 Good morning, colleagues, and welcome to the 18th meeting in 2018 of the Finance and Constitution Committee. The first item on our agenda is to consider the Scottish Fiscal Commissions economic and fiscal forecasts that were published last week to accompany the Scottish Government's medium term financial strategy. I welcome to the meeting for that purpose Dame Susan Rice, who is the chair of the commission, obviously, David Walsen, a commissioner, Professor Alasdor Smith, the also commissioner, and John Ireland, who is the chief executive of the commission. I welcome our witnesses to the meeting. I invite Dame Susan Rice, if she wishes, to make an opening statement. Thank you very much, convener, and good morning to all of you, and thank you for asking us back. Last Thursday, we published our second report containing our economic and fiscal forecasts for the next five years. You might hear other numbers this morning, but five is the number to remember, because this report is five pages shorter than the last report, but for the absence of all doubt, I'm not about to forecast a trend in the size of our reports. With this report, we mark another milestone as it's our first summer report, all part of the new budget process. Our winter forecast, as you know, will be used by the Government in preparing its budget, and our summer forecast can be taken as the first step in looking forward to the next year's budget, but it does not in itself affect the current year's budget. Winter and summer forecasts are two new terms to remember, alongside the number five. We will also continue to publish our forecast evaluation report every September, and we anticipate the upcoming report this year will be especially interesting, as HMRC will publish its first full estimates of out-turn income tax liabilities for Scotland over the summer, and we will obviously be analysing that and incorporating that into our September report. According to the current report, which lays out the central forecast for use by the Government, all the forecast tables and charts in spreadsheet form are posted on our website, which means that all of you in your spare time can go in and play with them, if you'd like. Let me highlight now just a few headlines from the report. Last December, we described the outlook for growth as subdued. Our view now of the overall outlook is broadly unchanged from December. The economy is growing, but the rate of economic growth has been slower over the last decade than historic average rates. Our view remains that this pattern of slower growth is likely to persist over the next five years. Nevertheless, unemployment is expected to remain low, with employment continuing to increase over the same period. Since our previous forecast, we have done further analysis of wage growth in Scotland. Real wage growth has been weak over recent years. Real wage is lower now than it was a decade ago. As a result of this new analysis, we have revised down our outlook for real wage growth in Scotland. We anticipated to fall by half a per cent this year before gradually levelling off in 2019 and then starting to grow very slowly from 2020 onwards. In line with this revision to the outlook for wages, our income tax forecast has also been revised down from the previous forecast by £209 million in 1819. That is about 1.7 per cent of total liabilities. Do keep in mind that that is against tax intake of about £12 billion for income tax. This report also contains detailed forecasts for tax receipts and devolved social security spending, including our first costing of the Scottish Government's planned expansions in social security, so the carers allowance supplement, now planned to increase in line with inflation, will cost £46 million by 2023-24. At the time when the Scottish Government provides further details on other benefits to be devolved and expanded, we will cost those. We have also been supporting the Scottish Parliament in its scrutiny of Scottish Government tax changes. Most recently, we published a costing of the change to group relief at the same time as the secondary legislation will continue to operate in that way. Finally, the commission is also required to assess the reasonableness of the Government's borrowing plans. On the basis of the information that the Government provided us, together with their projections, the plans are within the limits set out in the fiscal framework. We do, however, note in our report that the Government can only continue to borrow at the rate that it has done until 2022-23, thereafter the aggregate cap of £3 billion will be reached and will limit future borrowing. Those are our headlines, and we are now very happy to take your questions. Thank you very much for the opening statement, and I know that I said that we need to put some stuff on the record. We have seen what you have said in the narrative substance of the reports, but your income tax forecast is now £209 million lower than it was in 2018-19 than it was in December. That is only four months ago, so what has changed? For the December report, we spent a lot of time analysing productivity, which is one of the big factors that influences the economic forecast. Since then, we have done a lot of analysis on wage growth, and I mentioned the understanding from that analysis that wage growth is really quite low. That affects the overall economic forecast that necessarily feeds into the income tax forecast, because, if there are lower earnings, there is less tax paid, which is a very simple way of saying it. Can we try and get a bit underneath about that analysis and what data drove some of the outcomes and some of the judgments, so that we can understand a bit more clearly about why there is that lower projection on wage growth? Does somebody want to pick up the detail on the data? John or Alasdair, go ahead. There are two main elements to it. One is that we have done further analysis of wage growth within the macroeconomic forecast, reflecting the fact that wage growth has been low for the recent 2008, and lower than one might expect. In our last report, we put a lot of effort into discussing productivity. As we have looked further at real wage growth, we have observed that real wage growth has been low, even relative to what one might expect in relation to productivity. The overall picture of the last 10 years is of very low wage growth, and we have taken that more fully into account in this forecast than we had done previously. The second major element is that, in the last year, real wage growth has been particularly low—negative, indeed. For the next couple of years, that is our starting point. Those are the two elements of further analysis and recent data, which push us in the direction of expecting real wage growth to be lower than we had in the previous forecast. Susan Stewart said that it is a huge amount, but it is sufficient to have a 1.7 per cent effect on the income tax forecast. I remember when you came in front of the committee in December, or just after the December report, the committee was asking questions at that stage around the wage growth issue, because you had projected better wage growth in Scotland compared with the rest of the UK. Therefore, in terms of the overall impact, left Scotland in almost the same position as the rest of the UK in terms of tax take. However, I still have not got a feel yet for what change between December and now in terms of the data that you were looking at. What was that analysis, so that we can understand a bit more clearly about exactly what was going on? Although it is only £209 million, as you described, £209 million is still potentially £209 million in the longer term of public expenditure in Scotland. One of the issues that we face with wages in Scotland is data availability. There is no headline series for real wages, so we have to use a number of different sources. If you look at the main report on figure 2.3, you can see what we have done is potted some of that data for Scotland, the two measures that are available for Scotland and similar measures for the UK. First of all, it is a matter of interpreting two or three different sources of wage data. We have done that. We have also had some new data, an additional data point, so we have taken that into account. The main thing that is driving this analysis is that we spent some time looking at how real wages have moved in relation to the standard things that drive real wages in economic theory, our productivity and labour market slack. We have done some work looking at how real wages respond to labour market slack for the extent of unemployment and to productivity changes, and we have thought about whether there are any other breaks on the evolution of real wages. We have done some work that tries to give us a sense of that, and that allowed us to reconsider our forecast. If you look again at the main report, you can see that there is a figure that tries to capture that figure 2.5. I am just looking at that. Murdo, do you want to go on from this stage and put that on? I will come back. What I would like to understand is the issue of wage growth. You said that, back in December, you expected that wage growth would match the rest of the UK. I will now revise that view, because you are now accepting that GDP per capita and productivity will grow in Scotland more slowly than the rest of the UK. It seems quite a radical change to make in quite a short space of time, and I was wondering if you could explain a bit more about your reasons for that. I think that the simplest way to say it is that we have analysed further the information to hand and have made judgments in terms of what that means. That is why a change comes about, because we have more information and more evidence that we have put into the forecast. I understand that, but the consequence of that is that, because of the revision downwards, combined with revisions in the OBR figures, which affect the block grant adjustment, means that for the current financial year, the Scottish Government's budget is facing a black hole of nearly £390 million, which is a substantial chunk of money. We know that it does not have to be met in this financial year, because we know that there is the opportunity to defer that until the final figures are available. Nevertheless, it is a real challenge for the finance secretary who will be hearing from very shortly. Do you have any reflections on this process and what this is going to mean in future in terms of forecasting and its impact on budget decisions, if such a short space of time, such a large differential, can appear in the figure? In an overall statement, and I will ask David to give me more detail, but this is in the nature of forecasting that there are changes that come up and down. We see that with the OBR forecasts, if you go back, and it will happen with ours as well. David, do you want to amplify that? I will build on what Susan said. In terms of the last OBR forecasts, I think that they amended their income tax forecasts by the order of about 2 per cent, ours was 1.7 per cent. In most contexts, a revision of forecasts of the order of 1, 2, 3 per cent would not appear to be a major or significant issue. In the context, in the Scottish context, when we are dealing with income tax of the order of £12 billion, then inevitably, a revision has a significant headline number, and we fully acknowledge that. I think that just responding more directly to your questions. First, we do recognise that we have adjusted a downward revision to our income tax forecasts, which is because my colleagues have said that they reflect the further analysis that we have been able to do and our further understanding of the full implications of our wider economic assessments and the GDP forecasts that we have made and what that will mean in more detail in terms of income tax forecasts. Further analysis, further data and improved assessment on our part has led to this downgrade. I think that in terms of the specific issues about the budget, then just to recognise and maybe just to clarify the nature of our forecasts and the nature of the medium-term financial strategy, this is very much the first stage of the setting for what will be next year's budget, so those forecasts in themselves don't affect the funding that the cabinet secretary will have available during the year, and the actual setting of budgets will be based on our next forecasts in December. We fully acknowledge that we have downgraded the assessment, and we have taken into account better information in doing that. We think that it is a more accurate and fuller assessment, but in terms of having to find additional money or adjust the budget, that would not be the case, because those are the initial process of the new budget arrangements. No, I understand that, Mr Wilson, completely, but if your forecasts are correct, it will mean that when the out-term figures come out, there will be a reduction in the amount of money of around £400 million, which is a chunky sum of money even in the context of the Scottish budget, which either the finance secretary or a future finance secretary is going to have the job of trying to address. I think that it is worth emphasising that the out-term figures for what we are talking about 2018-19 will not be available for two years. I would be very surprised if we have to be realistic. There will be further forecast revisions between now and then. So that could get worse. Particularly because, as Susan said in her introduction, we will have out-turn figures for 2016-17, 2017-18 and before then, which will feed into our forecasts. If, just to pick up what you said, if it turns out in two years' time that the out-turn is £200 million done as we have forecast, then I hope that you will congratulate us on being two years ahead of the game in alerting the Government to the fact that the forecast is a bit more negative than we previously thought. I am still not totally clear on what is driving the change in the forecast in relation to wages. It is quite a serious situation for the cabinet secretary to be in, although, as Mr Wilson points out, it does not change the budget allocations for this year. If those figures turned out to be accurate, the combination of the income tax change plus the OBR forecast means that the cabinet secretary is nearly £400 million down where he started when he allocated his budget. It is important that the forecasts are robust. In terms of the wage growth, table 2.5 sets out four sources from which you take the calculation of wage data. It is sourced that there are four in-effects of different surveys. Is it possible to just talk through the changes in those sources that have driven the changes in your assumptions about wage growth? I think that table 2.5 is particularly key. It illustrates the issue that we have a number of sources. We have four different sources of wage data, all of which are collected in different ways and have different strengths and weaknesses. They produce quite a divergent picture of wage growth. In a sense, you could be quite simplistic and you could average those and come up with a number, or in a sense, you can make some judgment. What we have done is looked at the evolution of this data over a number of years. The data goes back a long way. Some of the data goes back to 2000 prior to that. In a sense, we have been able to have a look at the four data sources and how that has changed over a long period of time and a shorter period of time. We have come to a judgment about what we think is the underlying change in real wages. That sort of analysis combined with our judgment has led us to have an understanding of what we think the evolution of real wages is. We have done some further work, as