 Good morning, and welcome to the first meeting in 2019 of the Finance and Constitution Committee, and I wish all members of the committee and, indeed, everyone who is the panelist in the room a happy new year. I could just remind everyone that everyone is usually due to put their mobile phones into a process that won't disturb proceedings. The first item on our agenda this morning is to decide whether to take a draft report the Scottish Government's budget in for 2020 and 2019 opposition in private at future meetings. From the office of budget responsibility. We are joined for our first session this morning by Dame Susan Rice, who's the chairperson of the Scottish Fisheries Commission, John Ireland, who is the chief executive, and commissioners, Professor Alistair Smith. We are also joined, for the first time as commissioners, by Professor Francis Breeden and Professor David Ulf, and we look forward to working with you in your new role, not only today but in the future. I welcome you all to the meeting and I would invite Dame Susan Rice to make an opening statement. Thank you very much. Convener, you have just taken my first three sentences of opening statement, which was to wish all of you good wishes for a healthy and prosperous new year and to introduce my colleagues, but we're very pleased to be here this morning. Thank you for having us. This is the commission's third forecast report since we became a statutory body, our second budget forecast. As before, we give an economic outlook for the next five years and forecast devolved tax receipts and social security spending, but I want to mention just a few points where we have added or enhanced what we're putting in this report. We've also expanded our focus on the fiscal consequences of our forecasts and the block grant adjustments as the fiscal framework matures and as we start to get a better sense of the likely scale of reconciliations, particularly for income tax. To start, the economic outlook for Scotland for over 2018-19 has improved since our last forecast in May and the latest forecast reflects several things that improvement reflects recent stronger economic performance in Scotland, a more positive prospect for earnings over the next couple of years and the increased public spending that was announced in the UK autumn budget. A stronger economic performance over the next two years, but after that we forecast an outlook that's more subdued, with annual economic growth expected to settle back to around 1 per cent again. As in our previous forecast, this longer-term outlook reflects continued low productivity growth compared with trends before the 2008 financial crisis. At the same time, we still anticipate that productivity growth will gently start to recover in the later years of our forecast. Brexit was front of mind as we did our work and it has been throughout our various forecasts in the past. Our economy forecast was prepared on the central assumption that the UK's exit from the EU is relatively smooth or orderly to use the technical term. This assumption encompasses a number of different possible scenarios. There isn't an orderly exit, but that could happen in a number of ways, but a no-deal Brexit is considered in our forecast to be a downside risk to the forecast and not factored into it, although probably a somewhat increasing risk. Our formal judgment was based on what we knew up to late November when our economy forecast closed. Since then, as we've had no clearer idea of what's actually going to happen, we kept an orderly exit central to our forecast. As I said, that could reflect any of a range of scenarios. Even if there is a disorderly exit, specific detail around that would also need to be developed in order to forecast it. None of those are overnight changes. As it turns out, this approach mirrors the one taken by the OBR and its UK budget forecasts in the autumn, which were published shortly before ours. Although we came to these conclusions separately, there are advantages in having the UK and Scottish budget tax forecasts prepared in a similar view of the UK-EU negotiations. Moving on, our tax and social security forecasts now play a greater role in the budget arithmetic, as more taxes and benefits are devolved. In total, we're forecasting £15.2 billion will be raised by devolved taxes in 1920. That's just over a third of the Government's budget. Our forecasts show how the Scottish Government's policy choices are affecting the Scottish budget income tax, land and buildings transaction tax, are both raising additional revenue as a result of changes announced in the budget while receipts from non-domestic rates were lower. Taxpayers inevitably respond to the incentives implicit in the tax system, and estimating the impact and scale of behavioural change is an important part of our work. In last year's forecast, we included an adjustment for behavioural responses to the introduction of the new five-band income tax. In this forecast, we've looked at the behavioural response to the freezing of the higher-rate threshold. While it's important to consider these effects, however, the magnitude is small. We reduced our income tax forecast by £13 million as a result of behavioural responses to the UK tax system. That's about 0.1 per cent of the £11.7 billion forecast for income tax revenue. Social security features again in our report, with new and expanded benefits in Scotland bringing total spending on social security to £458 million in 1920. As benefits have been devolved, the Scottish Government has introduced reforms extending entitlements, making it easier to apply increasing payment amounts. In 1920, we estimate that new and expanded social security payments will cost £90 million more than the funding received from the UK Government for those particular programmes. The Scottish Government is due to take executive competency in April 2020 for the remaining benefits that will be worth around £2.6 billion. Social security forecasting will become more important for the Scottish budget, as all these benefits have block grant adjustments and associated reconciliations. I should also add that, since we last gave evidence here, we've continued to work on access to the data that we need for our work on social security. I'm pleased to report that we've had a number of quite constructive conversations with the DWP. Agreement has been reached to allow us separate access to information and timely access that's already provided to the Scottish Government. We still have to finalise a memorandum of understanding and MOU, but the DWP is now taking our need for access to data seriously. Finally, I was pleased that, yesterday, Robert Chote and I signed a formal MOU between the commission and the OBR, reflecting the strong and collegiate working relationship that we've developed over the last several years. Thank you for listening to those comments. Thank you, Dame Susan. In your introduction, you were discussing behavioural responses. That's where we want to begin the discussion this morning. I need you to help me, enable me and perhaps some of my committee colleagues to get a better understanding of the correlation between your forecast of behavioural responses to the Scottish Government's tax policy changes and your forecast for the increase in the number of top-rate and higher-rate taxpayers. Can I give you some examples of what I mean by that? Evidently, that means lots of numbers, but I guess that's part of the game that we're involved in this morning. For example, in December, you forecast the number of additional rate taxpayers to rise by 700 between 2016-17 and 17-18, which is a year before the rate increased to 46p. However, between 17-18 and 18-19, which is the year when the rate increased, you forecast that the number of top-rate taxpayers would increase by 900 and that it would increase by a further in 900 in 18-19 and 19-20. We need to send another forecast increase of 1,200 between 19-20 and 20-21. The question that I have is—I need you to help me with—is how are you able to forecast a larger increase in the number of top-rate taxpayers after the increase in top-rate than before, given that you also forecast a behavioural response to the tax changes? There's something in there that I just don't get. I'll give you a one-sentence answer and then turn to one of my colleagues to give you a little more of the detail. The numbers of people in each of those bands will necessarily change, like shifting sands, over time irrespective of the bands themselves. If the Scottish population grows, if people come into certain types of jobs, if earnings change, people will move category, it just happens. Those changes will happen necessarily. The specific numbers are part of the forecast judgment that we bring to it, but David, do you want to— Before you do it, if you look at all those numbers