the Scottish budget significantly over time would not feel particularly reasonable outcome of devolution, and there would be a case for, as David Phillips said, looking at resetting the clock periodically. However, I do not think that that implies that the block grant adjustments and the basic principles with which the block grant adjustments are calculated are fundamentally wrong, because they serve a number of important purposes. Okay, thanks, Daniel Douglas, to report, Michelle. Thanks, thank you, convener. I'm just going to go back and ask about risks again. Reading the report seems that the risk that Scotland has and the risk that Wales has is completely different. I'm just trying to understand that down to the differing risk appetites between the two Governments. Is that a political decision that has been made by both of those Governments? Maybe that's to David Izer first of all. Yes, I think that we touched on this a bit already. I think that David Phillips made the point earlier that the demographic risk and the distribution of income tax payers risk, if you like, is slightly different in Wales and in Scotland. Wales's population is projected to grow somewhat more slowly than the English population, but that difference is not as marked as it is for Scotland. Scotland has a different distribution of income tax payers, but the difference is not as marked as it is for Wales. The calculation is a bit different in the two countries. If Scotland had to choose whether it wanted the Welsh model that exposes the Scottish budget to differences in population growth but protects it from a difference in the distribution of tax payers, as opposed to the method that it's got now, that would be an interesting calculation. I think that it might stick with what it has rather than the Welsh model, but that's where the importance of looking at projections and doing some scenario modelling is important in informing those sorts of decisions. Would I be right in thinking that the model that we've got just now was probably selected because the Scottish Government had more appetite for risk than maybe the Welsh Government did when they were negotiating their block grant adjustments? I don't know if it was more appetite for risk but just the different sort of calculus about the risks that it faced. Of course, in a sense, what the Welsh Government was prepared to do was to accept the comparable method as part of a negotiation that saw it also secure this adjustment to the Barnett formula, whereby there's a sort of flaw that ensures that Wales allocation on the Barnett formula can't drop below a particular level. That's not really at the moment a sort of issue that the Scottish Government is likely to be looking at because its allocation under the Barnett formula is clearly well above what a needs assessment would suggest. I follow on from Daniel MacDonald's question about almost to keep level our economy would have to grow at the same amount as the rest of the UK. Is that the same for Wales then? When we look at the graphs, we see that the net effect of their tax devolution is positive but ours is negative. Are they actually growing their economy at the same rate of the rest of the UK or higher or higher compared to Scotland? That is an important point. Those different mechanisms for indexing the block grant adjustment are important because they influence which risks the devolved budget is exposed to. Fundamentally, if the tax base grows much less quickly in Scotland or Wales than it does in the rest of the UK, then there isn't a block grant adjustment mechanism that's going to compensate for that. In a way, it would be odd if it did because you have to think about the way that the interaction with the Barnett formula works. The implications of that would be somewhat strange if you had a devolved tax system whereby the devolved tax base grew less slowly and tax revenues grew less slowly and yet the budget was not exposed to the impact of that. I'm just trying to understand what we're looking at the graphs. The Welsh figures are a positive impact but does that mean that their economy is going faster than Scotland's? What does Scotland need to do to try and halt this decline really of the benefit of tax devolution? Maybe one of the other, David. I'm back in the room. I can briefly touch upon that one. One important thing to bear in mind is that in-contact devolutions only just really started in Wales, started the year before Covid. One of the things that happened is that because more of the economy in Wales is public sector, the Welsh employment and income figures held up better during the Covid crisis than the rest of the UK. It looks like one of the factors underlying the better performance of income tax revenues in Wales is that there has been a slightly stronger performance in the short term due to the Covid pandemic. Looking beyond that, it's not fully clear to me what the factors are that would drive the forecast continued small improvement in Welsh tax revenues relative to those in England and Northern Ireland, given that the OBR uses the same assumptions about growth. Unlike the SFC, it doesn't do a separate forecast for Wales for economic growth. It uses the same forecast that it's doing for the UK as a whole, but it could be to do with some factors about the distribution of income and the starting point. There have been some factors that have led to a slightly faster or better performance on income and employment in Wales. It's a bit more uncertain about what's going on in the longer term in the forecasts. Is it still the fundamental same model if Wales grows faster when it does better? Yes, that is still the same fundamental model in Wales. Michelle Russell, to follow me, Ross. First, I have a question for all three of the day, but perhaps we can start with Professor David Bell. We've been focusing a lot today on Scotland and Wales, but I'm interested in what helpful precedents operate elsewhere in the world, particularly the deal with some of the issues around fiscal transfers and divergence over time. I feel as though we're dancing on the head of a pin, particularly when we're getting into indexed-session methods, and some of those problems aren't unique. I just appreciate, obviously, for the review going forward, some thoughts from Professor Bell on that first. The UK system is really rather unique. Most countries have a more systematic or legalistic approach to the funding of federal Governments and provinces or states. That's not to say that all of them protect from risk. In fact, some of them provide less protection from risk. You get transfers, you get tax equalisation methods and you get spending equalisation. Different countries do it in different ways. Australia, we've already mentioned the Commonwealth Grants Commission, which is an independent body, decides on levels of support for different parts of Australia. In Canada, the provinces are pretty independent. For example, they have their own borrowing powers, and the federal government doesn't intervene in their borrowing powers. What we have been discussing is relatively unusual, and perhaps one of the key things is that it works without a formal legal framework around the arrangements that we've spent our time discussing. Whether that's a good thing or a bad thing is, again, something that can be debated. We argued in our recent paper that we managed to model through the pandemic because the funding guarantees were