I explained earlier, which tries to link that to conditions in the economy, to how much demand there is for labour and how much that is bidding up the price of labour or real wages, how much productivity increases are driving the change in real wages and an extent to which other factors may be influencing real wages. It is an awful lot of analysis. We have a lot of data in alternative data sources and there is no definitive series here. It is not like GDP where you can put your finger and say, it is that one. You have to look at all the sources and reach some sort of judgment. That is, in essence, what we have done. I am still not clear what new data has emerged in the last four months. It is a combination of new data in the sense that we have had an extra observation quarter of the observation. We have some, you know, these things come along at sort of different frequencies. So there is some new data and that has helped inform what we think is going on, but the principal thing is that we have looked at the sort of existing data in much more detail. So in a sense what we have been doing here is we have been thinking about the sort of key factor which drives the Scottish economy, productivity growth, and that is what we examined in December and we spent a lot of time in the rant to that December forecast looking at productivity growth. Now, in a sense what we have done is we have changed our focus of what we put a lot of our efforts in between December and now is looking at the evolution of real growth. So it is a combination of new data and it is a combination of additional analysis. Let me ask it slightly differently. Of the four sources in terms of wage growth for 2017, it varies from LFS forecast in a reduction of 1.5 per cent to ASHE, which forecast wage increases of 3.2 per cent in 2017. So there is quite a range there. You say in your note that the primary source of data for you and therefore I assume the priority that you give in terms of your modelling is the ONES source, which has an increase of 0.8 per cent in 2017. Now that is much less than the top two, ASHE at 3.2 per cent and RTI at 2 per cent. So you are giving greater waiting to, if you like, a more pessimistic view in relation to wages. So can you maybe just explain why that would be the case? If you want to use the optimistic, pessimistic flag and since there are two data sources there, the LFS one and the QNAS one, which is from the national accounts. Our judgment is that roughly real wages declined in 2017 by about 1 per cent each point. So what we have done is we have given more weight to the combination of LFS and QNAS in comparison to the other two. That is our sense. It is a judgment that these are the data sources that are probably capturing what is going on better than the other two. If I can add one point to reflect back on a reference that John made in an earlier answer, for me the strongest number to focus on is what is, or the strongest statistic to focus on is what is shown in figure 2.3 in our report, which shows the pattern of real wages. Using several different measures and the story there is that real wages now are lower than they were in 2009. This is a virtually unprecedented economic picture. We should focus on that story of 10 years in which real wages have not increased, not even in line with productivity. It is the analysis of that that is really driving it rather than focusing on what has happened in one year's statistics. What has happened in one year has played some role, but it is the long-run story about real wages that is the most important thing to focus on. Adam Scott has a supplementary question. As Dame Susan said at the beginning in her opening remarks, this is new for all of us. We are still trying, as you can hear from the tone and tenor of the questions, to understand the great science of economic forecasting and even whether it is a science at all. I am not an economist, I am a simple lawyer, so can I ask a simple lawyer's question about what you have just been talking about with James Kelly and Murdo Fraser? What we are interested in is what has changed since your last forecast. Is it the facts that have changed? Have you changed your mind about the existing facts or have you just realised that you spent an awful lot of time thinking about productivity last time around and not enough time thinking about wage growth last time around and you are just catching up? Which of those three is it? Are the facts changed? Have you changed your mind about the existing facts or is this just additional work that was not done last time? I hope that that is not an unfair question. As you can say, we are still trying to understand how this process of forecasting actually works. It is a good lawyer's question, that is fine. As John said, we have had a few more data points, not a lot, but we have had some more. They did not serve to change the perspective, so that is one aspect. When you talk about the science of forecasting, forecasting is part science and I like to use the word imagination because it is part judgment. We are making a judgment at a particular point in time. Since the last time you had forecast from us, we have seen what the OBR came out with in the middle of March. Part of what they say impacts part of our judgment in our forecast. That is new data in a more general sense. We are looking at no change in the rather uncomfortable numbers about wage growth. Any new pieces of data about Scottish wage growth have not gone in a positive direction. It is a combination of those things. It is not just one thing. It is not that we missed some data that were out there, that we forgot about or anything like that. It is not that, but we felt that it was worth. Partly you showed interested real wages back in December. We were very interested as well, and we thought that it was worth doing deeper and fuller analysis. That analysis was done by our colleagues in the commission, discussed at length with us as commissioners, and the judgment is what we have come out with. Patrick, have we got there or do you want to still ask a question in this area? Thank you. I would like to ask a little bit more about what you think is going on underneath the overall level of wage growth that you are forecasting. In particular, you have identified some factors that suggest that, while we will see very low wage growth for the next few years, it will rise again from 2019-20 onwards, including, for example, higher sector pay awards, increasing levels of productivity. You are saying that those factors will lead to stronger wage growth after that point or from then onwards. What is the reason for assuming that those factors will start to kick in at that point? I am looking at page 57 in the full report. I think that we are very conscious, perhaps going back to the earlier comments, where we are learning as we go in terms of fuller and better understanding alongside what is a changing situation. We are very conscious that what happened in 2015-16, which is coming through in the data as one thing, trying to interpret what is currently going on, is perhaps another. However, the core part of our forecasts is that the period of low-rail wage growth, the period of subdued GDP, which we have seen really since the financial crash, is continuing longer than anyone reasonably expected and is expected to continue for a few years yet. However, at the core of our forecasts is that, once we get into the second half of the five-year period that we forecast, we are forecasting an increase in productivity. In fact, in terms of looking at some of the numbers inside our assessments, there is quite a sharp increase in productivity compared to what we have seen over the past few years. That will lead through to real wage growth and others. On why, I think that most people are coming to terms with the fact that economic growth has been disappointing for at least 10 years. We are not getting back to the sorts of rates of growth that we saw before the financial crash. Fundamentally, I think that everybody who is in the business of forecasting thinks that it must get better than it has been. The debate is about the time and the extent to which whether and over what time period we will get back to earlier rates of growth. Our assessment is perhaps a middling one in the latter of the year. What is happening in the economy in terms of whether it is artificial intelligence, digital changes, further boosts and significant productivity improvements in manufacturing? There is a whole range of positive developments that are going on in the economy, which are in terms of the overall numbers being hidden by the continuing overhang of what happened with the financial crash. We do expect that to come through towards the latter half of the five-year period. That is what is impacting on increased real wages and increased GDP that we see at the end of the period. I have not heard many people suggest that automation is a fact that should make us optimistic about wage growth. The distributional impact may well be—those people who are working in terms of creating both the algorithms and the manufacturing of the robots and other things—the distributional impacts are a major issue, but technological change will lead to overall improvements in productivity that will impact on real wage growth at some point. That is what we expect to see. I hope that the algorithms do not start making themselves. I want to ask about distribution as well. There are some of those factors on the same page that you are suggesting clearly impact more or less at the higher or lower end of the income scale. Clearly, in order to link the wage growth projections into income tax projections, you are going to have to have a fairly clear sense of what you think the distribution of incomes is going to be. Are you able to say any more about that? Can you publish any more information that can allow us to generate some kind of projections about the impact of that on income inequality in Scotland? Formally, at present, we do not have a particular plan to publish a full assessment of the distributional implications of our forecasts, which I think could be a possibility. We have to take it into account because it is a material factor in affecting our forecast. That is certainly something that we could consider drawing out in a further publication, but we do not have a document in preparation at the moment, so that is certainly something that we could consider. It is something that you have to take into account, but then it does exist. That kind of assessment. It is a factor, one of the many factors that is implicit and partly explicit in the modelling work that we put together over the five-year period that we are talking about. The extent to which there will be any substantial shift in both the distribution of income and certainly earnings returns, we would not expect that to be a very major factor, but that is something that we could do some further work on and we could share that with the committee. Still on this issue of the wage growth forecast, if you do not mind please, are you saying that the downgrade in your forecast is mainly because of the LFS downgrade in its forecast? Is that why you have said that you have placed greater weight in that, Mr Island? No, I said that we looked at all those four measures in that table and the two that we put greater weight on were the LFS and CUNAS, so those two figures. It is much more a judgment of how all four have moved over time. With respect to the LFS forecast, I am looking at the data that might be responsible for the downgrade that the ONS table shows. There is a little bit of volatility in the Scottish figures over the last year, but the ONS itself says that the LFS forecast is perhaps the least reliable of all those forecasts. It refers to the data that comes to LFS being self-reported by employees and not employers, so it makes a little bit less reliable. Plus, LFS data can be supplied by proxy and not by employers or employees at all. The ONS itself says that the LFS is probably less reliable than the others, so does that not call into question your judgment about using that as a major reason for one of the major reasons? No, it was our forecast. I think that what I have been trying to be clear about is that we look at all four of those because each of those surveys has different strengths and weaknesses and you have identified one of the weaknesses of LFS. However, there are other strengths related to sample size and things like that. If you look at all four of those series, they all have strengths and weaknesses, so it becomes a matter of looking at the evolution of all four of them. The other thing that is really important here is that it is not about one figure, it is not about one quarter's figure, it is about how these have moved over time, which is why earlier in the… There is another figure, figure 2.3, which looks at the evolution over time and how they move together and how they move differently. What we have done is that we have looked at a very long data series here, not just one observation, and we have looked at how all four of those have moved and how they move together and how they move differently. That is how we have reached our judgment. It is a matter of trying to use the data that is imperfect and that each of those four sources has strengths and weaknesses and try to balance those things out. It just so happens that, for the particular quarter or year that we were talking about, it has that ranking. However, it would be incorrect to say that it is a simple one-quarter or one-year thing. It is much about the evolution of all four series over time. Now, there were a couple of people who said that they wanted to potentially ask supplementaries. Ivan, do you want to ask something in that series as well? I know that Neil was… I am not sure that I thought that I might be exhausted in this series, but obviously we are not Ivan. Oh, no. Thanks, convener, and thanks, panel, for going through this with us. I just want to clarify a few things that have come out in the discussion. We are looking at table 2.5, figure 2.3 and we are looking at the data sets that are there. Just to be clear, the data that is in there is what those organisations thought the out turn was, not the forecast, because we are talking about 2016 and 2017. In terms of wage growth percentages, you have got the table with the different organisations and the different percentages for two things. Sorry, sir. Survey, survey, survey. Yes, it is that. Table 2.5 is absolute data, yes. Correct, yes. So that is actual data, because I think that there is not going to be some confusion here about the forecast. So even when you look at that, there are four surveys there talking about what they think has actually happened in the past, not what they think is going to happen in the future. And even at that, the variation between what they think has actually happened is actually bigger between the biggest and the smallest than the variation in your 1.7 per cent you are talking about in your forecast accuracy. So even when you are looking at that and saying what has actually happened in the past, we still do not know what has actually happened looking backwards, never mind looking forwards. Right, but it is important to notice that the surveys are not looking at the same variable. So the RTIC is looking at average annual earnings, ASH is looking at gross hourly pay, LFS is looking at gross weekly earnings, full-time workers only. Each of them is different. It is not that they are giving four different answers to the same question. No, I understand that, but notwithstanding that wage growth is only something that we are measuring as a proxy, because what