put together, we're talking about top-rate taxpayers rising 13,300 more of them between 16-17 compared with 20-21. That seems to me more than just that sort of change that's going on. David? Yes, as Susan said, there are two drivers here. One is changes in the number of taxpayers who are eligible for various tax banks. If, for example, Scotland attracted back into Scotland through migration, some very high-income individuals, David would go into the top tax bank, so there's an increase in the number of taxpayers that comes about through a variety of forces—growth and population, migration—and, if you increase employment, that will bring people in more at the bottom end of the income distribution and at the bottom tax banks. The major force that's driving up the number of taxpayers is the fact that earnings increase faster than the tax threshold. If earnings go up faster than the tax threshold, you're sucking people from the lower tax bank into the higher tax bank. Because we've assumed that the top rate of tax will be frozen, the threshold will be frozen at 150,000 throughout the five years of the forecast, if you're sitting just below 150,000 and you have, say, two or three percent growth in your earnings, you will inevitably be pooled above that 150,000 threshold. For the higher-rate tax bank, we've assumed that it's frozen for 2019-20, but we've assumed that it will be uprated with inflation in the many years of the forecast. However, it's still going to be the case that, given our forecast on earnings, earnings will be rising somewhat faster than inflation, so earnings will be rising faster than the higher-rate threshold is going up in the later years of the forecast. Again, we have this force of pooling people who have had earnings just below the tax threshold into the higher tax bank. These are quite powerful forces driving up the number of taxpayers. It happens in any country where you have a progressive tax system, you inevitably pool people up through the various tax banks as the economy grows and as earnings grow in the economy. The behavioural effects that we're looking at are the decision to freeze the tax rate and the freeze the higher-rate threshold, while the UK Government has increased the threshold to 50,000. There are two components to that behavioural effect. Since we're interested in the number of taxpayers, I'll focus first of all on what we call the external margin effect. Here, people above the higher-rate threshold will end up paying more tax if they're in Scotland than if they're in the rest of the UK. That will cause some taxpayers who are resident in England to consider whether they want to move to Scotland and maybe decide not to move to Scotland, but they could equally decide some taxpayers who are resident in Scotland deciding that they want to move to the rest of the UK. When people move from Scotland to the rest of the UK or don't move from the rest of the UK to Scotland, Scotland loses the entire tax revenue that those people get. You don't need to have very many people deciding either to move from Scotland to the rest of the UK or not move from the rest of the UK to Scotland to have quite a big impact on tax revenues. Susan said that we're forecasting around £6 million of lost tax revenue because of those behavioural effects, but that can come about through a relatively small number of taxpayers either deciding to move south or not to move north. Both of those effects are included. The increase in the number of taxpayers is only relevant to the taxpayers around Scotland, so it's only that effect that will be picked up when we're looking at the number of taxpayers. The fact that somebody chooses not to move to Scotland is not going to affect the number of taxpayers in Scotland, but it will affect the lost tax revenue. There are different effects working on the behavioural effects, which won't necessarily affect the number of taxpayers. Still, the number of the issue for me is how are you able to forecast a larger increase in the number of tax rate payers after the increase in the tax rate than before? I understand all the things that you have described there, but it's that bit that I don't get. I think that it is simply with a stronger earnings profile. The fact that Dave talked about migrating from one band to the other is stronger, so the earnings profile necessarily generates a bigger transition into the higher-rate band. That's one of the important effects. The numbers are different. A large number of people hold above the threshold because of that effect—the increase in earnings—will be affected by the behavioural changes. You don't need to have very many people choosing to move south because of the higher taxes that they pay in Scotland to have a big impact on tax revenue. You lose their entire tax revenue. Final questions from me. I know that there are others who want to get in on that. That's one side of the equation, the tax issue. However, in terms of the assumptions that you made in the analysis that you carried out, what analysis was undertaken of the flip side of that in terms of issues such as free tuition, free care for the elderly, etc., in terms of your analysis of that process? The way that the analysis is done is the following. If you have people located on two sides of a border in the rest of the UK and in Scotland, there will be some people in the rest of the UK who are very committed to being in the rest of the UK for family reasons, for employment reasons and so on, and almost would never move. Equally, there will be people in Scotland who have a great attachment to being in Scotland and who have taken an awful lot to get them to decide to move out of Scotland. However, in between those bands, there will be a number of people for whom being in Scotland or being in the rest of the UK. There are pluses and minuses on both sides of that. There will be some attractions to being in Scotland and some attractions to being in the rest of the UK. Those are the people who are mobile. Those are the people who have relatively small changes in tax rates and could cause them to move from one side of the border to the other. The fact that they have seen some attractions of being in Scotland does not mean that they will not move because they may see other attractions of being in the rest of the UK. In your analysis, it was about the tax issue only. It did not include issues to do with the benefits that it gets from being in Scotland such as free tuition and free care for the elderly. We have had free tuition for years. Those factors will not change people's decision to move. The only thing that has changed is the tax change. That is what we look at when we are flattering in the behavioural effects. The continuation of a convener is that, despite the negative behavioural change, a number of additional tax rate payers goes up by 25 per cent and a number of higher tax rate payers goes up by 10 per cent by the next session. You have talked about that it is not about the migration to the rest of the UK and Scotland. It is about people moving from one band to another. With real earnings growth, whether it is 0.3 per cent or 0.5 per cent over two years between the next session, are you suggesting that there are basically 5,000 additional tax rate payers sitting within just below that band who are going to move up to that band? My question is about how confident are you that you can see those people just below that band? The data within the bands has a survey of personal income. That is only a sample of 1.5 per cent of tax payers across the UK. When that data comes to Scotland, I believe that that is aggregated. Within each band, how are you able to predict that there is that volume of people that is going to flip if the earnings predictions are correct? I think that you have hit the head pretty accurately there. The survey of personal incomes gives us a distribution. That gives us not only who belongs to which band but where in the band they are. Because it is a sample survey and because of the composite records for the additional rate, it is not perfect. In a sense, given the information that we have at the moment from the survey of personal incomes, that is as well as we can do. When we have the out-turn data, that will make things a little bit easier and will have more information. At the moment, we have to make the judgments of where people in the band are, so how likely are they likely to move up when their normal earnings increase? We have to make that on the basis of the information that the survey of personal income gives us. Adam has a supplementary point. I am trying to understand how robust those numbers are. We are all learning about the art of economic forecasting and what is robust, reliable and perhaps more near the guess end of the spectrum. I just want to know where on that spectrum those figures