offered by the Treasury. That was a completely new idea that suddenly appeared, but it was helpful to the devolved Governments over that period of time. I wouldn't say that the arrangements in the UK are by any means typical of the relationship between federal and state or province or whatever you call other levels of government. Professor Bell, to what extent does it start with a Barnett format in effect embed structural imbalances in the UK? You mentioned financial services earlier in an industry that I was involved in for many, many years. Over the course of my career, I saw in effect head office functions all over time move to London where a few noteworthy examples—I'm thinking standard life—that things have changed for them now. Does it not really embed those structural imbalances? The Barnett formula is not a formula that is based on need. Most countries, in terms of equalisation mechanisms, will look at relative levels of deprivation, relative levels of unemployment and so on. That is not the way that the Barnett formula works. The UK economy is one where there are very significant regional differences between the richest and poorest parts of the UK. That may be down to some extent to the way that Government funding is done, but it is also down to perhaps more fundamental economic processes that have led to the relative decline of different parts of the UK. It is not just the Catholic nations, it is also the north of England relative to the south-east. We touched on that earlier. Daniel was mentioning it. The committee itself talked about this area a great deal in terms of how one could grow the tax base in Scotland based on working-age population. I just wanted to understand a bit more, Professor Bell. In your view, what are the limitations in the current fiscal levers that the Scottish Government has to influence and grow the tax base, regardless, incidentally, of the indexation method? Of course, it is really the working age that we are looking at. I appreciate your thoughts on what are the current limitations in what we are discussing. I will mention one thing that could have come up in answer to previous questions. It also relates to the difficulties of making forecasts. That relates to the issues around growing the population. Scotland's population actually declined for a large chunk of the last century and has only grown since the beginning of this century. That has been largely due to migration rather than to what we call natural increase, which is the difference between person deaths. The most recent forecasts for the Scottish population are from 2018, so they are a bit out of date. They could also affect the projections that we have been talking about at length during the session, but they are also going to be made in a period in which we have a new migration situation, as far as the whole of the UK is concerned. It is not clear whether that will have a positive or negative effect on population growth in the medium term to the long term, which in turn will be reflected in all of the metrics that we have been discussing this morning. The current risks are shared across the different parts of the UK as a result of the fiscal frameworks that have been agreed between Scotland and Wales. I do not know whether the other guys want to add in to that answer. I can see David Phillips once coming in. He has put an R in the chat box. I was going to make two brief points. One was back to your first question, Ms Thomson, around other countries. One of the big differences in European systems is that there often is equalisation, not just at the point of devolution that we have in the UK, but also on a long-going basis for differences in trends in income tax or other tax, devolved tax growth rates. For example, in Germany, any lander or state that gets less than 99.5 per cent of the average tax revenue has over three quarters of the shortfall corrected. That is a different approach to the UK. In the UK, we say that 100 per cent of the shortfall at the point of devolution, but any further shortfall that grows after that point is 0 per cent. Other countries tend to treat them more symmetrically. In Germany, it says that anything below 99.5 per cent will get three quarters compensated for. There are different approaches in other countries on that point. It is stuff to learn from other countries. If I am being very frank, I think that what we ended up with in Scotland was ultimately driven by the four-week Smith commission, and those sorts of issues take more than four weeks to actually properly look at. I do hope that the review of what needs to happen and whether it is urgent does not take place through rush to pace. The second point that I would make is that, on this point about what things are devolved and what powers Scotland has, I think that the important thing to think here is that as well as there being population and participation, the other and the most fundamental driver of economic growth is productivity. That was set out of the sustainable growth commission and, for example, in other sort of government documents. With that, I think that there are certainly devolved by the Scottish Government. For example, capital investment, large parts of that are devolved by the Scottish Government, so the capital budget in Scotland is actually the most generous aspect of the Scottish budget relative to that in the rest of the UK. Capital investment per person is about 50 per cent higher in Scotland. Government capital investment per person is 50 per cent higher in Scotland in the rest of the UK. I think that there is scope to think about the use of capital investment. The other area that is very important for the activity that is devolved is education and skills policy. I am not denying that there are areas that are not devolved that are very important for devolution such as regulation policy, overall macro policy, so on and so forth. The UK-shaped prosperity fund is going to be much more UK-driven than the EU scheme was. However, there are things that are devolved that should be key levers around capital investment and education and skills policy. I think that my question was what were the limitations rather than what were the benefits. Perhaps you would like to fill in on that. What do you see as the limitations of fiscal levers that the Scottish Government has to influence the tax base? Clearly because there are a number of areas that are reserved to the UK Government, most regulations around product markets, labour markets, the international migration regime, overall macro-physical policy. Those will be things that are not under the Scottish Government's control. I think that what one would need to do—and I think that this comes to the fundamental question—is look at the additional benefits that Scotland could have if it had access to additional levers versus the potential costs from reduced redistribution and equalisation that come and exist within the UK. That goes far beyond the scope of that question. I thank you for mentioning those fundamentals. I thank you very much, convener. I will let you move on. Thanks, convener. I have one question on the process and then a couple on policy if we have time to get through them. First, on the process itself, there has been a little bit of confusion in the public discourse around the independent report and the review. I say public discourse, but it is not like that. There is a huge number of people engaging in this conversation beyond