we really want to know is what the impact on income tax receipts are, because that is what goes in the budget. Wage growth does not go in the budget, income tax receipts go in the budget. The only reason for a measure on wage growth is so as we can figure out what income tax receipts are going to be. Yes, and that is one of the factors that impacts the income tax forecast. Yes, correct. As I said before, less earned, less tax paid. Okay, so notwithstanding the fact that they are all measuring on something different, you have still got to figure out the relationship between what they are measuring, which are all different, and they are all giving you a wide range of different numbers and what is going to happen in the future. The point that I am making is that, given that lack of stability and what has actually happened in the past, it is kind of not surprising that your forecast accuracy is going to have up to 1.7 per cent variation on it. It is even more complicated than that. Yes, because you are unprecedented times as well, so you cannot even lie on. What has been the part in the past? It really goes to, in a sense, the data that we have on income tax and income tax payers. So we have another data source, and this is the tax record of individual tax payers, and this is the survey of personal incomes, and this is the data that lies behind our income tax forecast. So we have a lot of data on individual people, and it is much less timely, so the data that we have is much older, and that is what we use to generate our income tax forecast. This data about real wage growth is then used to update rather old data, very detailed data, and that allows us to have a sense of where income tax is now, and then our forecast of wage growth is used to project forward that very detailed micro data, individual data, into the future. So there are a number of steps in this process. What I take as a degree of greater confidence is that we have individual tax payer data, or dated though it be, and that allows us to get a much better and richer understanding of income tax receipts. That relates to some of the questions that Mr Harvey was asking earlier about distributional effects as well. The point of this data on wage growth is basically how you project individual data forward. Given that we are struggling to know what happened in the past, it is not surprising that you are struggling to tell us what has happened in the future. You want the science, the art or the dark arts of forecasting. If you look at the stack tolerances, they are even more difficult, because there are a number of different factors involved as well. That is clear. Given that we are going to have unpredictability, the question then is how you deal with that. You said that 1.7 per cent is not unusual when we are talking about forecasting errors, and you talked about the OBR, I think, had a 2 per cent error in the current time period. Is there something fundamentally different there? You look at a UK level, are they just used to having to deal with that so that they can manage it better? Or do they have extra powers and the ability to deal with those shocks and those forecast issues compared to what is available to the Scottish Government? Let me just say that 2 per cent was 2 per cent up, and ours was 1.7 per cent down. You should understand that. I may be down next time. That is not the important issue. The issue is that you are going to get that variability in some times, in some times it will be down. It is how you deal with it. I think that everyone wants to speak to David John Alasdair. Clearly, at the UK level, there is much greater experience and undertaking budgets, managing various incomes and expenditure. The fiscal framework in Scotland is relatively newer, and we are all learning as part of the process. I am grateful for your acknowledgement that that is a difficult task, but it is the task that the fiscal commission was set up to do. Perhaps it is clear that, if I may, it is not inappropriate to quote the Government's numbers rather than ours, but in the MTFS it is very clear that, if you look at the uncertainty that they model in terms of income tax, our central estimate is using that document, but they estimate some high and low. They quote that net spending power could be between minus £400 million or plus £1.4 billion below and above our central estimate. That is the range of uncertainties in the MTFS. There is a significant range of protect pension income. Our role is to seek to give the best current estimate of how that will go forward, and that is what we are very much trying to do. I suppose that the question is that the UK Government, because it has more powers, it has a wider tax base, it has different taxes coming in, it has more economic levers, it has more borrowing powers and it is better to deal with those natural forecast variations. The Scottish Government has a limited scope of powers to deal with that. I think that the short answer to that is that the fiscal framework for the UK Government is different for a whole number of reasons from Scotland following powers as one, the fact that if there are forecast errors in relation to Scotland, the reconciliation is two or three years ahead rather than coming along at once. It is a very different framework and the ability of the different Governments to adjust to changes in income tax is different as a result. Are you still wanting on this, Neil? If we are saying that our liannans are slowing but there is still strong growth in our work, what does that say about living standards? Can we assume that that has been a relative reduction in living standards? We have made the statement that real wages are lower than they were a decade ago and real wages are when you strip out inflation what you have left to spend. I think that you can draw the conclusion from that. There is a partial upside, which is that we have employment that is very strong, unemployment that is decreasing and in fact employment is growing. That means that for those people who are willing and capable and able to work, there seem to be jobs out there. It is conceivable that, if employment is even fuller, wages may rise because there is pressure there. The downside of having high employment and lowering unemployment is something around capacity because if we saw a lot of investment happening and the need for other new jobs, which would then ultimately improve wage growth, we would need the people to take those jobs. It is not directly related to wages but, in paragraph 24 of your summary, it talks about real household disposable income. In the early years of the forecast, that is obviously a challenge. Obviously, Mark Kearney, the Governor of the Bank of England a couple of weeks ago, suggested that, as a result of the vote on Brexit, household incomes were already £900 less than they had previously been. In those circumstances, has there been any building into that? I do not want to make things worse and make it even more pessimistic, but has there been any building into the forecast of that description of Mark Kearney about since the vote, not about Brexit itself, because we all know yet that we do not know what that final deal will look like, but since the Brexit vote, there has been a £900 per household reduction in spending power. Was that factored into your materialist stage? In the economy forecast, we look at Brexit as one of the background factors. We make some general judgments but we can only incorporate information when we have specific policy, when we have specific data to hand and there is a lot of uncertainty. The real impact of Brexit is that there is a lot of uncertainty and therefore it leads possibly to less confidence in business investment and so on. We have not picked up a figure that the Governor has stated and do not actually know the basis for that unless my colleagues do. Brexit is there as a background factor that is creating a bit of drag on future investment. I would not imagine that the Bank of England, the Governor, would have said that without some sort of analysis, I am assuming that there was some sort of analysis that the bank had done. I think that they do and have a different role from ours. We have not made an assessment and I do not think that we would make an assessment based on a Brexit versus no Brexit sort of counterfactual. We do not do those sort of calculations but, broadly speaking, in our assessment, it might be worth checking on table 2, which is on page 42. That sets out our estimates that come out of the modelling work that we do of household consumption and, like real wages, that shows very limited increases over the period of the forecast, which is exactly what you would expect given the overall assessment, that there are clearly pressures in terms of household consumption as well as wages. I was not really thinking about what is coming. His comments were made on what has already happened. I am assuming that, therefore, come December, you will be able to look at that area a bit more in depth when you make your next forecast. In the expectation that we will have a lot more information about how Brexit is likely to unfold, our intention is to provide that the December forecast will incorporate a much fuller analysis of the effects of Brexit on the assumption that we will have a much clearer picture then. I think that we need to move on to another area now. Ash, my relation. Thank you, convener. We have obviously spent quite a bit of time there talking about the impact of the public finances of wages, but, from my perspective, underpinning that is the working population and the proportion of working-age population in economic times is really important. We know that it is not growing quite as fast in Scotland as it is in the rest of the UK. In your report, you have said that this place is a drag on growth in GDP in Scotland. I suppose that my assessment on that would be that it is difficult not to conclude then that it might be beneficial, at least in economic terms, for Scotland to control migration themselves, but I would not expect you necessarily to comment on that. In your report, for your calculations, you have said that you use the 50 per cent net EU migration variant of the ONS 2016-based population projections for Scotland whereas the OBR has continued to use the principal projections for the UK. Can you explain for the committee what is the difference between those two and why you have used the one that you have? Two things. First, in terms of the population projections that we use, we very much use the ONS and national records for Scotland's main projections, but they produce a variety of different variants of their projections. We chose to use what is called the 50 per cent EU version of those, so our forecasts were just that we choose one of the variants that they use. In terms of a bit of background, Scotland's population has not been growing as fast as the rest of the UK. In 2017, we tipped into a period in which there was a natural decrease in the population in the sense that there were more deaths than births in very simple language, so population is something that is very important in terms of our forecasts in Scotland has some differences. However, the key factor that has been driving faster growth in the UK and less growth in Scotland is different levels of in-migration. We have gone over a time period from—I checked back in the numbers—back in 1997, there was a net outflow of about 7,000 people. In 2006, there was a net inflow of about 30,000 in those each years. We have gone now to very significant levels of in-migration. To explain the specific forecast that we used, the principle projection for Scotland, as forecast by ONS and NRS, assumes an average net in migration of 15,000 people based on the recent historical trends. That will go forward over the period of projection. Given the Brexit vote and the possibility that there will be change in behaviours and a tighter immigration regime, the variant of that 15,000 only part of it is due to EU migration. The assumption is that that portion is due to EU in-migration and EU out-migration is effectively halved. That is where the 50 per cent comes from. It is not no in-migration or out-migration from the EU, but it is a significant reduction in the changes. What that leads to is that, rather than a net in-migration of 15,000 per annum, it reduces it to a net in-migration of 9,000 per annum. That works through the numbers going forward. We felt that that was a recognition of the downside risks in terms of Scotland's population of the vote to leave the EU. We made that. That was in our December forecasts and we have not changed our view on that in those forecasts. It may be different for that, but that is the forecast that we use at the moment. A little bit of information. You mentioned the word so-called working age population, which we call 60 to 64 because people are working beyond that. Those are the primary income wage earners. That is actually beginning to shrink. That population will start shrinking a little bit this year. We see that shrinkage to continue a little ways in the future. That also has an overall impact. Our birth rate, of course, is not enough to compensate for what happens at the other end. Various factors affect population. Thank you, convener. I just note my register of interests around house building. There has been a modest increase in revenue from that and there are a couple of anomalies around that. One has been a huge increase in sales over £325,000. Some attribute that to post the UK general election. Some commentators concluded that it was increased confidence for some of the diminished prospect of India ref 2. There is another anomaly in that just four postcodes in Edinburgh account for nearly 20 per cent of all LBT receipts. However, the overall trend has been that the number of transactions has dropped, contrary to what your prediction is. The question is again a backdrop of stagnating wages, growth and, in figure 2.3, the continuing fall in gross weekly earnings. Why are you still persisting with showing an increase in the number of transactions, albeit slightly diminished from your original forecast? I thought that your question was going in different directions, so I do not have that answer. Does anyone want to pick that up? What we are reflecting in the numbers is that we have seen more higher value transactions, which seem to be rather muted more recently in the past. Now we have seen more of those, and so that has increased the tax revenue that has come in, although we have seen lower transactions, particularly at the lower end of the housing market. These things may also just even out a little bit over time, but I do not hear the better answer. I will not have a better answer, but I will supplement that by saying that, first of all, the housing market is inherently volatile and difficult to forecast, and therefore LBTT is difficult to forecast. The way that one forecasts that is a mixture of looking at long-run averages, long-run trends and short-run behaviour. When you get new information that says that the housing market this year has behaved in an unexpected way and that prices have been unexpectedly high, or that transactions are unexpectedly low or that transactions are unexpectedly high at the top end of the market, that feeds into the forecast because it would be foolish to ignore the fact and to assume that what happened in 2017 was purely 2017. It would be natural to think that it might well continue to go on in 2018, but you also do not throw away the long-run information. New information does shift the forecast for the next period, but one year of new information does not have a big impact on the long-run