fit. Specifically, what you have said in your most recent forecast is that the number of additional rate taxpayers in Scotland will increase by about 30 per cent over the years between 2019 and 2023, so from 15,800 to 20,100. That is a very significant jump as a 30 per cent increase. Of course, that has massive consequences for the tax revenues that the Scottish Government receives because of the way in which income taxes are prioritised amongst the busker of devolved taxation. How robust is that forecast increase of 30 per cent additional rate taxpayers, 30 per cent increase in the number of additional rate taxpayers in Scotland over that four-year period? Do you know that there are that many people currently earning £142,000, who in a few years' time will be earning £150,000 or is it nearer—I am not being disrespectful—the guess end of the spectrum of forecasts that you are required to make? Of the types of numbers that we have been talking about, that is a relatively robust number because we have a fairly good idea of what the distribution of income is among taxpayers in Scotland through the survey of personal incomes. We can use that to reliably predict what the distribution is. The thing is that there is quite a lot of people sitting just below some of these thresholds. We know for a fact that there are quite a lot of people in Scotland currently earning £145,000 or £140,000, so you predict that within a space of four years we will be earning £150,000. You know that. We know it better than that. It is not a guess. We have a pretty good idea of what the shape of the distribution of income is in Scotland. Can I be a little bit more specific? We know that income distributions at the upper end characteristically have a very predictable shape. It is a shape that tails off quite sharply, so as you move up the income distribution, you get fewer and fewer people. If you think about that, what means when the threshold does not move up with inflation? You have relatively small number of people in the tail above the threshold, compared with the people clustered just below the threshold. When the threshold does not move with inflation, you get a surprisingly large number of people moving into the upper tax band, but it is just a feature of the shape of that tail distribution, with quite a lot of people close to the border and a relatively thin spread of people above the threshold. That is a pretty robust feature of income distributions. You are not surprised by the surprisingly large number of people. I will not be surprised if we are asking the question. First, I will pick up on some of the questions that Bruce Crawford was asking about the balance between push-and-pull factors. If you like comparing changes in income tax, convener mentioned some other factors that Professor Alf said had not changed, such as the social benefits of living in Scotland. However, there are other factors that will change, such as the affordability of housing, compared with some parts of the UK, which face a much more severe housing crisis than Scotland, albeit that there are challenges here. As well, the decisions that people make, the behavioural changes that might arise, are not just about a response directly to changes in things such as tax policy, but they are a response to what people know and what people think and feel about those things. If the fiscal commission is not in a position to try and gauge a net effect, is anybody able to produce an overall sense of how those push-and-pull factors might interact or cancel out? The situation that I described before is that people are on the side of a border who feel some attachment to one area but some attachment to another area as well. Wealthy small changes can cause them to shift from one area to another. You are absolutely right that there can be a whole variety of factors that fit into that scenario. It can be family factors, it can be employment factors, it can be schooling issues, a whole range of factors can go into those decisions. It could be social, cultural or political factors like how welcome migrants feel in a political environment. The way that we calculate this is that there are many places throughout the world where this situation arises. Think of the various states in America. You have the same language, the same currency, but you have differences between states in schooling and other areas. Similarly, in Australia and in Germany, there have been lots and lots of studies made of migration between those different states. Remember that each year about 30,000 to 40,000 people are moving in both directions across the border between Scotland and England because new opportunities are arising, new factors are shifting and changing and causing people to make those moves. That is happening throughout the world. Throughout the world, there are these views across borders. You can use evidence about where those flows are affected by tax differences to try to gauge the extent to which a small change in tax induces a somewhat larger flow of people across borders. That is the kind of information that we use in our forecasts. We use a lot of studies from many other areas that give us some sense of confidence that we have a fairly well-established estimate of what the percentage changes in the amount of tax for Lincoln that we get in Scotland for a given percentage difference in tax rates between Scotland and England? I absolutely appreciate that. I am still slightly at a loss to know whether it is possible to do that work and then to make a comparison with what the other factors might cause people to do, for example, changes in housing affordability. If there are studies out there that have looked specifically at housing affordability, we could draw on those studies to look at those effects, but we are really focusing on the effects of tax changes. That has been fairly well studied, so there are lots of studies out there on which we can draw. Let me come on to that then. Last year, when the Fiscal Commission gave evidence at about the same point in the budget process, I asked some of those questions. In relation to location issues, either where people report their location being for tax purposes, where they move to or from, or whether they might change their decisions in the future, I was told that we are not making a specific forecast on location, we are making an overall assessment of the impact, not setting out particular numbers for the impact of relocation or any other effect. This year, we have a table 3.12, which sets out numbers for 19.20 up to 23.24, suggesting the impact of immediate tax residency changes, longer-term migration effects to and from Scotland. While you acknowledge that there are more people in the most recent year report, you report 16.17 moving to Scotland than from Scotland, you are now at a point in which you are putting specific numbers on to some of those questions that, last year, you were not putting specific numbers. How have you gone about changing that methodology and what exactly has changed? It is a simple methodology. It is a question of how—as we can see from the table—the effect is quite small, but it is one that is now big enough that we think is worth the effort of doing the work on. As the differences in taxes have got bigger, it has become more material for us to think about, and that is the process element of it. Obviously, the dynamic element is a different issue. A central question that we were looking at last year was about an increase of one point in the higher rate, which is a relatively small increase spread across people. Here, we are looking at a different question. We are looking at the effect of the difference between the Scottish higher rate taxes, including national insurance contributions and the UK rate. We made a judgment this year that we needed to particularly look at the behavioural effects of that difference in rather more detail. We have used some of the things that I was talking about before, where we can say that a given percentage tax difference between two countries is a given percentage change in the taxable income in those countries. We have tried to help you by translating that into what would that mean in terms of the number of tax payers. There are some assumptions in there. You have to make some assumptions about the average earnings of the people in those groups, but one future that you will see in table 3.12 is that the response in terms of tax residency is much stronger than the effects on migration. We have made the assumption that tax residency is something that people can shift quite easily. We have assumed a higher response rate on tax residency on migration, because migration is a much bigger decision. You have to choose to buy a house and move your whole family to a different region. We have used some of the different velocities. We are