those of us in this meeting right now, but there are some. Some folks are mixing their terms when they reference the independent report versus the review. The report itself is not going to make recommendations. It is, to some extent, essentially an evidence-gathering exercise. I am interested in the panel's thoughts on exactly what you think the most desirable outcome for the independent report is. What purpose is it trying to serve, given that its purpose is not actually to make any recommendations? I could direct that to David Bell in the first instance. I am not entirely sure what the clear answer to that is. I think that what the report should do is, as we said earlier, go through the various options, do some back-casting, do some forecasting and present those to the review and then have those taken forward. It becomes a fairly automatic exercise to an extent where I am bringing in some of the issues that we have already discussed about forecasting errors, population forecasts and sensitivity of the results to variations and all of those kinds of parameters. That would be my expectation, but I am not privy to exactly the UK and Scottish Governments' thinking on it at present. No, thanks. That is useful. That is all a highly politicised exercise, but given the comments of that, the report is a relatively technical part of informing what will then be a much more politicised review. On the point of forecast error borrowing, I might direct that to David Isaacson, because he mentioned it earlier on. Before we get into what I presume will come with the review and debate around how we decide on the limit for that, whether it is cash percentage, etc., we are not asking a question of what the rationale is for having a limit on forecast error borrowing at all. That is not about a divergence in policy choice as much as correcting for a divergence in technical exercises, but correcting for error rather than divergence in choice. What purpose does a limit serve when it is just about forecast error correction? I am quite sympathetic to that as a view. As you say, it is not something that the Scottish Government sets independently. It is the outcome of the two independent forecasters operating together. Even limits that are significantly higher than we have now would not pose any fiscal risk to the UK Government. I have a lot of sympathy with the view that you have expressed. I am moving to the other borrowing question. I might again direct that to David Phelps, because it is an issue that you mentioned earlier on in reference to the report that you published recently. On discretionary resource spending borrowing powers, you recommended that the Scottish Government should be given some limited powers for discretionary borrowing. The rationale for those being limited powers is an equity issue, as there is no England-only borrowing regime. I wonder whether you could expand a little bit on that rationale given that the UK Government is de facto the English Government when it comes to areas such as health or local government. It has an unfettered ability to borrow to spend in those areas if it wishes to. What is the rationale behind granting the Scottish Government a discretionary borrowing power but having it limited for the purposes of equity in the union? That is a good question. I will first go over the rationale and address the second part of your question. The effect of rationale was, as I said earlier, that, as it stands, any borrowing by the UK Government automatically generates either spending on things that are UK-wide, such as defence or social security or paying down the national debt or is spent on public services in England and then generates Barnett consequentials for Scotland, Wales and Northern Ireland. Any borne by UK Government is UK-wide. Scottish borrowing or Welsh borrowing comes on top of that on what is paid back by the residents of Scotland or Wales, at least unless there is any sort of bailout. There is still value to that, otherwise people would not want the borrowing powers. That led to our conclusion that one needs to think about the fairness of that to England. The second point that you are making there is that, although it is true that there is no England only borrowing powers, if you want to borrow more for England, because it is UK Government that makes that decision, it can go ahead with it. There is an argument that, although there is an unfairness, if you like financial unfairness to England, if you have significant Scottish and Welsh borrowing on top of UK borrowing, there is a power dynamic unfairness in the current system, where you can have borrowing for England at the top of a hat if the UK Government decides that is what is needed. If the Scottish Government decides that we need more borrowing for Scotland, it has not got that. I think that there is that sort of power issue involved. I am not sure the extent to which that can be avoided, given that, even if you had a separate English Government with its own borrowing powers, England is 84 per cent or 83 per cent of the union. It is going to have a large political say in the union. I think that that power issue is one that is potentially inherent in a union that has one very large area. Of course, you could then say, in England, you have regions of England that have different preferences. The fundamental way to think about that issue is that we need to move towards a system where the UK Government is making decisions on behalf of the UK as a whole and that it takes into account the needs of each different area of the UK. That is why we say that, in our port, when it looks at what happens if you have an asymmetric shock that hits, whether it is one of the devolved nations harder than the rest of the UK, or potentially one of the English regions, there needs to be ways in which you bypass the normal system and say, look, we are going to bypass that system and give additional direct funding or additional borrowing powers to that particular region. In more normal times, my own view, at least, is that I do not think that it is unreasonable in a unitary state for overall fiscal policy to be determined by the central government. We are just a slightly unusual unitary state where, if you think about it on a nation by nation basis, one nation is more than eight tenths of the overall size of the state. I think that we are at a deeply asymmetric unitary state. I will leave it there, convener. Thank you very much, Ross. I had hoped to ask a question about behavioural responses while I was close to his heart, but time is sadly against us and we are well over time at the moment, so I will call a halt there. I hope that I will see all your witnesses again before too long. I am sure that there is a lot more that we have to discuss on this particular issue. Once again, thanks to the three Davids, I now suspend the meeting until 11.45. We are now joined by Dr Ed Poole and Guto Efan of the University of Cardiff for our second evidence session, which will focus on the Welsh fiscal framework. I welcome them both to our meeting. Members have received a briefing paper from our witnesses, and we will go straight to questions from the committee. I again remind members and witnesses that a broadcasting team will operate their microphones and that they should pause for a few seconds before speaking to ensure that they will be heard. We have around an hour for this session, and I would like to start the discussion by asking