forecast. To pick up what you said about transactions, we are not going to completely change our view of what a sensible forecast is for transactions because of one year's data. It shifts it, as is reflected here, but we still give a lot of weight to the long-run average, both in respect of prices and transactions. That is the way that kind of statistical modelling works. You are not seeing a relationship between transactions and earnings? No, in a formal sense, I am looking to John to correct me or add to it if that is not right. The housing market model is essentially a self-contained model driven by data in the housing market, and we do not have a big feed-in to it from the rest of the economy. Thank you, convener. Good morning, everybody. I am interested in landfill tax. I am aware that landfill tax is an environmental tax intended to incentivise waste disposal in landfill sites. Your report shows that all taxes are supposed to increase with the exception of landfill tax. I know that it is not just as simple as a standard rate for waste disposal and there is incineration involved. Can you clarify, just in terms of forecasting for landfill tax, will it continue to reduce? We believe that it will continue to reduce. There are some key factors that influence that. One of them is the rate of development of incineration in Scotland, because that takes a lot of what would normally or in the past have gone to landfill. That means building kit. That is a construction project for each incinerator, and that involves time and construction and planning and so forth. That trajectory is not absolutely certain. The other thing is the ban on biodegradable municipal waste, which, as it comes into effect, is bound to have something—that is mainly from households—and all of the councils have to find a way to avoid putting that in landfill. There are various things that can happen. If the incineration is not ready, that waste can be exported. If the incineration is ready, it can go there. There are some uncertain factors and uncertain timings around that, but we believe that, over time, that take will go down. That is what we want. I think that the number set out in the report is working very effectively in reducing the number. There is a bit of a decline in that rate of fall, almost. It is not confused by saying that because of a delay in incineration facilities, but overall the trend is quite strongly downwards. We have not yet made a specific judgment on the further reductions that will result from the BMW ban, but we will do that once the full regulatory framework to put that ban into place is all set out when we have all the information on that, which we would hope would be for in our December report, and that will show significant further reductions again. I thank the panel for coming along. I do not envy your job. Forecasting is not an easy thing to do, particularly when you are dealing with a new process. There is inevitably going to be unintended consequences. We have a fiscal framework that has, from my perspective, a significant reliance on forecasting from two different bodies, which inevitably is going to produce a lot more risk and turbulence. At some stage, we will have to have some sort of risk analysis to this process, not the actual numbers themselves. Maybe that is something that the committee will need to think about for the longer term. In the meantime, thank you very much for coming along this morning. I now suspend for five minutes. The second item on our agenda day is to consider the Scottish Government's medium-term financial strategy. I welcome to the meeting Derek Mackay, the Cabinet Secretary for Finance and Constitution, John Nicholson, who is the Deputy Director for Financial Scrutiny and Outcomes, Eden Grieswood, who is the Deputy Director of Financial Responsibility Division and Simon Fuller, who is the Acting Deputy Director in the Scottish Government. I welcome our witnesses to the meeting, and I invite the cabinet secretary to make an opening statement. In view of the fact that I have given a statement to Parliament and taken questions, the members have now had more time to read the medium-term financial strategy. I propose that I just go straight to your questions. That is very helpful, thank you very much. In that case, we will go straight to Emma Harper. I am just interested in the office of budget responsibilities forecast that productivity is expected to be slow. I am interested to know if you can outline what interventions that you could take forward to boost the economy and what levers are at your disposal to do so. I think that it is very interesting analysis between what the OBR is predicting for the UK economy and what the SFC is saying about the Scottish economy, and part of that is driven by their assumptions differing methodologies. OBR has taken a top-down approach to the Scottish economy, the SFC, as they would argue. As it has done this morning, a bottom-up component approach to the economy. Looking into that, productivity is clearly a challenge since 2007. Over a period of devolution, we have had a strong track record of improving productivity within Scotland. Some divergence over the past couple of years, the reasons for which no one has been able to quite identify yet. The SFC report touches on that as well. Where we can deliver support around improvement and enhancement is some of the interventions that we are making as a devolved Government, around investment in skills, innovation and enterprise, in our economic strategy that is about industrialisation to high quality, such as the National Manufacturing Institute for Scotland that is currently proposed, as well as all the other investments around upscaling business growth, internationalisation, innovation hubs and connecting our universities with the business functions as well, and the New South of Scotland enterprise agency. There is a range of economic interventions that will be good for the economy and economic growth but within that productivity as well. A couple of other key points, participation is important in productivity. The productivity challenge in Scotland could be argued. It was partly down to the downturn on oil and gas, so that is onshore impacts as well as offshore tax take, as well as the population challenge that we have, as it has been discussed and is now well understood. There is a shrinking population and an ageing population. It is great that people are living longer but that will have an impact on earnings, productivity and other factors. The working age population is 16 to 64, so that is changing. That will probably have an impact on the productivity drivers as well. In the Government's interventions, we are doing as much as we can. Where we do not have control, I have tried to express in the medium-term financial strategy and in many other places why population and participation within that is so important. It is not just about throwing money at these things, it is absolutely about understanding the composition and demographics of our nation and then being able to respond to it. That is why immigration is not within our control but is a factor within the productivity challenge as well. We should reflect on the positives. We have enhanced a lot over the period but there is absolutely more that we can do. That is why we are doing it through our economic interventions, as I have just described. We have heard from the Scottish Fiscal Commission this morning about immigration that they have used a slightly different population variant than another one that was available to them. That might be a bit more pessimistic in their forecast. The size of the working age population is really important for our tax receipts and that feeds into the public finances. In your report, you have a section on immigration. To run through a couple of the conclusions that are in there, you have the Brexit effect. Reduced migration could reduce Scotland's GDP by up to 4.5 per cent per year. On top of that, you have also got the fact that the UK has additional net migration targets, which, if they were reached, could have an effect on Scotland's GDP to the tune of 9.3 per cent lower by 2040. To put a number on that, that is 10.2 billion of lost GDP to Scotland. Clearly, that is significant in the context of the Scottish budget, but it is completely outwith Scotland's control. What can be done here? Clearly, I would argue that it would be better to have more controls around immigration naturally. It is also clear that the Government is trying to help to get the UK Government in a better place in relation to the Brexit negotiations and then beyond that immigration target. It has an impact on the whole of the UK, but it is very specific and I would argue disproportionate impact on Scotland for the reasons that you have governed. All the Brexit scenarios were bad enough in terms of impact on our GDP, impact on our population, impact on our working age population, impact on specific sectors—whether that is the NHS or not—a whole range of sectors affected by that. Beyond that, reducing immigration to the tens of thousands, as the Prime Minister has discussed, is singularly unhelpful to Scotland's economy. We need to grow our economy, grow our working age population and, of course, make the best of those who want to enter the labour market. However, those are clear economic challenges for Scotland. It is an area in which there is a lot of consensus in Scottish politics. Certainly in the Parliament, every parliamentary party pretty much agrees on the needs of Scotland's economy in that regard in relation to immigration. However, the UK one-size-fits-all policy is not appropriate. It is counterproductive to our ambitions in this country. As well as the social side of immigration, it enhances the diversity of your country. However, just thinking about it from a hard-headed economic point of view, it will subdue our potential around economic growth, as well as present a whole host of challenges. What can we do? We are running a promotional campaign for Scotland to be a great place to live, work and invest in. Clearly we have international efforts in the UK. We want Scotland to be seen as attractive as well. We have a far more welcoming and positive case to make around immigration. I think that all of that helps, but when we don't set the numbers or the attitudes of some of that, we certainly have an issue. I think that it is a reason to have more immigration control within the Scottish Parliament so that we can better use those particular levers to support our economy and the needs of our nation. I want to make another point. Immigration is generally positive for the country. The net contributor to the figures gave her correct from a global context on GDP and economic performance, but per head, for every EU migrant to Scotland, the net contribution is something like £30,000 net contribution to GDP. From my point of view, the fiscal tax takes about £10,000. Drawing up the drawbridge, pulling down the barriers and telling people that they are not welcome is most unhelpful to Scotland's economic needs. It has a big impact on Scotland's economic needs. I know that the Scottish Government has continued to make the case at the UK Government level about Scotland having a bit more control over immigration. Are there conversations on that topic on-going? There are. There is a range of conversations at the moment in relation to EU negotiations, Brexit and the constitutional arrangement. I think that looking at the fiscal framework, the Smith Agreement and the Scotland Act, frankly, I think that the time has come to look again at what further powers Scotland should have. If we collectively accept that there is a challenge to Scotland's economy, surely it follows that we should have the appropriate levers to put us in a better position. I think that the time has come to be able to look again in a positive and constructive way what other levers or differential approach could Scotland have to enhance our economic position. That can be in the context of Brexit. We have been trying to do that in terms of Scotland's place in Europe. In any event, we should have much deeper conversations with the UK Government on what powers we could have. Clearly, we are a maximalist Government in terms of the more powers that come to Scotland, the better in our view. We have our constitutional view, but immigration is just a case in point as to how the current system, the current UK economic model, does not suit Scotland, and we could do better if we had more levers in that regard. The case is made by the increasing body of evidence that we have. Good morning, cabinet secretary. I welcome the publication of the Scottish Government's medium-term fiscal financial strategy. That was a key component of the recommendations of the budget process review group. The budget process review group was assembled, partly by the committee, with your assistance as the Scottish Government, to improve parliamentary scrutiny of the Scottish Government's budget, which is one of the first things that we had exchanges about in the chamber a couple of years ago. Can you explain to us how the publication of the document in your view will assist the Scottish Parliament in holding the Scottish Government to account for its financial strategy? It is an excellent question, because it is only the beginning of its first time that we have done it collectively, and I am open to suggestions about what else could be, including how it can evolve going forward. The request to produce it comes off the back of the view that, in changing the reflection on the timetable of the Scottish budget, it is now accepted that the Scottish budget can only follow the UK Government's budget. Of course, there, the rhythm of business has changed for a UK budget now in the autumn, although it is strange how the autumn is defined in that regard, but a UK budget in the autumn and then a UK spring statement. It makes sense now in the rhythm of business for the Scottish Government to be compelled to produce such a statement and outlook, because it is an outlook of what lies before us as well, and to then be open to questions on that. In offering the statement, the questions, and now this parliamentary scrutiny allows us to look more in-depth at this point in time as to what the fiscal outlook is, what the key principles and factors are for Government and therefore Parliament to wrestle with, and of course, crucially, it coincides with the publication of the Scottish Fiscal Commission's latest forecasts that inform that debate. For all those reasons, it is good to be able to take this opportunity. Of course, I have returned to Parliament on out-turns, so actual out-turn figures. I have returned to Parliament on the Scotland Act Complimentation, as I have done, but then there will be the fiscal framework reporting as well, which will reflect on the out-turn figures from those particular arrangements. I think that this is very helpful engagement, and for all of Parliament, I think that as the Parliament's powers are maturing and scrutiny is absolutely taken seriously by this committee, so too should the responsibility be upon Opposition members, as well as Government, to look at all the issues before us to take a responsible approach to the balanced budgeting now and into the future. Thank you for that response. Clearly, this committee must play and will continue to play a lead role in budget scrutiny, but one of the themes that ran throughout the recommendations of the budget process review group's recommendations is that the subject committees also needed to play a role in a greater role than they were previously able to do because of the very constrained timetable that is available