coming out of other studies that we have looked at. Do you want to pin those numbers? Just finally, because some of the discussion last year was about the fact that there are some comparisons that can be made with tax differences between US states, but there are some big differences in the context and the scale of what we are talking about geographically. I wonder if it is possible for you to give us, perhaps in writing another time, an overview of the specific other jurisdictions that you have studied? I think that there are some evidence from some other European countries that mobility is much less for people at the higher end of the income scale, because they are much more physically invested in the place that they are living in. We can follow up that question in writing. Quite a good study on the Spanish system, where they have that across the regions. That is one of the strongest studies that we have looked at on Spain. I think that it would be really useful on an on-going basis to know what other places you are looking at as we look at this year by year. I have one more question on behavioural changes, Tom. It was actually on the increase in higher and additional rate pairs, if that is okay, which is a supplementary to the earlier report. It is still relating to the behavioural issue that I started off with. Thank you, convener. Good morning. It's just a very brief question to Professor Alfam. You described one of the drivers for an increase in higher and additional rate pairs in Scotland. That forecast would be that these higher and additional rate pairs potentially relocating to Scotland. I just want to clarify, would that be that they would be perhaps working on other parts of the UK but would be resident in Scotland for tax purposes? Would they be setting up businesses in Scotland, or relocating businesses in Scotland, which would drive their increase? Or are there vacancies in high-salary jobs, which are currently unfulfilled? It would be people from other parts of the UK or elsewhere who are coming to fill one as a consequence to be Scottish registered taxpayers, which would lead to this increase, as you described. It would be a mixture of all those types of factors. As I said, people will see new opportunities arising in one country that would make them want to move from another country, so it could be that there are people out there who do a job in England and are now given the opportunity to do the same job at the higher salary. In Scotland, you might get a consultant working in the NHS in England who gets a promotion to a higher-paid job in Scotland. You might get people moving for those reasons. It might be people who are working both sides of the board. Sometimes they are working in London, sometimes they are working in Scotland and they just change their residency requirements. I am keen to understand what is the balance between the creation of new, higher-paid jobs within Scotland, which could theoretically be fulfilled by anyone, including people who are currently resident in Scotland, and are there a particular category of jobs that would be performed by people elsewhere in the UK, but they would be resident in Scotland. Perhaps it could be someone living in Edinburgh who commutes to London who is working in financial services, for example, and comes back, but they were registered Scottish taxpayer, hence that is why the revenue would accrue to Scotland rather than the Treasury. Can I just say something that we have right now a fairly tight labour market in Scotland? That means that there may be new jobs or new businesses. We are not looking at this tax from that perspective, but as there are opportunities and openings, the Scottish organisation will need to pay to attract the right person to it. That has an impact here as well. We are not starting by saying how many new companies do we expect to start and how many jobs will that create? I understand that inward migration is essential for driving this increase in a higher and additional tax. Earnings growth as well? Sorry, David. In terms of the increase in the number of taxpayers, it is driven partly by increases in the number of taxpayers, but the largest part of that driver is the fact of what we talked about before. Earnings increase is sucking existing taxpayers in Scotland into that top-rate band, so that is by far the most important driver. As Susan said, we have a very tight labour market, population is not projected to grow very much here, so the growth in the number of taxpayers is a relatively small factor in terms of sucking people. It is large as a drive, the increase in our news, and the fact that the top-rate threshold is frozen, that is the big drive. We will move on to Earnings issues more generally, because you have introduced that now. Tom James, you were going to kick that session off. Okay, thanks a lot, convener, and good morning. I am interested in pay and employment rates and how that contributes to the overall tax position. Compared with the budget that was agreed in February 2018, the forecast position in relation to 1920 is deteriorated by £963 million, and the economic aspect of that is a £183 million decline. That is underpinned in terms of pay and employment by what you are saying, compared with what you gave us in December 2017, as a slight decline in pay rates and employment rates. I am interested in how that has been built up. The comparison that we are thinking of is really compared to our previous forecast. The Earnings pitch has actually improved somewhat, and that is really just the basis of the last few courses of data that have given us stronger earnings pitches. I am not quite sure which comparison we are making. To be specific, I am asking about the comparison with last December, so the position has declined from last December. We took the forecast down in the last forecast, but we brought it back up a bit, not as far as we did in December. That is really just an issue of outturns for earnings that we have seen in the last few quarters. They are very weak prior to our previous forecast, because they have got slightly stronger. It is really just responding to actual outturned data, which, admittedly, for Scotland, is a hodgepodge of different measures. The consensus of the measures is that the position has slightly improved in the last few months, but it did worse prior to our previous forecast. If you look at the OBR on those forecasts, they are forecasting stronger earnings growth and stronger employment growth. I am not asking you to comment on their forecasts, but why in Scotland have we got a picture of declining earnings growth and declining employment rate? I think that the differences are quite small. That is the overall trend in the field. We are talking about this, but the key point being that the Scottish specific numbers point to a slightly different picture than the UK-wide numbers, and that is where this is coming from. What I am interested in is trying to understand what are the drivers for those numbers. That is a more difficult one. One of the things that we have seen is that the productivity performance in Scotland over the last few years has been somewhat worse than the rest of the UK. That is probably an underlying driver. It is hard to translate directly, but you can see the link that should be there. I think that that would be one thing I would point to. You are saying that productivity is weaker, so what is causing productivity? That is a very big question. It is hard, but this is an area across all countries in the world at the moment where we are really struggling to work out why productivity performance is weak across countries. The fact that productivity performance in Scotland the last few years has been marginally worse than the rest of the UK, I am afraid. I do not know the answer to that question because we do not really know the drivers of why productivity has been so weak over the last 10 years across any country. Just going back to the pay issue, one of the comments that you made in your paper was that in relation to average hours worked. That had been falling in recent years, but you saw it as being static going ahead. What is the basis for that comment? Sorry, we will beat the question. You said in your paper published in December that in discussing paying productivity there is a comment that the average hours worked per household had been declining in recent years, but looking ahead it was going to become more static. What is the basis for that? Was the average in space for that comment? I think that one of the keys is obviously, as we have already mentioned, the labour market is tighter in one way. That tightness shows itself that hours go up, so there is more over time. People are asked to do more hours. There is less slack generally in the economy, so that would be one of the drivers of why the hours