about the three separate block grant adjustments for income tax, which are a critical element of the Welsh fiscal framework. I understand that they insulate the Welsh Government from UK-wide factors, which disproportionately affect one part of the income distribution, allowing a fair system to operate Wales, despite its markedly weaker tax base. We have your paper in front of us before the record, and for those who are listening in, I wonder whether you can talk us through how the system actually works to benefit Wales. Good morning, convener. Good morning, committee. Thank you very much for having us. As we wrote on our paper, the most important part of the discussions that we had in Wales prior to the fiscal framework being agreed was how to deal with Wales's poorer tax base. We had the advantage of the Scottish fiscal framework negotiations that had happened earlier in that same year, and the great deal of work that had been done by parliamentary committees, by the three panellists who had just been in the previous session, by a large number of individuals in Scotland working on how the block grant adjustments would work in the Scottish case. However, when we looked at the numbers and how they would apply to Wales, we saw that while population risk was an element that would be a concern, the bigger risk would be the great deal of dependence in Wales on lower taxpayers as part of our tax base, particularly taxes earned at the basic rate of income tax. At that time, we will remember in the first decade of the coalition Government and the first five, six, seven years of that previous decade, there were very rapid increases in the personal allowance, the amount of tax that is tax free. If you like cannibalising more of the Welsh tax base than was the case across the UK as a whole, that would therefore have had an impact on likely faster block grant adjustments than Wales could earn even in the reasonable case scenario in terms of its own tax adjustments in tax growth. As part of that, and we were involved with David Phillips, who had been on the previous panel, we were looking, as part of those negotiations, on a way in which the weaker tax base of Wales could be accounted for in a fair way to both the Welsh side and the UK side. The way to do that was to have three block grant adjustments for income tax. That means that Wales would not be overly penalised for the impact on the tax base that disproportionately hit Wales. Instead of comparing the Welsh tax base with the UK as a whole, we would now be comparing the basic rate of income in Wales with the basic rate of income in the rest of the UK. That way gave a fairer sense of protection, so that the impact of that rapidly growing personal allowance would be felt on both sides if we only considered the basic rate of income tax on both sides of the border. Likewise, the additional rate of income tax, the very top rate, the very small number of owners in Wales who pay at that level, is much more important than the UK level. Again, we needed separate block grant adjustments that would account for that massive disproportionality. Thank you very much for that. That is very helpful. I mean, I have to say that your whole paper is really excellent and very readable. A lot of the questions that I am asking, you have actually more or less answered in the paper itself. Again, I want to take this to a wider audience, people who would not have seen this paper, obviously. I think that what is very compelling is that the figures that you have put out, not only on a table but also in paragraph 311 and 312, and what you have said at the bottom of paragraph 311, is that the overall impact of tax devolution on the Welsh budget is forecast to be a surplus of £252 million a year by 2026-27, whereas in Scotland the negative projected effect of tax devolution is expected to reach £355 million a year. If the separate rates block grant adjustments were implemented in Scotland, although there would still be a reduction in Scotland, there would still be a deficit. It would be £271 million, which is still high, but it is £84 million less than it is currently projected. A couple of things. First, are those figures based solely on the type of block grant adjustment, or are those based on economic growth impacting on those figures? Advocating that Scotland should go down the road if possible or lobing for block grant adjustment powers for separate tax rates? I can briefly answer that and then bring my colleague Gita into the conversation who has been working very much on his forecasts as well. The key point is that this is all forecasts, of course, and that is really important because we are living through very extraordinary times in terms of the fiscal arrangements. Income taxes that the last panel said are very new in Wales, but they are less than that. April 2019 was when the Welsh rates of income tax came in, so we are dealing with a very short amount of data. We are also relatively unclear in the Office of Budget Responsibilities involved tax reports. In the Welsh case, the OBR do the forecasting for taxes and the BGA adjustment forecast, the UK forecast. We have the same organisation doing the forecast on both sides, but it is not particularly clear what is driving the future forecast that Wales will do better on income tax. Whether that is growth in the Welsh economy relative to England or what have you is a relatively little indication. What we do know is that the personal allowance freeze of the UK Government at the moment will relatively help the Welsh tax base, as I mentioned, with very dependent on incomes at the lower end of the scale. Although it does not help tax payers for the tax-based perspective, personal allowance freezers will relatively help the tax base. As the previous panel mentioned, there are some elements of protection because of Wales's large number of public sector employment in Wales as a percentage of the tax base that has been relatively shielded and being a operative word during the pandemic. At the moment, there seems to be an indication that Wales will be doing better on income tax in the next few years. What we do know is that our replacement for the stamp duty is performing above estimates. That is a healthy growth in that price for recovering more quickly. I do not know whether I want to come in on any of the forecasting points on that. Yes, sure. It is based on forecasts by the OBR. As I said, it is not entirely clear what is thriving—the apparent data forecast for Wales compared with England and Northern Ireland, to the block on adjustment. Of course, in Wales, it is early days compared with Scotland. We have only had one out-in data in the first year of the evolution, as in 1920, as opposed to three years in Scotland. It also reflects tax policy changes by the Scottish Government, which is important to mention, and the different assumptions that are being made by the Scottish Fiscal Commission against the OBR. The OBR is set to publish more analysis on the forecasts of the Welsh share of the income tax revenues in future years. It will be publishing it soon, which should shed more light on the assumptions that it is making about the relative growth in Wales. On the second question of whether Scotland should be advocating for that, there are four separate block-on adjustments. What we show in our projections of the different models based on the out-in data and on forecasts is that, as you said, it is still projected