for parliamentary scrutiny of the Scottish budget for reasons that you just outlined. What is in this document that is new that we did not previously know that will help the subject committees of this Parliament to scrutinise the Scottish Government's budget? In terms of my own medium-term financial strategy, I am sure that there is a paragraph near the end in the conclusion that says that it does not present new policies. It does not do that. It was never intended to do that. It was a point in time of the fiscal position, the latest fiscal commission forecast, and bringing together into one place what the Government saw as its priorities within that. There are new statements, but there are no new policies in terms of just announcing another whatever it is for whatever it could be. However, what I have done is place in the public domain real-time current suggestions and how we could address some problems at source. For example, the UK fiscal path, if it were to change, as I have suggested in the paper and I said so in the chamber, could unlock as a minimum £60 billion for the UK's economy and public expenditure and turn £5 billion for Scotland. There is a new political argument in the paper. Policy context is bringing together that which already exists and is refined by the latest numbers and analysis that we have. In terms of scenario planning, if I had not published scenario plans, I am sure that the committee would have asked me to publish scenario plans, so I have put them in as illustrative as to the scenarios that we could be looking at. I heard the SFC because I watched their evidence this morning to describe the starting point for the budget itself. It is a good place to be that all of Parliament is thinking about what are our priorities at this stage going forward. It is a really useful document. It was never intended to launch new policies, but it has set out new information, fiscal paths, illustrative examples, the financial context that we are working with. Patrick Harvie said in relation to a question last week in the document that this was never expected to set out detailed portfolio spending plans. It is not appropriate to do that. It would all be just like the forecast subject to change in any event. However, if the committee has further suggestions as to how you would like it to be refined, I am very open to that. I am obviously with the finance committee, but if we were the health committee, how would the publication of the document help us? How will it help the Parliament's health committee scrutinise the medium-term financial stability of the NHS in Scotland? If you do not like health as an example, take education or take policing and justice, how will the content of the document help enhance effective parliamentary scrutiny of your Government's budget proposals going forward over the course of the remainder of this Parliament? I frankly think that that is a very fair question, but my answer would be very clear. The paper sets out the principles for the Government and the Government's key commitments. When the Government makes statements in the chamber about what our commitments are, that is obviously very important. However, setting out in a fiscal strategy, a financial strategy shows that we are serious about delivering in that regard. It also describes the challenge if you say that there are our priorities, because everything cannot be a priority. It sets out the share of the budget that would be involved in the key commitments, but it gives greater certainty that we are serious about those key commitments because it is within our medium-term financial strategy. I think that that is quite important. Any committee of this Parliament can do what you are doing right now in terms of scrutinising the appropriate Cabinet Secretary to the spending plans going forward. That was the purpose of all year round scrutiny, not just to wait for the three-week period of the budget process itself, between the UK budget and my announcement of draft budget, but all year round scrutiny means that Cabinet Secretaries and Ministers can be called to account on what is happening in real time. However, really importantly, that health question—I gave other examples as well if I did not like health, but I will take health as the first one that you have given me. Clearly, the Government is committed to more financial detail around how you meet the health challenges, recognising the demographic challenges, expectations, the cost of providing services and all that. We will, imminently, also publish as was committed to Parliament. Essentially, a medium-term financial strategy for the health service specifically is well. We have committed to do that. It refers to, I think, in my own medium-term financial strategy. However, we said that we would outline more detail around specifically health, showing the need for on-going transformation and going hand-in-hand with investment at the same point. Now, the Finance Committee can scrutinise that as well, but those documents will certainly work with each other. Health requires a very specific look. Health is the line share of the Scottish Government's budget for good reason. Those examples and illustrations of scenarios show just how dominant it will be in future spending to meet the commitments that have been made around health. Within that, it describes the extra £2 billion increase for health, which is the Government's manifesto commitment. More detail to come in that specific health paper. What does it say to education? What does it say to police and what does it say to justice, as the other examples that Mr Tomkins gave? It says what our key commitments are in that regard. It was never meant to be an operational document about each individual part of the public sector, but it set out how we proposed to invest in that. It reinforces a real-terms increase in resources and police. It also refers to the VAT issue. Clearly, that sits within the justice portfolio or in education. It sets out the principle around access to education and the use of, say, the pupil attainment fund as well, and the commitment around £3.5 billion to tackle the attainment gap in Scotland. It is an update of the budget. It is a forward look, and it sets out the fiscal position as we see it right now, I think, with a lot of policy content. The committee can certainly come back in any particular strand that it would like more on. We've probably touched on it a bit already. As Adam Tomkins was talking about, the budget process review group set out the four elements that it was recommending, one of which was clear policies. As you have already mentioned, in the conclusion, it said that there are no new decisions or policy commitments set out. You said that that was not the intention, but is the opportunity available to you to be able to do that? In light of the new dramatic change in projections, if that was not the opportunity to do so, when would you be? I think that the Government can announce new policies anytime it likes, in accordance with the parliamentary protocol. That is a really opportune moment to reflect on the current forecast, but that is the key point. Reflecting on the SFC forecast is timely right now. It has come out at the same time as the medium-term financial strategy. If we were to choose to change policy on something fine, I could have done it. There are part of the statements, part of the document, and done at that point. What I have chosen to do is to re-emphasise the priorities of the Government. I have made fiscal suggestions as to how we can enhance our economic position, as well. I have referred to austerity, Brexit, caps and migration. I have covered the fiscal plans of the Government and reflected on the fiscal forecasts. I think that there is quite a lot in it. If something comes out of that in terms of policy, if I had one wish, what could come of that document? I mean, I have many, UK Government, change course and a whole host of things, but I think a helpful debate is emerging on immigration. If something comes out of that, but it is around the consensus on immigration and how important participation and population is for Scotland's future, we need those powers now, and we need access to those levers now. If I am hearing consensus across the Parliament in that regard, it might not have been a policy announcement, but maybe we have found a new consensus on immigration that we should take forward because there is an increasing body of evidence of how important it is to our economic prospects now and into the future for all the reasons that you have quite exhaustively explored as a committee. That might not have been a new policy announcement, but it is certainly an aspiration that I think is finding a great deal of consensus. Of course, the big moment for new spending plans is the budget. Clearly, as a minority Government, we have to work with other parties to secure the passing of the budget. A First Minister's programme for government is a key point for policy intervention as well, but I think that that serves what was asked of me of the medium-term financial strategy in terms of the budget process review group. Let's go on to income tax forecasts. When you first saw the numbers from the Fiscal Commission in regard to their forecasts on income tax, it must have been an uncomfortable moment for yourself and the Government. As we heard earlier from the Scottish Fiscal Commission, for 2018-19, their tax forecast is lower by £208 million than it was in December. In addition, in relation to the block grant adjustment and the OBR projections, I had further challenges to you, potentially producing a shortfall somewhere close to £400 million. On the face of it, I realised that we are in a new process and there is turbulence in its forecasting and forecasts. However, I think that it would be helpful for the committee to understand what you think that the impact of that will be on your budget. Of course, convener, there is no immediate impact. I am sure that the committee is well aware of that because the numbers of the forecasts are locked into the budget setting itself. I know that the committee is aware of that, but it is probably worth reinforcing that point. The second point that I would make is around methodology. The OBR and the SFC use different methodology and they have different approaches. I am the finance secretary in the middle that has to use the OBR's forecast that is the driver for the block grant adjustment and then the SFC's forecast in terms of what can be drawn down from treasury. We all knew that that was a complex situation—complexity from the fiscal framework and then complexity because of the forecast. We have civil servants and I get the end-of-process update from the chair, Dame Susan Rice. There are challenge meetings where civil servants and our economists understand their workings and they are thinking how they arrive at those numbers. On the first site of them, I was as surprised as the committee that there is such a change in forecasts between the December analysis and what we see now. The SFC has described that as evolution in their judgment. Of course, I have explained some of that to you this morning. Obviously, in the SFC's substantial report, it points out the risks of forecasting and how it is very rare for any forecaster or economist to get anything absolutely right. However, we are reliant on SFC forecasts and OBR forecasts to lead to our numbers. The first point of reassurance that I would give is that the Government always competently balances the books. I give that assurance to the finance secretary. I will balance the books. We will deliver sound, competent government with some of those challenges around the economy. The UK economy is subdued within the EU context and the Scottish economy is subdued within that context as well, partly because of the things that we have been discussing earlier about participation, productivity and population. What was curious is that there was an analysis that was fully explained by the SFC around the impacts on wage earnings. That is a key issue here, wage earnings. The SFC says simultaneously that the economic forecasts for GDP have not changed, in fact, in some years they have gone up. There is no real change in the GDP forecast. The downgrade that the SFC sees in the income tax forecast—and it is only the forecast by 1.7 per cent—attributes to the wage earnings issue that they have done more analysis of. It was not necessarily that anything has changed in the economy, as I say, because GDP is broadly the same from their five-year forward look. Some people have described OBR as quite optimistic and the SFC is quite pessimistic. That, of course, increases the gap and the volatility that we are dealing with. Other reasons for me to be more cheerful in that regard are that those are not the final forecasts. We will get to nearer the end of the year, so just before the budget, when we get the SFC's latest forecast, we will also get the OBR's forecast that will drive the block grant adjustment in UK Government decisions. OBR will already have to revisit their figures, because, right now, the out turn is already different from what the OBR was forecasting. We already know that the OBR's got it wrong, and that is just a matter of time. The sequencing of all of that, we will have the best up-to-date information closer to the UK budget and the Scottish budget, then we will also have more data, more actual hard data, and I think that that will be better than just some of the forecasting that we have at the moment. I hope that that is reassurance around forecasting and the methodology elements of that as well. In relation to how does a finance secretary respond to that, so the levers will have at our disposal. Remembering, of course, that the currently devolved taxes can be managed in year or the year after because of the nature of currently devolved taxes. With income tax, there are the out turn figures, which are two years, and then essentially the knock-on effect of those figures in the third year. If you take 2017-18 figures, of course, it is 2020-21 before any change that is required there actually takes effect. Those forecasts give us time to prepare, if that is what we are preparing for. The levers that we have at our disposal, of course, are trying to stimulate the economy, support economic growth, use potentially the Scotland reserve, if that is required. Budget exchange used to be known, the carry-over, and then borrowing powers, if that was required to address a forecast error, if it is a forecast error, then known at that point of an out turn. However, in all that, the GDP forecasts, as they are, represent a subdued but growth outlook. There are still real terms of economic growth there. The final point that I would make about income tax is not to stand in the fact that LBTT and landfill tax, specifically the forecast for that, have improved, but on income tax, the SFC in revisiting its forecasts, any figure of downgrade must also be seen in the context that revenues are still increasing. Revenues are still increasing year on year for income tax in Scotland. As a consequence of the decisions that the Government and ultimately Parliament took in the budget, we are £2 billion better off, even with those latest forecasts, because of the tax decisions that we have taken. That is an important figure, because that is the sum that, if we had not taken those tax decisions, we would have been down by if we had not taken the tax decisions in relation to income tax. On that point, income tax is still going up year on year. GDP is still increasing in Scotland year on year, but within those forecasts, the SFC in revisiting means that I need to prepare for a range of