have declined so much. There may be a factor—I am not absolutely certain—that the shape of our population, comparing to the whole of the UK, is a little different. We have an increasing proportion of people in the highest age groups who are not necessarily active in employment as the people in the middle age groups, if you will. That creates some of that same effect so that the people who are employed, who are working, their services are needed and so they may be offered and may take more hours. I can come back to what Professor Branson Breeden said, because it was quite interesting. On Scottish specific numbers, you used the words, the hodgepodge of numbers available for Scotland. That seems to suggest that, in some way, the numbers that we have available to work with in Scotland are perhaps not as robust as they could be. Is that because it is an extrapolation of UK numbers? What can we do to improve that in that case? There is more than one. That was really my key point. When we look at the earnings profile in Scotland, we are drawing on about four different sources. I cannot necessarily comment on whether that data is stronger than the UK equivalent, but it is the case that, when we are making the judgment on earnings, we are not making it on the basis of one earning series or making it by looking at a range of series, which you can see in the report. If you look at table 2.7 in the main report on page 64, you can see what we have done is we summarised the sources of earnings that are available to us. You can start to see the picture coming out there of stronger earnings growth in 2018, which is reflected in our report. The data sources that you mentioned in your table, are those subsamples of the UK or the Scottish-specific samples? The bulk of them are Scottish parts of UK surveys. Some of those are boosted in Scotland in proportion to the population size. The QNAS, the final one, comes from the national account, so it is slightly different. It must make your job more difficult than that area. It is a characteristic of working with regional economies. The data is not as good as the national economy, but, as we said in September in our data statement or data needs, there are a lot of advances being made in Scottish data. Scotland is pretty well served by its economic data. There are gaps that we identified, but the picture is not as bad as it could be elsewhere. I am still struggling to reconcile all those various figures about forecast income tax receipts and forecast income tax payers. I am focusing on additional rate tax payers because they contribute so much income tax. Income tax is so important to the devolved basket of taxation. We know that the top 1 per cent of income tax payers in the UK contribute more than 28 per cent of total income tax receipts. That is why it is critical to the future prosperity of the Scottish Government's spending plans to maintain and attract ever higher numbers of additional rate tax payers. That is why that is so important. Your forecast increase in the number of additional rate tax payers is, to use Professor Smith's phrase, surprisingly large. It is good to know that you are not surprised by that surprise, but it is a very significant increase. We are talking about over the course of only a four-year period the number of additional rate tax payers going up by more than a third. However, over the same period, you are forecasting income tax receipts to go up much more modestly than that. You are forecasting income tax receipts to go up, yes, but from £11.5 million in 1920 to only just over £13 million in 2022-23. What accounts for what appears to be that variation between, on the one hand, the number of additional rate tax payers going up very significantly, but on the other, the forecast income tax receipts for Scotland going up relatively modestly when we know that additional rate tax payers contribute so much of overall income tax receipts? It is not behavioural change, because behavioural change accounts for only £6 million. It is important in thinking about the arithmetic of that to remember that we are talking about people. The additional tax payers are mainly coming from people whose incomes, because of income growth, move them from one tax payer category to another. It may be the case that the additional rate tax payers as a whole pay a high proportion of income tax revenue. For the individual who moves category, they are moving from just below the tax threshold to just above the tax threshold. Their marginal rate may go up significantly, but the actual tax bill, paid by someone who moves from just below the threshold to just above the threshold, changes relatively little. The numbers changes are driven by people who are close to the threshold and move over it. The numbers of tax payers are driven by that, whereas the tax revenues figures are driven by the average tax paid by different tax payer categories. The average tax paid by someone who moves just over the threshold does not change that much. Neil Findlay, I think that Tom's question is right. Just following on from Adam Tomkin's question, at our last meeting, David Phillips of the Institute for Fiscal Studies warned that there was a particular big risk if Scottish revenues were overestimated and the OBR underestimated UK revenues. Do you agree with that analysis and what is the current risk and risk of that likely to be over the next two or three budgets? I think that that observation was in relation to the reconciliation issue and how that forecast differences could drive the sort of reconciliation as arithmetic in a sort of particularly bad way for the Scottish budget. So I think he was just highlighting the circumstances in which that could happen. What our report does do is it looks at and there is a table in the report that looks at what we think is the current position on reconciliation and makes a forecast difference. That shows that those adverse circumstances at the moment seem to be likely, but they can change. It is just a forecast of a forecast difference. I have a question on the issue of data, particularly to average earnings. I wonder, in terms of the composition of earnings across Scotland, how much that informs how you come to your forecast on earnings. For example, there will be a concentration of high earners historically in the northeast due to oil and gas or financial services in Edinburgh, which will, to some extent, inflate average earnings across Scotland because of that small concentration of high earners. Consecretly, those sectors may be more exposed than others to particular effects, economic shocks, for example. In terms of your forecasts for average earnings, how do you come to them? What are the data sources that you have available, and how does that take account of regional variations where we have perhaps clusters of higher earners in different parts of Scotland? I guess that the approach is very much at the aggregate level. I do not think that we get into these regional issues that much when we do these sort of analyses. I think that the effects that you are talking about, that is fine for our purposes. It just means that, potentially, earnings could be more volatile because of these regional effects, but as long as our focus is obviously always on the Scotland-wide implications of those changes. It is also fair to say, Francis, that when we think about that aggregate macro picture, we are thinking about, in particular, the onshore or on gas industry. We take that into account, and we take into account the prospect for financial industries. Francis is absolutely right. We think about these at a very high aggregate level for Scotland, and we are not blind to the consequences of different sectors and how they are going to evolve over time. Just an example. Last year, in looking at land and buildings transaction tax, given the state of the oil and gas sector, we did focus specifically and had some work done on the northeast and what was happening in that area, in particular around housing prices and transactions and so forth. If we think that there really is something happening, we could go in and look more forensically. In terms of the comparison between average earnings, forecast for Scotland and for the UK, I think that there was a difference of about 0.3 per cent in favour of the rest of the UK. Is that statistically significant? In your opening remarks, you said that Brexit was at the front of your collective minds. I notice that, again in your remarks and in your report, you said that your forecasting is based on an orderly Brexit, although the forecasts for an orderly Brexit are perhaps, if I can be kind, rather fluctuating. You speak a fair bit in your report about the uncertainty around Brexit. However, have you undertaken any specific work on the range of scenarios, including a no-deal Brexit, on