to have a negative effect, even if you control for the population that is accounted for relative population growth, and you introduced separate block-on adjustments. It is a slightly improvement, but it is still a downward trend. That is probably reflective of Scottish specific factors. It may be perhaps what is happening in the north-east of Scotland and the oil and gas sector. The question of then is what is a fair amount for the block-on adjustment to be. Another way of thinking about the block-on adjustment and what it should capture is the revenues that are being foregone by the Treasury because of tax devolution. That is a noble after the point of devolution because of tax rate changes, but the block-on adjustment has probably been growing faster than the revenues that were foregone by the Treasury. Having a separate block-on adjustment might be a way of bringing you closer to the revenues that have been foregone by the Treasury over recent years. In other devolved areas around the world, they often reset situations whereby every five or seven or ten years they have reset the baseline that was touched on briefly by the previous panel. To take into account major changes in structural issues such as oil and gas in the north-east of Scotland, which others have mentioned today including yourselves, is that something that you feel is something that should be built into any future agreement between Scotland and England and indeed Wales in England, but Wales in the UK, I should say, or Scotland in the UK? I wonder if I could ask him to do it on this point. I guess that there is another difference between Wales and Scotland. If you look at the data for the last 20 years, there has not really been any major divergence or convergence in Welsh economic performance compared with England and Northern Ireland, so that might be less of an issue in the Welsh case. Whereas in Scotland you have factors that, even though the output per person is probably closer to the UK average, you have had friends of relative convergence in the first part of devolution and then relative divergence away from the UK average. As you said, if those data factors are not in the control of the Scottish Government because of the different make-up of the tax base, for instance, there is a case for limiting the effect of that on the budget. Of course, that could work both ways. It had tax devolution occurred earlier in the process of devolution, but the Scottish budget might have benefited and then a reset would have taken money away from Scotland. However, if you are looking at exposing the Scottish budget to risks outside of the Scottish Government's control, that could be an option of a reset after a period of time and limiting the divergence in the Scottish budget. However, as the previous panel alluded to, it was very difficult to know what that reset should be and the extent of changes should be after the fact. A reset has to be based on fairness to both sides. It cannot just be a situation whereby Scotland or indeed if there was one in Wales always benefited, it would have to be on very specific criteria. That is something that perhaps should be looked at. What impact do you think the difference in the powers that Wales has, relative to Scotland, has had in terms of the impact of the block grant adjustments? Wales is much more limited powers. You talked about, for example, in property that the price has probably gone up more than was anticipated. That has helped in terms of some of your land transaction tax or stamp duty land tax. What impact do you think the Scottish experience has encouraged or discouraged Wales to perhaps seek more fiscal powers? In general, Wales has been in Scotland's slipstream on a lot of the fiscal developments. The Welsh Fiscal Framework had followed a similar approach to the negotiations that Scotland has had. We learned a lot from the work that was done in Scotland from right back to the Kalman commission. Our tax, as we mentioned in the report, is, ironically, probably the longest lasting, at least on the income tax side, the longest lasting legacy of the Kalman commission is probably the income tax system that is currently operating in Wales. We have learned a great deal from the Scottish experience. That is when we looked at the numbers on how, whether it was IPC or Comparable Method, whichever of the models that work for the BGAs in Scotland, when we looked at their implementation in Wales, we were concerned about the impact at the bottom end of earned incomes. That is why there was quite a divergent outcome of the Welsh fiscal framework, even though it was obviously inspired by the Scottish experience. That was an element in which we often criticised the way that the UK Government conducts its negotiations on a bilateral basis, rather than multilaterally involving all the Governments of the UK. However, on this occasion, having the opportunity to have Wales-specific elements in the framework was quite important in the outcome that you see so far projected from tax evasion in Wales compared with Scotland. I think that Wales may have learned from Scotland, but it is now certainly time that Scotland will learn from Wales and its experiences. I think that, certainly in terms of the block grant adjustment, it is a real eye-opener in terms of what has happened with regard to the separate tax rates. I am going to open up to colleagues in a second, so I am just wondering if the Govevskir report, review and so on will go on for some months. I would hope that, certainly, we might be able to speak to you again further down the line in yourself to good talk, but if you could make one change—if you are the Scottish Government, you could wave a magic wand and you could make one change to Scotland's block grant adjustment—what would it be? I wonder if I can pass that to get to it to start. Well, body swear. I think that having some recognition and the block grant adjustment that there are risks here that are outside of the Scottish Government control and over the past, since the start of tax deviation in Scotland, the effect of what has happened and the secular decline of the oil and gas industry during recent years, having some adjustment for that, by introducing a different block grant adjustment methodology. I think that that is probably the key ask that will be from the Scottish Government. Is there some recognition of the fact that it is outside of the Scottish Government's control? I am going to open up to colleagues, and the first colleague to ask questions will be John, to be followed by Daniel. I was interested in reading the paper about the extra 5 per cent that Wales gets if there are changes in the barat formula. Correct me if I am wrong, but the barat formula basically reduces the need-based element when extra funding comes up, but Wales has managed to counter that with this extra 5 per cent. Could you maybe explain a little about the history of that? I think that there was a suggestion that the figure should be 15 per cent, so can you tell us how we ended up at 5 per cent? We mentioned in the reports that, about 12 years ago at this point, the Welsh Government had set up a review commission chaired by Jerry Holtham that had looked at the operation of the barat formula in Wales and across the UK. It found that if Wales were to be treated as a region of England—in other words, to have the formula allocations through which funding England is distributed by the UK Treasury—Wales