scenarios, including those forecasts, coming to pass. However, I have a great deal of evidence to suggest that they will change before the budget. You hinted in your answer about the HMRC figures that will be published in the summer. In paragraph 31 of the summary from the Fiscal Commission, it says that, because of those figures not yet being available, there remains significant uncertainty over the measurement of Scottish income tax base. Come the middle of the summer, we will begin to get some certainty. I know that the Scottish Government has got to rely on the forecasts that are made in December, but for the first time we will have some hard numbers to put against some of that. I recognise that you have to rely on forecasts. If those numbers start to tell you that you have a problem at that stage, what will you do then? In terms of whether the SFC forecasts are right and that looks like an outturn being as it is, first of all, I think that you cannot just answer that in isolation because it relates to OBR. Already knowing that the OBR was too optimistic and the actual outturn figures for the UK are different, so knowing that the key determinant in our final figure is about to change anyway, knowing that, even if the SFC is right at this stage, we know that the OBR is wrong. It is so complex, of course. If it comes to pass that the SFC is right in their own forecasts, what I actually have to spend is still determined by the OBR number and the block grant adjustment in any event. No matter what, the Government will continue to focus on growing our economy and making the right interventions to keep unemployment low. Something that I was lost in the debate of the past few days is that the SFC also forecasts for unemployment to remain near record low levels and employment to remain at record high levels. There is an issue for us about capacity to grow our economy within those economic parameters. You return to immigration. How do you expand your capacity? We bring more people into the labour market, you expand childcare, you have people with appropriate skills, you upskill your workforce, you support businesses to grow, you internationalise. That is a range of economic interventions that the Government is making. However, those numbers will change. If you go through the report of the Fiscal Commission, it touches on it a number of times how population and productivity is important. However, even in relation to their own forecasts, I was drawn to page 29 of their own report on the limitations of forecasting and they say of forecasters. Forecasters cannot perfectly predict the future. Forecasting is an on-going process of intelligence gathering, learning from previous forecasts, reflection and refinement. Judgment will be made on the basis of the best evidence and intelligence available at the time of publication, but may change from one forecast to the next as the economy evolves and our understanding develops along with it. The final point is making reflections on the OBR and the OBR itself. However, on page 29, the likelihood that any given forecast will turn out to be accurate in all respects is essentially negligible. That is very helpful to guide us. We will prepare for a range of scenarios, but we see a clear need to continue to grow our economy and that is why we have a range of strategies and interventions so to do. On that point that you have just made from reading out those particular paragraphs, it is obvious that we are in a new process. There will be unintended consequences, as you said earlier, to the Fiscal Commission. The fiscal framework is built on the whole area of forecasts, which are never accurate effectively, as you have just said. On how it operates, as we are beginning to see that more and more visibly about the complexity of the system, what risk analysis is the Government planning to undertake in that regard? I think that this is something that the committee will come back to. I think that some of the risk analysis is in the document in terms of the central scenario and funding that we would have available in the upper range and the lower range as well, so that sets the parameters of where we think the risks are. I meant the risk of the actual process that we are dealing with here as well. I think that there should be an independent review of the process that is leading to UK Government and Scottish Government revisiting it by 2021. The other point that I would make, and this goes back to the more powers point—and, of course, I would make this point as a nationalist minister—is not the nature of forecasts. Even knowing that well-established forecasters with well-established institutions and methodology, they have also stated that they cannot get it right perfectly every time, either. The difference that the UK Government has that we do not is more levers. We only have some of the levers to be able to handle that economic risk, to handle that volatility, as it can be seen. More levers, in addition to the borrowing powers, in addition to having a reserve—of course, there are caps on how much I can draw down from that reserve—we need more flexibility in the event of worst-case scenarios. I have given a clear assurance that I will set a balanced budget and will tackle the challenges in very positive and constructive ways to do that, but clearly more fiscal flexibility would allow us to do that. It is also why I learnt quite heavily and some of the choices that the UK Government can make right now, whether that is on its approach to austerity, whether that is on Brexit, whether that is on the borrowing powers or other elements that we could have, would put us in a stronger position, where we absolutely act responsibly. However, convener, we can tackle that risk, because it is a fair point that you have touched on, this potential volatility from forecasters saying different things. That might be a fair question, but you have not given me an answer. Two, the answer that I was wanting was around whether the Government intended to take any risk analysis into the actual process that we are involved in. If you are, when is it likely to happen? I will know about 21, but we will start working on that early to make sure that we can sort out the outcomes. Our current analysis has gone into this, if you think. I think that it is right to say that should we develop our thinking around this approach in the budget and then beyond, yes, we can do further analysis. If you wish, you can present that to the committee and, ultimately, to the UK Government well in advance of 2021. So, yes is the answer to your question. I think that we can do more of that kind of work. Thank you. Thank you, convener. Just a couple of questions I want to ask just to follow up some of the points that the convener made. Absolutely fair, cabinet secretary, to talk about the fact that this is simply a forecast and a subject to change. It may be that talking about a £400 million gap in the current year's budget is unduly pessimistic. However, I was going to say that it may prove to be unduly optimistic. We simply do not know and will become clear near the time. We will not know the figures until June 2020, so it will be the budget for 2021-22 that will need to take account of that. I am assuming that you are not intending to leave to your successor a note saying, sorry, there is no money left. I am assuming that you are planning to make some contingency planning in the interim. There is nothing in the document that you published last week that suggests any contingency planning, so perhaps you can flesh out a bit in terms of your answer to the convener. What sort of timescale are we looking at to get some understanding from yourself as to how the gap will be filled? There is an implication in your document last week that you are not planning any further tax changes. Is that fair? Understanding? If so, does that mean that we need to be changes in spending patterns? First, on tax, I think that we have a settled structure in terms of income tax, I think that the nature of the changes, the five bands and the structure that we have in terms of being supportive of the economy, more progressive supporting lower income earners and using the tax system a more progressive way is the right balance. I think that the structure of income tax is now the right one. I can come back specifically to the scenario planning in this regard because it relates to the question around multi-year budgeting. If the UK Government commits to, and I think that it has, a spending review for spring 2019, and if it gives out enough certainty to us, then at least we will have a clear line of sight into what the block grant should look like. Of course, it is still a substantial part of the Scottish budget. If it does a multi-year spending review, and that gives us a great deal of certainty, my intention would be to emulate that to try and give a multi-year spending review for Scotland as well. Clearly, there is a lot of dynamics in that. There is the fiscal framework, the issues that we have discussed around tax forecasts and other determinants, but I would try and deliver a multi-year settlement. That would be good for planning, it is good for everyone, it depends on the settlements. I suppose that that takes us back to the scenario planning that the convener was asking about. If I had that certainty in the spring of 2019, we could probably more clearly be able to set out what the fiscal outlook was like going forward over whatever period the UK Government chooses. However, it takes us back to the complexity point that, in this regard, all paths lead back to London and Westminster and to the Treasury, because whatever we do in tax is all relative to what we have at our disposal by way of resources is relative to what the UK Government does on tax as well. That is a block grant or our own tax decisions, because of the fiscal framework, it is all relative back to that. If the UK Government gives us that certainty and we have clarity on their tax position as well, it gives us deeper clarity for us to be able to plan. Of course, there is some debate, even in the Conservative Party right now, about departing from the current position on tax. I know what the manifesto position is. I am now hearing different positions, including from Ruth Davidson, on tax and how it relates to public expenditure. For us to be able to set out more clarity on our own tax plans, it is helpful to have the UK Government's tax plans as well because of the nature of the fiscal framework. However, what I am trying to describe is that all the range of determinants lead us to a place where we can more accurately show you what the scenarios look like when we have those key drivers coming from the UK Government. In relation to tax and spend, tax is a pretty settled position. In relation to the structure on expenditure, I have set out the challenges, the determinants and the key policies within the document. Clearly, that is the start of the process, leading to the Scottish budget and then potentially a UK spending review, as they have announced it in the spring of 2019. I hope that that is more helpful. I take from that that spending is more likely to change than taxation. We have to spend within the envelope that we have set out in the scenarios that we have set out. What I have tried to define within the document is to deliver the key commitments that we have, what are the kind of issues that need to be addressed within that. There is a range of issues that need to be addressed within that that I am quite clear about. Efficiency, transformation of public services, digitalisation and tackling some of the expectation and demand issues for public services. That is how it describes the shape of the NHS budget. It is predicted to increase because there is a clear commitment around the NHS, clear demands on the NHS and that is why that kind of shape of the budget is characterised in the document. It sets out public expenditure in here as well as my current position on tax. Can I ask one more question about the question of immigration that you mentioned a couple of times in response to questions from Ash Denham and then the convener? We have had in the UK over the past two decades relatively high levels of immigration and yet the proportion of immigrants coming to Scotland within the UK has been relatively low. It has certainly been lower than our overall population share. There are a lot of issues to reflect on as to why that is the case and why we have been relatively poor at attracting immigrants to Scotland within the current constitutional arrangements. Andrew Wilson's growth commission proposes offering tax cuts to immigrants to attract them to come here. What is your view on that policy and whether you accept the premise that higher taxes deter people from coming to Scotland? Nice try, Mr Fraser. Mr Fraser is well aware, as is the committee. I was a member of the growth commission as well as chair of my own political party. I am convener of the SNP. I am a very curious position as well as been the finance secretary. I think that the growth commission is a great piece of work. We will discuss it more fully at some point. Of course, it raises the point around people and productivity participation but immigration is a key issue within that. The point about the growth commission is that there are some things that we can do as a devolved Government but the package of things that we can do, we can only do as an independent country with all the levers and all the tools and all the democratic and fiscal opportunities that we would have. As part of that whole package, we can take the right set of approaches to be able to attract a range of people. As it happens right now, as it stands right now, there are many people who want to come to Scotland and they just can't because of the UK regime and it is going to get harder because of the proposed future UK regime. Population growth was only predicted to happen in Scotland because of positive forward inward migration. That is how important migration is to us. That, as it stands right now, is even without the tax incentives. The point that the paper in the growth commission makes is that we can do more if we had all those particular levers. Incidentally, how we connect transaction taxes, LBTT, wealth tax or income tax is quite interesting to have a proper package for attracting people. You would want to be able to align all of that. We can't. We just set the rates and the bans, we don't set the definitions, we don't set the criteria, we don't get to define what wealth is and therefore we don't directly control the agencies that do the administration so you can't properly connect and join the dots to make such a package work as a devolved Government the way that you could if you were an independent Government. Within that, because I'm not one for just hoping that we get more powers, we've got to do what we can right now as well. In that regard, I agree that we should look further at how we can get more immigration to Scotland. The experience is very positive. The trajectory of the flow would have been that population growth in Scotland is largely down to forward migration. People are coming, people do find that Scotland is a welcoming, attractive place to live, work and invest, but we can get more. Across the range of skills, whether that is absolutely in farms and agricultural opportunities that Mr Fraser will be well aware of, or financial services or whatever it happens to be, so the high-skill right across the whole range of sectors that there's a need for immigration, so we could do even more if we were independent, but the current policy of the UK Government is economically catastrophic. I think that that will do