the impact on the tax take in Scotland? We have discussed matters of that sort extensively, but as I hinted at in my opening comments, even if there is a no-deal Brexit or a disorderly exit from Europe, that doesn't have one shape. It's not like a braver in apple and that's it. Apples come in a lot of varieties. If that is the outcome of the parliamentary vote, there will then be a period of time where the detail around what does that mean and how will that operate happens. We wouldn't be resourcing. It wouldn't make sense to imagine all of that and to do lots and lots of different forecasts at this point. We need to wait to see what some of that detail is and we would then, at the right time, remember that we also forecast in relation to your timetable in the Parliament, produce a forecast for that. We're not sitting today forecasting every possible because we don't know what those details are. We just don't have the detail. That's really the reason that we stayed with the notion of an orderly exit because that seemed the more likely thing. We don't have any detail right now that tells us that it will be other than that. You can imagine it might be, but we don't have that evidence right now. We need to wait for the evidence. I understand the difficulties in and around the lack of detail and the uncertainty. I wouldn't expect anybody in the panel to have a crystal ball. I did notice that, in paragraph 29 of your report, you started to tease out some of the underlying issues in and around Brexit. Productivity is predicted to be more in part due to Brexit. You talk about international trade, the difficulties around predicting the future economic relationship between the UK and the EU, but you specifically begin to talk about migration. I'm particularly interested in Brexit and the impact on migration. Given that there is a fairly broad agreement that we have a demographic challenge in Scotland and population growth is important to economic growth overall, bearing in mind that there has been a UK Government white paper with a proposal for a £30,000 minimum salary threshold for EU migrants, which, according to the Scottish Government, would reduce EU migration by 80 per cent. We know that all our population, predicted population growth is based on migration. I wondered whether you've given some thought—you've not done the work as yet—about how you will follow the impact on reducing migration into a tax take and into overall economic performance, as it appears to be a very alive matter. Alasdair, if you could give you some detail, I would simply say that these three factors don't relate to orderly or disorderly or no Brexit at all. These are factors that we have been considering as we've thought about Brexit in our economy forecast last year. We've discussed them in depth, and this is our judgment about the impact on migration post-Brexit, but Alasdair, do you want to give some more detail in response? First of all, I emphasise that point. Paragraph 29 of our summary refers to our existing forecast, which includes, as Susan said, an assumption that there will be an orderly exit of the UK from the EU in economic terms, which is essentially happening at the end of 2020, at the end of the transition period. That assumption puts some downside forces into our forecast, as listed there. We're assuming that there will be a negative effect in that central scenario on migration productivity and trade, which will lead to income being lower than it would be otherwise. What we haven't done, as Susan said, is look at what these effects would be if there were a disorderly Brexit. We would expect, looking at the work that other people have done on no-deal Brexit, we'd expect all of these negative effects to be bigger, and there would be some other negative effects as well, and possibly some really quite big negative short-run adjustment effects at the roundabout time of Brexit itself. We produced one forecast based on our central set of Brexit and another assumption—that's our job. If we proceed with an orderly Brexit, then as we find out more about the way migration policy, for example, develops, that will be the time for us to feed more elaborate assumptions about migration into our forecast. You must be right that if whatever form of Brexit we have generates bigger reductions in migration than the ones that we're assuming in our current forecast, then that will have further negative effects on the economy. One other thing that I draw to your attention is that we need to worry about negative effects of migration, not just because of the kind of demographic effects that you talked about, which are of course important. The age of 16 to 64 population in Scotland is at a lower proportion of the overall population than in the rest of the UK, but also of the link between migration and productivity. The flow of migrants are not into overwhelmingly low-paid jobs. A lot of migrants come with high levels of education and skill, high levels of work commitment, and there's no doubt that migration has a very positive effect on productivity. The expectation would be that reductions in migration will have negative effects, not just on direct demographic effects but negative effects on productivity as well. However, those are things that we will need to explore when we find out more about the Brexit path that we're currently embarked on as it develops or an alternative Brexit path, if that's where we end up. Those are all very important things that we will need to give careful consideration to in the future, but we have not done that yet. I'm interested in how quickly you'll be able to give consideration once some light has been shed on the path that we're about to embark upon, given that EU migrants are indeed net contributors in terms of population, presumably tax-take, if the working-age population has grew up on the very important point about productivity. It would appear to me that whatever form Brexit takes, and in particular the UK Government white paper on migration, you talk about downside risks, and I would talk about a devastating impact on our economy. All of that, being in mind our economic performance, relative to the UK, has a big impact on how we fund public services in Scotland. How quickly will you be able to change your assumptions and do some forecasts that scope out the shaping size of the challenges that we are undoubtedly about to face? It's important to be realistic about the timescale. It doesn't take long to change assumptions, but changing the forecasts as a result of a change of assumptions is a process that takes time. We have a forecasting cycle. For our next set of forecasts, we have a clearer picture of what Brexit means, and that can be fed into the forecasting cycle. There is a limit to the extent to which the length of the forecasting cycle can change, not least because it will take time for us to understand what changes we need to look at in our next set of forecasts. We may get more clarity at some point about what form Brexit is going to take. If Brexit were a no deal, there would be probably significant macroeconomic changes at the UK level in response to those, and we would need clarity about what those were in order to produce our forecasts. I don't think that one should imagine that our economic forecasts should be the front line of assessing the immediate effects of policy towards Brexit. We will work through just to stick with your example the effects of Brexit on productivity if we see significant new effects coming along for our next forecast. It's possible to imagine circumstances in which the timetable for our next forecast would change a bit, but we're not in the business of providing policy analysis for politicians making decisions about Brexit. We might wish that we were, but that's not what we do. Just to sum that up, you started by saying how quickly we can only move as quickly as the detail emerges about what that form of Brexit, whatever form it is, happens. We are restrained until some of that detail takes shape. I get the point that you have a specific job in relation to the Scottish budget, as opposed to the policy choices of Scottish politicians, but the realities in your report have started to scope out what the impact of Brexit would be. Your forecast won't be worth a job if you're not doing some sort of horizon scanning and Brexit is looming large in some shape or form. We will move as quickly as we are able to move. Obviously, this will be a tremendous change, whatever the form of Brexit, and we're well aware of that. Thank you, convener. It's just a quick step up to pick up on what Angela Constance is saying. In Dumfries and Galloway, we've got 48 per cent of Scotland's dairy farms, and the big dairy farms have Romanians, Lithuanians and folk from Poland. They're not making £30,000 a year, so there is a bit of a mix. I