was underfunded relative to how it would be treated as a region of England. That was correct at the time, because during the first decade of this century, there had been a large increase in spending, which accelerated the so-called Barnett squeeze and the convergence of spending per capita in Scotland, Wales and Northern Ireland down to per capita levels in England. That had been one of the boosters under, if you like, during that first decade of devolution. At that point in time, a great deal of concern shared across parties in Wales that Wales was relatively underfunded as a result of the Barnett formula in a way that the other parts of the UK—non-formal of spending in England but also Barnett formula spending in Scotland and Northern Ireland—were not. That has been a long-standing cross-party concern in Wales for the past at least 15 years around how to address the relative weakness in Wales of spending through the Barnett formula. The 5 per cent multiplier was a way of giving, if you like, the carrot to the Welsh Government accepting the stick of the comparable model in terms of its fiscal framework negotiation and the agreement for that. In technical terms, in the agreement, the needs-based multiplier is a misnomer because there is no need calculation at all. It is simply a number that is inserted into the fiscal framework, a zero sum bargain between the Governments. It says that it is 115 per cent, therefore that every single Barnett consequential would be topped up by 15 per cent. However, that only kicks in once Wales's spending per capita converges to below 115 per cent of the level in England. We think that that could take many years to happen. It is currently at 120 per cent. For the period in which it does not drop below that level, the multiplier is 5 per cent. It is lower of course than the multiplier that is expected in the long term, but it is still a very considerable boost to the Welsh budget, particularly given the extraordinary amounts of money that has been pumped into the block grants as a result of Covid-19 funding. That is very helpful. The 5 per cent sounds a little bit arbitrary. I think that you said that there is a deal between the two Governments. We have a problem sometimes in Scotland that the two Governments do a deal, but the two parliaments, or the Senate or whatever, do not get a lot of a look in. Was that broadly what happened in this case? What was the feeling, what was the reaction of the Senate, did they feel that they should have pushed for more than 5 per cent or whatever? As in the Scottish case, this was a Government to Government agreement and the results of which came out in the publication of the report. As in the Scottish case, there was relatively little parliamentary input to that. It was such a departure from the Scottish agreement that it was somewhat unusual. There was not a baseline from which to analyse the 5 per cent needs factor, because that was a totally new innovation compared with the Scottish agreements. There was not a huge amount of discussion in the aftermath of that, about what that would mean. We now know that that has meant quite a significant amount of resource into the Welsh block grant, compared with the situation in which tax dilution had not happened and the fiscal framework had not been agreed. That is great. To move on to a slightly different area, if you saw a previous session, there was quite a lot of discussion about the amount that we can put into reserves, the amount that we can take out of reserves, how much flexibility we have got at the end of the year. We are certainly in Scotland feeling quite constrained by all of those things. During Covid, we were not allowed to switch any capital spending into resource, even though it might have made some sense. Are those issues relevant in Wales as well? I wonder whether Peter MacDonald would like to come in on that point. Yes, it has been a concern in Wales, especially during the past two years, with the massive in-year changes to the Welsh budget, especially before the funding guarantee last year and this year. The Welsh Government did not have a heads-up on how much it had to spend. From our perspective, when scrutinising the Welsh Government's response to Covid, it was very difficult to understand what the Welsh Government's fiscal firepower was, if you like, which made it difficult to assess whether it was doing an effort or whether it was fully utilising what it had. It did not know themselves to a large degree, and that meant that it had to keep funding in reserve, as well as that it was later in the financial year. Outside of Covid-19, a few years ago, we submitted evidence to the working group on the Scottish Fiscal Framework Review. We compared the levels of reserves powers and throw-down levels and capital borrowing powers of Wales and Scotland. We found that, in absolute terms, the amounts were smaller than Wales. If you compare it to the size of the devolved revenues and how much devolved revenues, the Welsh limits seem to be slightly higher than or significantly higher than what Scotland had. If you compare it to the total revenues and if you think that the budget management tools and borrowing should be reflective of the devolved taxes that you have, there is certainly a case for increasing the Scottish limits based on the Welsh Fiscal Framework Agreement. Of course, the different Fiscal Framework Agreements happen at different times and at different chancellers who had different fiscal rules and different focuses on borrowing, and that has certainly been a massive change in the Treasury's fiscal rules from 2016 to now, so maybe that will be reflected in the review as well. That is very helpful. Thank you, convener. I will leave it at that. Thank you very much, John Daniel, to be followed by Douglas. Thank you. I have my thanks for the paper. It is extremely interesting, in particular, figure 3.4 showing the impact of the different models applied to Scotland. I wonder whether there is a question here of whether the Scottish Government needs to be careful on what it wishes for. Very often, when we hear discussions of the Fiscal Framework and the Welsh example, the assumption is that the indexation for separate bans would be in addition to the existing IPC model, which would, of course, reduce the negative consequences. If you look at the grey dotted line on your graph, applying that model but the comparable method would actually see us significantly worse off. Indeed, I wonder if the points that you were just raising with John Mason need to be added into the mix. That is not necessarily in isolation from the Barnett formula on the block grant either. The issue that John Mason was raising there is the sense that the end point of the Barnett formula works towards Wales. However, if you look at what the Barnett formula currently delivers to the nations, Scotland essentially ends up the best off from that side of the equation. Should we be careful what we wish for, both in terms of application of indexation of separate bans and that you could end up having the comparable method, and is there a risk that Scotland reexamination of Barnett and how that applies to Scotland as well? Yes, and thank you for the question. Of course, the choice of the block grant adjustment method is the most important for the whole upcoming review and negotiations to come. It is obviously at a macro-political level as well as the technical aspects that we can