at that stage on that answer. That's quite a long answer, but I can understand the temptation, cabinet secretary. James. Okay, thank you. Good morning, cabinet secretary. You said earlier that you were surprised when you received the forecast from the fiscal commission and truth, you must have been absolutely raging. When you published your draft budget in December in terms of the tax policy changes that you announced, they were going to release an additional £164 million into the budget. Those latest forecasts have taken £209 million, not out of the actual budget but out of the forecast, effectively blow a hole in your tax policy. I'm raging at those comments. That characterisation. This is my raging face. I do think that it's a good point. It's a good question. I watched your evidence session earlier on and I say surprise. I was surprised as you, and you probed this quite rightly as well. How can the forecast change within five months without any major economic difference? The GDP was broadly the same, drivers broadly the same, I had the same questions as you, my shovel servants, without speaking out of turn, had the same questions as you, economists had the same questions as you. Of course, I had some of those questions when I saw the original figures last year and probed some of it then. In fact, I remember raising it with the committee that there was an almost inexplicable enhancement that I said, if those are the numbers that I have to go with, hodd me back, but I'm a prudent, responsible, sensible finance secretary that will make sure that we use the resources prudently. That said, on challenging the numbers in a constructive fashion, clearly the SFC has described it about methodology, deeper understanding, etc. So, we'll revisit those forecasts when we have more data, more information, more actual outturn, and then we'll get more to real life, but we're still reliant upon forecasts. In terms of the terminology of budget impact, there's no budget impact, of course, because the numbers are locked in. Arguably, the economic stimulus that will come from our pay policy, from the economic interventions, what we've done around non-domestic rates, what we've done around innovation, education, capital infrastructure, all of that is why spending to help stimulate our economy, which, of course, in turn, the SFC did say would have a positive impact if you take just-to-pay policy on wage as well. In terms of forward look on the budget, we'll keep a close eye on our forecasts. Their change, of course, is only 1 per cent. In terms of my own tax policy, one key point to remember is this, income tax, so the other taxes are forecast to increase above previous forecasts, so they've been improved, they've been upgraded. You didn't read about that, but they've been upgraded. On income tax, every year, income tax is still generating more money in Scotland, so every year there are more tax receipts in Scotland. It's just that it's less than the forecast that they gave us in December for the reasons that they have given, and the tax decisions that I encourage Parliament to take has placed us £2 billion better off as a consequence, so that has vindicated my tax policy. I thought your answer to Murdo Fraser was very interesting in the sense that you were basically indicating a no-changed position in relation to tax. Of course, the focus of these forecasts a lot has been on this year's budget, but it's the trend that's really concerned. In terms of income tax, the cumulative impact of the forecast on the tax changes is to have £1.75 billion less by 2022-23. If you're signalling a no-change policy in relation to taxation, what you're really signalling is massive cuts to public spending and putting public sector services under real pressure. No, that's not an accurate characterisation at all. In fact, that characterisation suggests that James Kelly maybe needs to just get a slightly deeper understanding of the forecast. What I'm talking about doesn't mean less than what. Less than a previous SFC forecast is quite different from less than the budget or less money, so there is a world of difference in those interpretations. The first point that I made at the outset in relation to forecasts is that the OBR forecasts are already wrong. One of the key determinants is that they are already wrong, and that's just a matter of time, just because of their report and timescale flowing into the outturn that they have. SFC has, as I say, changed the forecast that that's a matter for them. Tax taken in terms of income tax in Scotland is still up, because the key determinant for us is what's income taxed in the rest of the United Kingdom, what's the outturn, and that's what we need to understand as well as the SFC forecast. In terms of what happens in the block grant adjustment, the actual tax take, that's what will determine our budgets. However, if you look at our budget forecasts, they are projected to increase overall. We have to look at everything, so the way that we've characterised income tax is only in relation to the SFC forecast. To then go on and say about the impacts that you suggested that it might have means choices for the Parliament Government. You have to prioritise, you have to make choices, and you will have the different levers in terms of tax and other things. One point that I would want to correct is around tax going on from Murdo Fraser's point. Murdo Fraser asked me broadly as the tax position settled. In terms of structure, I said yes, it is. The high-band system broadly settled. I think that the way that the Government conducted the exercise of a consultation paper was set out with four key principles, which we delivered upon. Protect the economy, protect lower income earners, use the system in a more progressive fashion, invest in public services. Key factors, tests that we set out and have delivered are proposed to continue with those principles in relation to tax, as well as the Adam Smith principles of certainty, efficiency and proportionality. I want to give people a greater degree of certainty in those turbulent times, those uncertain times, and that is why I said that the structure is broadly settled. I think that that is as much as I would say in the matter. That is quite a lot. I think that we will just try to cut some of the answers down a bit if you can, Patrick. Thank you very much. As you mentioned earlier, I said in the chamber last week that I do not think that anybody expected this strategy document to include blow-by-blow, budget line-by-budget line projections. That would effectively be to ask for draft budgets for years in advance. I do not think that anybody expected that. However, I would like to ask about a couple of things that are not in there that I would have expected to see in there. The first, as you know, that I am interested in is local government. The scenario graphs that start on page 61 include specific Scottish Government policy commitments on health, social security, police attainment and so on, and leave a very large light-blue chunk of those graphs as being other expenditure. Almost all, the large bulk of that other expenditure is surely local government, given the scale of what is spent on local government. However, the section that says in a few pages before that, page 58, following on from setting out those Government policy commitments, what that means for spending elsewhere—and the first section there is local government—and all that that section says is that we spend some money on local government. Here is how much we are spending in 2018-19 and that it includes the general revenue grant, NDR and specific revenue grants. It does not say what the context of those policy commitments and the scenario plans means for local government. What does that mean for local government in relation to the five-year plan? It is a fair question. Just as a technical point, in terms of the charts, of course, if you take early learning and childcare, that is a function that is largely delivered by local government as well. It is a very small point. I know that it is a tiny part of the chart, but I just make the point that there are other elements of funding that do not necessarily— For the large bulk of that light-blue chunk is local government? Yes, I take that point, but I am just saying that it is not exclusive. There are other elements of government funding that also make their way through local government as well. I want to make that point. I said at the outset of this evidence session that I was not launching new government policy if I had changed the position on local government funding. I suppose that would have been a new policy initiative. What those fiscal plans represent is the Government's manifesto position, a programme for government position and key announcements over the past few years since our re-election in 2016. I think that I accurately or fairly describe the composition of the Scottish budget if we protect those protected areas, those key commitments that the Government has set out, including investment in the national health service, police and education, as it relates to attainment and the other commitments. Of course, we have social security within that as an emerging new power as well. In relation to local government, my track record and Mr Harvey has been a contributor to this clearly in the budget negotiations and ultimately the parliamentary votes has ensured that local governments had a better settlement than they were forecasting and preparing for, including the current financial year in which they had a real terms uplift. It is true that I have not set out a fiscal path for local government, but to answer the question, because I know that the convener wants me to be more concise, what does it mean for local government? On my track record, the finance secretary, I have tried to give local government the best deal possible in the circumstances and I will continue to do that, but I have set out very clearly what the Government's key priorities are. If other parties have other key priorities, negotiate with me through the course of the budget and that will be what ultimately the Parliament approves or not. I appreciate that you are saying that this is not a document for launching new policies, but it surely should say what the implication of your existing policies is in other areas. It is not a party manifesto, it is a Government financial strategy and one of the major areas of Scottish Government expenditure is the contribution to local government and to the local services that it provides. I would suggest to you that that question remains entirely unanswered to anybody who has read the document. I take that point on board, but it sets out what the Government's key priorities are and it also shows what the shape and composition of the portfolios and essentially what the Scottish Government's budget is going to look like going forward as a consequence of that. It tries to do it in that regard. Of course, that element, just as a technical point, the element of expenditure is simply expenditure to local government by way of financial support. It does not touch on, for example, council tax, which is a matter for local government. I take that point, but there is more to just local government finance than the revenue support grant or non-domestic rates that come via the Scottish Government. I had one question on capital as well. Just following on from Patrick Harvie's comments, Professor John McLaren at the weekend warned the fact that local government was not one of your six priority areas would mean cuts for local government services. Do you agree with that analysis or will you commit to real terms increases in future budgets for local councils? I have not seen the nature of the analysis, so I think that it is wrong for me to prejudge it and say that I am right or wrong if I have not seen the weekend analysis of that particular article. I have set out my position with local government. I have done my best to give them the best settlement possible in the circumstances. I have live and ongoing discussions with local government on a range of matters, including the figures on housing investment, investment in early learning and childcare that we have reached a satisfactory conclusion on, health and social care integration. It is incredibly complex and, as I approach the budget, I will engage with COSLA as I engage with other political parties. They also have options around their council tax function. They are lobbying hard right now around discretionary taxes. I have not set out a commitment to a specific real terms increase, but what I have clearly done on a case-by-case basis is to negotiate with local government to reach a satisfactory conclusion and a substantial one of that is early learning and childcare, where they now believe that they have the resources to get on and deliver the policy. That is fundamentally a local government function that is funded by the Scottish Government. We have reached a conclusion on that, and it is just an example of how we operate with local government. However, I would not accept a characterisation that has been offered. On the capital side, this relates to the fact that this is not a document for new policies. You have an existing policy commitment, which was made this year, that, for every year for the rest of this Parliament, you will increase the proportion of the capital budget that goes on a low-carbon infrastructure compared with high-carbon. The closest I can find to any reference to that is a commitment that the following guiding principles are applied to infrastructure investment and one of them is managing the transition to a more resource-efficient lower-carbon economy. I would have expected to see a bit more detail in a financial strategy for the years ahead about how it is that the Government is going to meet its existing policy commitment to increase the proportion of low-carbon in the capital budget for every one of the years in the rest of this Parliament. Has the Government done the detailed work on how that is going to be delivered and when will you be in a position to put that into your published information about your financial plans? First of all, I agree with the point that the policy continues. I firm the policy for the avoidance to doubt. I do not think that that is the place. I think that it would have been helpful to have avoided that question to have put it in, so that is a wee learning point for me for future years. I do not think that it is the appropriate place to publish the full infrastructure investment plan here. That is elsewhere. The principle continues. The workings were developed over the course of the 18-19 budget. I can certainly revisit the trajectory for that, but I think that it is more appropriate and pertinent to do that for the next budget. In preparation for the next budget, it is evident how that direction of travel is being delivered, as well as the infrastructure investment plan. If the policy needs to be reaffirmed in future equivalent documents, that is fair enough. However, I do not think that that is the place for the detail of that necessarily, but it should certainly be in a position that it can be published somewhere. I look forward to more detail in due course on that. I have a new question about VAT, am I right? Yes, I was going to touch on the forecast on that process. I think that it is probably more pertinent, given where we are now, if I may. Cabinet Secretary, you have touched on that to some extent, but I just want to explore it a wee bit further. We heard from the SFCLR, of course, about forecast accuracy, and we went into some detail. We explored the make-up of the forecast and why it was unreasonable or unexpected for it