know that there's work being done by the Scottish Dairy Hub to look at exactly how many migrants. When we're talking about a devastating impact on Brexit and immigration, that is going to have a massive effect on productivity if there's nobody to milk the cows in Dumfries and Galloway, which contribute to the Scotland's economy. It's just to pick up on your thoughts about that, because that's something that I think it's really worth looking into. I think that's right that the agricultural sector is one that is particularly vulnerable to the effects of Brexit on migration. It's probably also one of the sectors that is most at risk from the effects of a no deal Brexit, because if we leave the EU without a deal, then it's going to be very difficult for British agriculture and fisheries to sell their products into the rest of the EU, and that's a big part of their market. That's another big Brexit effect under a no deal scenario that would be relevant for that sector. There's no question but that Brexit, in whatever form it takes, will be providing big questions for us in our next cycle of forecasts. Very briefly, I appreciate there's much of Brexit that could perhaps only be termed as nebulous. However, one clear scenario that may emerge if the UK Government's favourite policy is implemented, i.e. the withdrawal act, is the potential for a backdrop scenario to emerge if the Irish protocol is indeed invoked, which would come into effect within the forecasting period that we've been considering today, early into the next decade. Clearly, the terms of that are quite well defined, including the regulatory diversions that would occur within the UK between Great Britain and Northern Ireland. Has there been any consideration given to that in terms of informing scenarios for your forecasts in the 2020s? The short answer to that is no, we have not looked at those sorts of issues in any detail. That particular example is perhaps a good example of why it would be premature for us to do this. It's simply not clear, and it doesn't matter how careful you read the draft withdrawal agreement. It's not clear how much regulatory difference there will be between Northern Ireland and the rest of the UK in a backdrop scenario, because, as I understand it, Northern Ireland will be obliged to follow EU rules in relation to goods regulation. However, the reality is that producers throughout the UK will have a very strong incentive to stick to the same rules as well. The companies that are selling cars in Northern Ireland or the supermarket chains that are selling food products in Northern Ireland are selling the same products in Northern Ireland as they are selling in the rest of the UK. They are selling the same cars in Northern Ireland as they are selling throughout the whole of the EU. Those UK producers will, in reality, be sticking to EU regulation in any event. That's just an example of the kind of thing that needs to be thought through and understood. In the first instance, it's not by us because we're not Brexit analysts, we're economic forecasters. However, it's an example of the kind of complex issue that we will need to understand the effects of much better as it evolves. In the unlikely event that the withdrawal agreement is agreed to by the UK Parliament in the coming weeks, that is clearly a concrete scenario that could emerge, the Irish protocol being invoked. If that scenario does materialise, do you imagine that the SFC is going to be considering what the implications of that would be, given that it's a concrete real scenario that's legally defined and that will have to inform at least some of your forecasts and scenario planning? My initial thought on that would be that, if the Government's withdrawal agreement does pass through Parliament and we formally exit at the end of March into a transition period in which nothing changes until, essentially nothing changes until the end of December, that's the scenario on which our current forecast is based. I'm not sure that we would feel under strong pressure to set about producing a new forecast other than on our planned timetable. It's the picture where the withdrawal agreement fails to get through Parliament and we have a disorderly Brexit at some point in the next few months. It's the one where everyone involved in economic policy making and forecasting would need to think about what needs to be done and in what order. As I said earlier, we would need to think about how much clarity we needed to have about the policy responses of both the UK and the Scottish Governments to that scenario before we thought about what the implications would be for our next round of forecasts. That's very helpful. The media position is very clear. Thank you, convener. Good morning. I've got some questions on income tax forecasts, but just before I come to that, I wonder if I can ask just a follow-up question, Professor Smith, to something that you were talking about a moment ago in relation to migration that I thought was very interesting, particularly talking about the economic contribution that was made by migrants. I wonder if you are aware if there is any difference in terms of the evidence that we have in terms of whether the economic contribution of migrants varies depending on whether they are migrants from EU countries, from non-EU countries or migrants to Scotland from other parts of the United Kingdom. The short answer to your question is no. There is a lot of work on the positive effects of migration on economic performance, but I can't off the top of my head and certainly not in the report and front and point you to evidence of those kinds of differences. It might be quite an interesting area to look at in the future if there is an argument that there will be a reduction in EU migrants, whether there might be increases in migrants from other parts of the world or indeed other parts of the United Kingdom, trying to understand if there are differences. That might be quite useful. That wasn't really what I was going to ask about, but I thought it was an interesting point to get an answer on. I really wanted to ask about the SNFC's projections for income tax forecasts, where what we have seen is quite a substantial reduction in your forecast for income tax receipts as compared to the forecast that you produced at this time last year. Obviously, we have a narrative from you as to why that has occurred, and to the extent that those reductions are offset by changes to the block grant adjustment. What is of interest to this committee is what the direct impact of all those changes is on the Scottish Government's budget for the coming year. Perhaps you could tell us what exactly is the net impact of all those changes on what we are now expecting for income tax for the coming year for the Scottish Government's budget. That is set out in table 6, just below paragraph 41 of our summary, where the top panel of that table shows our forecast for income tax for 2019-20 and the forecast for the block grant adjustment and the net difference of £182 million. That is the answer to your question. There is our forecast for the 2019-20 year about net receipts in relation to income tax. I thank you for that answer, but am I right in saying that this time last year, the figure that you were forecasting was £591 million. We are talking about a difference of roughly £400 million less than we were thinking we would have at this time last year. Yes, but both our tax forecast and the UK tax forecast and the forecast, which underlies the block grant adjustment, have changed very significantly because we have had out-turn data for 2016-17 in the intervening period. That has shifted both numbers down quite significantly, but you are right to identify that the gap between them has also reduced, so we are now forecasting less net impact on the Scottish budget. There are many moving parts that go into our tax forecast and into the OBR forecasts of UK taxes that then feed into the block grant adjustment. One issue that is perhaps worth thinking about is that the UK tax forecasts have been pushed up this year by the unexpectedly strong performance of tax receipts in 2018, which has led the OBR to increase its forecasts of UK income tax and other taxes. We do not have as detailed information about Scottish tax receipts as the OBR has about UK tax receipts, because the range of data is less. However, in the information that we have, there is not evidence that Scottish income tax receipts have gone up in the same way that UK-wide tax receipts have gone up. That may be because there is a higher proportion of high-rate taxpayers in the UK. The increase in UK income tax receipts is some evidence. I am talking very cautiously, because both in relation to the UK and Scotland, this is some early evidence. There is some evidence that UK income tax receipts have gone