forecast in reports such as those. What is interesting that strikes me in the graph and in the analyses of the different methods shows the relative degree of risk on population versus on the tax base, the composition of the tax base. Wales has a relatively slower growing population. Historically, it has not been pronounced that slower growth as in Scotland. However, in contrast, Wales has a weaker tax base and is more dependent on the basic rate than is true of Scotland, so it has a different balance of where the most important adjustment to the block grant adjustment should be. If you were to negotiate the continuation of index per capita and add to it the three separate BGAs for income taxes in the Welsh model, that would of course be the most preferable outcome for the Scottish Government and Scottish budgetary perspective. On the treasuries side, certainly in the Welsh fiscal framework, the mantra was about consistent treatment of population on both the expenditure and the revenue side. In any negotiation, the treasurer will be asking about the differential treatment of population, and that certainly came up in the Welsh negotiations. One of the reasons that the comparable model was so important to the treasurer and, as a result, there were adjustments made that benefited the Welsh side of the ledger as well in those negotiations. That is helpful. In the interest of time, I will not ask any other questions, but if you are wanting to add anything into it. On a wider level, it would be beneficial if the reforms happened on a UK-wide basis in their first principles approach to spending and revenue sides, but they did not do that. It was pretty much ad hoc arrangements being bilaterally negotiated between Scotland, the cross-Scottish Government, the UK Government and the Welsh Government and the UK Government in Northern Ireland, where their fiscal commission now is perhaps going down the same route. There is no UK-wide thinking through how needs should be assessed and what spending levels should the block grant reflect. The needs-based factor on the Barnett formula for Wales was almost an admission by the UK Government on the treasurer. The needs vary across the country differently, but it did not reform the Barnett formula for Wales in a way that made sense across the board. It is an arbitrary figure of 5 per cent for a transitional period that could well last decades. That needs-based assessment was based on the Hawthorne Commission's report, which, in turn, was some data from the 2001 census. There is certainly not been an appetite of Welsh needs. I will go about it to your point about the Scottish Government. Maybe you keep being careful for what it wishes for, but I believe that it was one of the Smith Commission's first principles that the Barnett formula should be capped. In an ideal world, that would be looked at in the round, but because the VAR and the Smith Commission principle of keeping the Barnett formula are stuck with that in a way, it is in a bit a discussion of block grant arrangements on the spending and tax. Thank you, convener, and thank you for your submission. It has been very helpful. From my attention was figure 3.2 and 3.3, which is almost a mirror image between what is happening in Wales and what is happening in Scotland. You mentioned many of the risks that Scotland has, but you mentioned the decline in oil and gas, but I guess that there could be other factors in there as well that would draw that figure down as well. Is that right? Yes. At the moment, it is relatively unclear about what is driving the income tax growth and the out years in particular in the Welsh forecast. That is partly the relative protection public sector in the pandemic being the operative word. It is partly about the policy changes that are not yet built into the Scottish projection because the Scottish Government has not given a long-term forecast on where the thresholds and policy changes might lie. However, given the freezing of the higher-rate threshold and the personal allowance threshold, Wales's thresholds match those in England. Relative to Scotland, there is forecast growth in the out years, but the OBR is relatively unclear about what is driving that. One of the benefits of having an organisation like the Scottish Fiscal Commission that can do a lot of bottom-up work in analysing the tax base of the granular level in Scotland is that the OBR is much more of a top-down forecast. Of course, it is considering the Welsh forecast, but it is less bottom-up and granular in the Scottish case. The Welsh Treasury and the Welsh Government have talked about doing a detailed investigation of the trends in the future and in the out years. Obviously, as you can see on the graph, they are very important in driving what is projected to be quite a positive benefit from tax devolution. More certainty at the moment is the positive change on the land transaction tax size. That is our replacement for stamp duty, where we have seen faster price growth in Wales as a result of the pandemic. A lot of people wanting to buy homes out of the big metropolitan areas of England were seeing house price growth, and policy changes are driving quite a lot of that growth relative to England and relative to a situation in which taxes have not been devolved in the first place. It is good to hear that the Welsh Government is doing a detailed analysis to try to understand those figures. I guess that the Scottish Government should be doing something similar to try to understand the figures in a negative way. Sure, but of course you have the Scottish Fiscal Commission, which is what we do not have in Wales. The OVR does all that detail granular work that is done in Scotland by the Scottish Fiscal Commission. The Welsh Government does not have that resource, so the Treasury will have to be involved in those types of analyses. It is obviously very important in understanding what the impact on your budget is going to be in the current couple of years, but in the 2025, 2026 and 2027 as well. That may also inform policy changes to try to stop the reduction in budget that we will see over the next few years. Sure. Of course, there are some elements that are outside the control of the Scottish Government. There are some elements that are within the control and are those types of policy areas that lend themselves to long-term planning such as deals, education, migration and so on and so forth. Okay, great. Thanks, Camila. That's all I had. Thank you very much, Douglas. Thank you very much, convener, and thank you to Edd and Guto for the paper. I would echo the sentiments of everyone else. It really is excellent. I have a quick question on how you view that the separate BGAs per income tax band have been beneficial for you, given what you have outlined about your difference in your tax base and what you see as the primary benefits of that going forward in the light of post-Brexit immigration restrictions. It is just quite a general question. Whoever wants to answer is fine. Perhaps we can both give our views on that one, because I think that it is a really interesting point. As we mentioned in the paper, the three block grant adjustments for income tax are absolutely fundamental. They are the only reason that we see the positive growth in our income tax relative to the block grant adjustments, because the incomes are so important in Wales at a basic rate. It is a way to protect Wales as a budget on the impact of