to be out by the amount that is out by, in fact, the absolute error in their forecast is less than the absolute error in the OBR forecast over that period. It was really just to take your view in a bit more detail on, given that this seems to be the way that forecasts play out in the real world, that OBR and the UK Government deal with that, what do they have to enable them to deal with that that you do not have? I think that just revisit in forecasts that if their position changed within five months, then would their position change again before the Scottish budget is a key point? If they have what I saw them describing earlier, more information. SFCLR has described it to me how they arrive at their numbers, you know, a bottom-up analysis of the Scottish economy approach, OBR described it as they take a UK-wide approach, then they essentially do, right? This is what we think Scotland shares, so they are both using different methodologies, which is a challenge in itself. Then we have to drive our numbers from the difference in those figures. I think that having more data will help us all, and I think that that will lead to firmer forecasts. The economists will all be a bit more satisfied and comfortable in that regard, and in turn so will we all be. I think that when we have more out-turned data—we never had it before—the Scottish rate of income tax, we just haven't had the data, so when we get more of those real figures and we see what is actually being raised in Scotland in relation to income tax, we put us in a much stronger position. However, the closer we get to the budget, the firmer forecasts will be, and both SFCLR and OBR will look again at their numbers, and they will all come out in the wash. Will it not? Will you actually depend on those out-turn figures? Onw i ddweud nad o'r ei bod i fforddol ac i'w proses rai fost o'r proses ymwyr i fawr i'w unrhyw ddoddiadau i'w proses rai fosto, mae'n hoffodd i'w fawr i'w proses. Ben yw'r cwm itfawr i'w proses, mae hyd yn ddull i wneud eu ddaddiadau toddiadau i'w ffordd,�on a'r perth-wathachu. How that process may pan out and the kind of problems that may cause given what we are learning about the income tax process? I am sure that economists and accountants across the land may say that independence must be easier than this, with regard to the complexity of the frisco framework and how you use forecasts to derive numbers and revisit them. The AT is a disgust at the last evidence session. I think that it needs more work. I know that we'll have more data than before because of the size of the sample, but I think that we might want to make sure that the methodology is absolutely right. The starting point is right, the benchmarks are right. When we're at the point of agreeing methodology, we do it through the Joint Exchequer Committee, so UK Government Treasury and myself should sign this off, but I want to be totally satisfied as you would want to be as a committee that we're making the right decisions in that regard, because of course it is only a signation. There's no tax leaver there, it's only a signation and surely we all want to make sure it's in Scotland's interests, so the issue is no further forward as I see it since the last time I attended committee a few weeks ago on Scotland Act implementation, but I want to make sure that we're absolutely robust on this before we trigger its analysis and implementation. As I said, I would return to committee when I have more on it, but I don't as it stands right now. Let's push you a bit further on that, cabinet secretary, because of our experience that we're getting on the fiscal framework and the complexity around income tax. I'm conscious of how I phrased this, but will you pull the plug if you think that this is not going to work in terms of a benefit for the financial settlement for Scotland on it? The potential on this area, as Ivan describes it, is relying on forecasts and not-real-out-turns, a real concern. That would be very bold, convener. We clearly want tax powers. I don't see this one as a tax power, though it's just a signation. The question that I put back to the committee is— That's not what you might be using. Bruce Crawford is saying this question, by the way. It's not something that I'll share with anyone else. Inequally, what I would try to do is to get the transfer in a shape that it suits Scotland. I would simply ask the committee what it would do if you were me and you felt that the methodology—we might get the methodology there, but if the methodology isn't robust enough to accurately reflect what VAT has actually been accrued in Scotland, and even more importantly, if it's only a signation and Scotland takes an unnecessary financial hit just because of a point in time, what would any reasonable finance secretary for the nation of Scotland do discuss? I haven't come to a conclusion, convener, but I'll return to you on that. I think that you can be sure that this committee is going to be all over this issue. I appreciate it. My principle will be to try to get the successful transfer as agreed, but I think that I want to be reassured that it's the right thing to do. You're going to have to reassure us as well as reassure yourself that it's going to be a harder task. Neil? I just want to ask you about the other parts of tax that's been mentioned briefly in the medium-term financial strategy. In your letter last week to the committee, you announced your intention to defer introduction of air departure tax beyond April 2019. When do you expect that you will introduce air departure tax if it's being deferred beyond April 2019? Are you still committed to your policy of cutting air departure tax by 50 per cent and abolishing it altogether? Yes, it's still the position of the Scottish Government to reduce air departure tax by 50 per cent and abolish it when resources allow. I have written to the committee, I have answered through a parliamentary question that issue of deferral. To answer the question around when do I expect it to be switched on in Scotland, frankly, when we have a resolution to the Highlands and Islands exemption issue, which the committee has well cited, on that I will not switch on the tax in Scotland with defective devolution where this issue is not resolved. I will not impose this tax for the first time on the Highlands and Islands of Scotland. I want a like for like exemption, and I am working constructively with the UK Government to find a solution so that that can be the case. I continue to engage with airports, airlines and other stakeholders in relation to aviation policy in Scotland, but it can only be resolved when we have a resolution. Thanks for that answer. You have confirmed that you are still committed to cutting ADT by 50 per cent and abolishing it altogether. If you are still committed to it, you will have to cost that policy yet. It does not appear that the cutting ADT has been costed as part of the spending commitments in the medium-term financial strategy. What is the latest cost of that policy? Last time, we looked at it. The overall potential tax take at that point was about £320 million, so if you reduce the tax by 50 per cent, that gives you the broad figure. I think that we would cost it at the point where it was about to be implemented, and I will give you those figures at the time. In principle, we are not switching on air departure tax in Scotland, and therefore the UK Government has just written to me to confirm that it will not switch off air passenger duty, the UK equivalent tax, so that there is no negative impact to the block grant adjustment. I would not want the UK Government to remove it from our finances through the block grant adjustment, and then we will not have the option in Scotland. We will use the figure at the time that is appropriate, which will be as close to decision as possible. £320 million is obviously a huge figure, and with the growth in passenger numbers, it could be even higher. Do you not accept that, with more cuts to local services and other services on the way and potential reductions in the funds that are available to the Government, it is a wrong priority for that Government to keep pursuing tax cuts for frequent fliers, given the budgetary position that you are in? The key priorities of the Scottish Government are set out in this document to invest in the national health service, invest in education, invest in housing, invest in digital skills, grow the economy, support businesses, and so on and so forth. The key commitments that are published here, I am sure that Neil Bibby would welcome. In relation to air departure tax, there is clear evidence that has been published that has asked to produce it in relation to economic and environmental benefits. There is evidence that it would grow the economy, there would be more routes in Scotland, there would retain jobs, retain routes, grow routes, and support airports such as Glasgow Airport, which I am sure that Neil Bibby has an interest in. Some airports are doing better than others, and they say that it would make Scotland more attractive as a destination and also enhance their economic position. In turn, it would suit the economy because it would raise extra revenue. The Government still supports the policy, but I am not switching it on until the Highlands and Islands issue has been resolved and devolution is delivered as it was intended to be. You mentioned digital, and I think that you were interested in digital, were you? I certainly am, Bruce. Just a couple of questions if I can. Cabinet Secretary, in page 60 of the document, you talk about European funding, first of all, and you state there that the value of those programmes to Scotland is worth about £5 billion in the current review period. When do you have to start to begin to introduce the impact of whether there is a reduction in commitment to that sort of level of funding from the UK when we leave the European Union? When do you have to start doing that work to reflect it in your financial planning going ahead? Different cabinet secretaries are doing that work already. The figure is correct. It is what we have roughly been a beneficiary of EU funding to the tune of about £5 billion over the period. What is the figure going forward from the Brexit negotiations? I do not know, because the UK Government does not know, and they are arguing on our behalf. What guarantees is the UK Government giving to Scotland in that regard? None, or very little. Some time-limited commitments to some farmers is all that we have at the moment. We need longer-term certainty in relation to EU funding with the beneficiary. It is helped in the infrastructures, in agricultural policy and in so many different areas. Greater certainty from the UK Government would allow us to plan better in terms of what resources I had and portfolios had to be able to proceed. If you have just taken farmers at the moment, it is £0.5 billion in farm payments, and they have no certainty beyond a certain timescale as to what that might look like. We need to address that problem at source. That is the UK Government not giving us the clarity. Portfolios can try and prepare right now, but we do not know what the settlement is going to be from the UK Government. I would like to think as a minimum, and committee should support us in that, that we should continue to get the full benefit of the resources that we have as being part of the European Union. If the UK Government insists in tearing us out of the European Union and insists on the worst deal possible, surely we deserve better than a slogan on the side of a bus. The NHS will not be getting the £350 million of our promise by the UK Government every week, but we should get the resources that we should absolutely get the funding streams that we were beneficiaries of in the event of the UK Government insisting that we leave the European Union. Portfolios will have to plan right now. What it inevitably means is less resource, less resource for structural programmes, less resource for skills, less resource potentially for farm payments. If the UK Government does not give us the certainty that we need it, that is why we cannot go further without knowing the successor arrangements that are in the hands of the UK Government at this point in time. I will ask you about digital. You mentioned it a few times yourself, cabinet secretary. We know that the UK Government is also planning to leave the digital single market, which is estimated to be worth about €400 billion per year across Europe. You could make a reasonable estimate that that is worth €4 billion to the Scottish economy and GDP. When do you think that you will have to start to begin to factor in the impact of that? My view must be one of the most monumentally stupid things that a Government would intend to do is to leave the digital single market. It is the height of economic recklessness that the UK Government is positioning at the moment. No wonder that the UK Government cabinets at war with each other. Never mind European Union negotiators, but whether it is aviation agreement or digital customs union single market, the effect on the economy is profound and we are trying to get the UK Government in a better place. The UK Government is also upscaling its own civil service, so the health service is not getting £350 million a week, but the civil service is expanding so that we can have enough in terms of the UK people to do the jobs of all the bureaucratic work that needs to be done. Clearly the Scottish Government will have to respond in terms of the legislation regulations that will have to be addressed for us, so there is a point within the plethora of agreements and treaties and regulations that will apply. Digital is just one, but notwithstanding that, uncertain to the Scottish Government's getting on with the £600 million digital R100 programme to improve the infrastructure, and then with a separate, of course, but aligned strategy on skills, compliance and interconnectivity as well. We need to get on with the rest of our business as well this morning, so I thank the panel for being here this morning. I am going to suggest that rather than suspending, we just proceed, but I will give you just a couple of minutes for those who are not involved in the next session just to leave the table. I am not bothered by their suspending in the interests of time, so I think that John and Simon are leaving us. Before we come to the motion seeking our approval, on the Scottish Fiscal Commission modification of function regulations, again we are joined for the session by the Cabinet Secretary for Finance and Constitution. Mr Mackay has joined for this item by Aidan Gwswood, who was part of the original panel. I just wondered if you wish to make an open statement on this, Cabinet Secretary? Not if the committee is informed of what we are approving, I do not feel the need. Well, we have obviously had the appropriate paper put in front of us, we had the chance to read it. Does anyone have any questions to the Cabinet Secretary? If there are no questions to the Cabinet Secretary, we will move on to agenda item 4, which is consideration of the motion on the order. I invite the cabinet secretary to move motion S5M-12320 that the Finance and Constitution Committee recommends that the Scottish Fiscal Commission modification of function regulations 2018 be approved. I move. Do the members have any other further comments? No, there are no further comments. The question is that the motion S5M-12320 be agreed or we are all agreed. We will publish a short report to Parliament in the coming days, setting out a decision in order to thank the Cabinet Secretary's officials for attending this morning and now close this public part of the meeting.