changes that have a disproportionate effect. Of course, they are outwith the control of the Welsh Government, because the thresholds and the responsibility of the UK Government—the UK Government's decision can have a direct negative effect on the Welsh tax base—were it not for the three block grant adjustments that take into account the very different make-up of the tax base. That is very important, because, originally, given that Wales we know as Northern Ireland is a relatively poorer part of the UK, there was a lot of concern about whether more reliance on our own source tax is what would that mean for the budget? That is the way to make sure that tax devolution can work in a fair way in Wales. Migration is very important in terms of how the overall pattern of the tax base looks. Freemovement would often have young people moving to the big metropolitan cities of England, but it is potentially the case that migration has been lower as a percentage to Wales than it has been to the big metropolitan cities of England. Potentially, there might have been a relative short-term benefit relative to England as a result of the three-movement issues. However, that does not last into the future, because we know that migration policies will be very important in terms of the education base of the tax base. One of the main reasons that Wales has a poorer tax base is that it is a relatively lower productivity compared with the rest of the UK. Reducing that productivity gap and raising wages is key in the long term to raise Wales's tax base. I am sure that that is true in Scotland as well. We have relatively small short-term adjustments when we look at the impact on the block grant adjustments to what we are raising in revenues in Wales. In the long term, migration and retention skills are very, very important in that long term. There is no feather dog. Is that you, Michelle? Is your dog out of view at the moment? Will Michelle be back? Are you joining us, Michelle? I am sure that everybody was talking about the barking that came out of nowhere. Thank you very much for that, Ed. Guto, have you got anything to comment? That is the only question that I have. I will quickly answer the benefit of the block grant adjustment. It is a bit too early to say for Wales, especially because we have only had one year of about in-date data. We can say that we did modelling of the effect of that. Had it been in place since about 2010, it would have cushioned a lot of the growth that the Welsh tax base had in place in previous years. It is interesting that, since full tax devolution in Scotland in 2016-17 onwards, the relative growth in the additional rate in England and Northern Ireland has been a lot higher than the rest of the tax base. It has been driving a lot of the growth in the overall tax base in England and Northern Ireland at the very high end, which is quite interesting. Having set block grant adjustments would have cushioned the Scottish budget somewhat during the past four years, because the additional rate tax base is a smaller share of the Scottish overall Scottish revenue. Even if it had grown higher incomes in Scotland and grown in England and Northern Ireland, that would not have had the same effect on top-dull revenue growth. It would have been beneficial to the Scottish Government to have that during recent years. Thank you, convener. Okay, thank you very much. That is exhausted questions from the committee, but I have just got one in myself to finish off. In section 2.3, you listed how in the last seven years Wales has gained four taxes in full devolution of non-domestic business rates, land transaction tax, landfill disposals tax, wealth rates or income tax. I wonder if we look at the entire tax structure in the UK. There is still a huge amount that is obviously reserved to the United Kingdom. Savings and dividends, income tax, VAT, national terms, fuel duty, alcohol and tobacco taxes, inheritance tax and so on. Where does Wales go from here? Is Wales settling in with the taxation regime that it has and seeing how things progress or is Wales looking to see if it can devolve further taxes? Thank you for the question. On that question, of course, it is that intersects with politics naturally where the questions about the relative balance between reserved and devolved powers, both in the tax area and also more generally. As you can see from the list of taxes that you mentioned, they are very familiar to the Scottish audience. Even though we have had our own commissions, the recommendations that have subsequently been implemented by law have tended to follow the models laid down a few years prior in Scotland. In many ways, the range of possibilities for tax devolution in Wales is limited by what has gone prior in Scotland. I would use the term of Scottish slipstream in that Wales would not necessarily gain all the powers that have been devolved to Scotland, but it sets the kind of menu of options that might be chosen from in a Welsh context. One of the areas in which politicians of various persuasions have been looking in Wales is on the income tax powers, because that is an area in which Scotland has much more extensive powers, constrained by the block grant mechanisms that we have been talking about, but particularly over the changes to the threshold and the fact that all non-saving, non-dividend income is devolved to Scotland. That is logically the next step in the Welsh tax devolution journey, although it is entirely integrated with politics on whether or not those types of developments occur. Particularly if you were to model an income tax system, you would not pick the bands and thresholds that we have for Wales at the moment. We have UK thresholds that, given Wales's relatively lower incomes, do not match how you would model a progressive tax system given Wales's incomes. Thresholds are one of those areas. You mentioned others that have obviously been evaluated in the Welsh case, such as corporation tax, VAT, aggregate levy, air passenger duty—a number of those taxes that have often been brought up. In the context of the difficult inter-governmental relations between the countries of the islands at the moment, that is a very much a political question, as well as a fiscal question. I do not want to really intrude on too much on political things. I mean, I think that Scotland, obviously, is a corporation tax and potentially a share VAT. Assignment might be something that happens here, although I would be quite keen on alcohol and tobacco, due to despair, but I certainly hope that we are given some of the issues that we have to deal with in relation to those matters. At this point, I just want to thank you, Ed, and I am also good to hear Evans today. I also want to apologise for delaying you by some 30 minutes because of the previous session, so I really do appreciate your patience. The committee will consider the next steps of this work once the UK and the Scottish Government have agreed the terms of reference timetable and authorship of the report. We may invite Ed and Guto back. We did not spend a lot of time asking questions mainly because I believe that the report was so detailed and we already had so much of the answers before us. Thank you very much for that. I will now have a two-minute break while we go into private session to discuss what programme and members would log on via the MST and the MS Teams link in their calendars. We will now close this public part of the meeting.