up, particularly at the higher end of the income distribution. There are proportionally fewer high-rate taxpayers in the Scottish income tax distribution. Currently, we think that Scottish tax receipts have probably not been subject to the same rate of increase in 2018 as UK tax receipts. That may be—I stress the word—the reason why the difference between our income tax forecast and the block grant adjustment forecast has narrowed so that the net impact on the Scottish Government's budget is now £183 million rather than a larger number. I understand that. I appreciate that everything to do with a block grant adjustment is very complicated and one has to work hard to keep on the thinking on the right lines. The advice that we got from our budget adviser was that your latest forecast implied a worsening of the net tax position of £400 million compared to your forecast this time last year. Is that correct? Yes, that is correct. You look at table 8, the income tax reconciliations figure a couple of pages on that square. For the 2018-19 budget, the net difference has changed from being plus £428 to minus £43 million. I thank you for coming to table 8. I will ask you about this next, because this is looking at the potential forecast reconciliation in the future. For last year, we are looking at a forecast reconciliation of £145 million, which will kick in in the year 2020-21. For the following year, for the year 2021-22, we are looking at a forecast reconciliation of minus £472 million. I appreciate that it is only forecast, but do I read that correctly, meaning that, if your forecasts are correct, when setting the budget for 2021-22, the Scottish Finance Minister will be there for starting with a negative of £472 million. Yes, indeed. That is going to be a... If this is the way it turned out, when we have the outturn data for 2018-19, whenever it is, mid 2020, and the budget for 2021 is being set, then yes, that is a negative number. You are quite right to say that this is a forecast of the extent to which a budget based on past forecasts will turn out not to be accurate. We should probably not get overexcited about the specific numbers. However, behind your question is, as I understand it, the observation that these are quite large numbers relative to the budget. Reconciliations are going to be a very significant issue for Scottish budget management from next year onwards. Indeed. That was the point that I was going to come on to, because we are talking about £0.5 billion, which is a very sizable chunk of money coming out of a budget and what will actually be an election year, so that could lead to an interesting political scenario at that time. I was never going to ask you what the impact that would be on the Scotland reserve, because you go on in your report in paragraphs 115 to 117 to talk about the amount of money in the Scotland reserve, and you observe in paragraph 116 that, in terms of the budget for the coming financial year, the Scottish Government is proposing to draw down £85 million from the capital reserve and £250 million from the resource reserve, and you observe that that is the maximum allowed in the fiscal framework. Given the looming black hole that may or may not materialise, how prudent it might be for the finance secretary to be drawing down the maximum from the reserve when perhaps he should be filling it up? We have set out the facts as we see them here as clearly as we can, because we do think that these are important numbers, but making judgments about the prudence of the decisions is for the cabinet secretary and for you, not for us. I think that we have covered a lot this morning. It has been interesting to hear about some of the political arguments or the economic arguments for how we can have income tax revenues being higher or lower in some areas. I am interested to hear about what would mean factors be, whether it is economic or political, in determining that the forecasts might be higher or lower in Scotland or the rest of the UK, for instance, because the forecasts that you make might not be accurate in some areas, depending on what is happening with Brexit or other wider areas. I guess that there is a general issue about forecasting. Sadly, we do the best we can with the information that we have today, but there are events looming that will almost inevitably knock the numbers off track. I am afraid that there is a lot of a forecaster who can see their forecasts almost inevitably. Is Scotland at a higher risk than the rest of the UK, specifically with some of the forecasting that you have engaged in? Obviously, in the forecasting process, the issue of the data that you start with is key. I cannot really think of a particular risk that is worse for Scotland than it is for the rest of the UK in terms of thinking about what could happen in the next few years. Some different factors, whether they crystallise as a risk or a downside risk, that is another matter, but the factors are, as we said before, that we have a higher proportion of the population in the age 64 plus group that our population is not growing, particularly the working-age population at quite the same rate as it is in the rest of the UK. There are some factors that are different with the type of labour market that I mentioned. Some of those can have positive or negative impacts, but there are some core differences in our makeup. The final question on income tax issues has come from Neil, and then we are going to retweet with Willie Macdonald. In table 3.7 of your report, you have shown revised your income tax forecast down by £275 million, and due to UK policy changes of £199 million, it is due to the increase in the personal allowance. Can you clarify what UK policies account for the remaining £76 million? Which page are you on? I can get you a page on that. The answer to the question is, but I can't put my finger on the note. Can we write to you with that one? Oh, I'm sure, yeah. We have a list that is quite detailed, but I think that's probably the best way of handling that. Yes, that'll get help. Willie LBTT About at this stage of the meeting, you're delighted to get a question on land and buildings transaction tax from me. It was simply to ask that the forecast for revenue for LBTT seemed to be going up progressively year on year, but we hear that growth in house prices is perhaps slower in Scotland, so it was just to ask why the difference is why are we getting more revenue when the growth is perhaps not there to match that. It can't just be down to the policy changes on additional development supplement. That wouldn't account for the difference. It was just to get your view and the flavour of why we're getting more revenue in LBTT over the coming years. The very simple answer is that it depends in those different bands of LBTT where the transaction activity is greatest. If you get a lot of activity at lower bands, that makes a difference, but Alasdair, you probably are a resident expert on that? No, it's just that over the period of the years we do—although house prices increases are less than they've been at some points in the past, we're still predicting that over a period of time house prices will go upwards. We also look at, as Susan said, the distribution of sales between different bands changes from time to time and putting all of those things together. We do forecast that LBTT revenue will rise over the years. That's mainly because of thresholds in bandings rather than the policy change on additional development. Yes, because the policy change is built into all of the years of our forecast. The rise over the years is basically driven by house price rises. That concludes our evidence session this morning. I thank our witnesses very much. We all know that this is a complicated area, so thank you for bearing with us and helping us to understand it more clearly. I will suspend this meeting for probably 10 minutes before we get into the next session. Okay, colleagues, we resume. For the second session this morning, we are joined by Robert Choate, who is the chairman of the Office of Budget Responsibility. Robert, you've been before us a couple of times before, so we're grateful to see you again today. Thank you for coming. I welcome you to the meeting and invite you to make a short opening statement if you wish to do so. Thank you very much indeed, convener. It's a pleasure to be back, as always. As I'm coming after Susan and her quintet, she's obviously covered quite a lot of the territory already that I would normally force you to suffer through in an opening peroration, so I'll keep just a couple of comments. One, obviously, is that, you know, the last time that we produced a forecast was now what seems distantly back in October. The big picture there was that, despite the fact that the economy had not actually been performing very differently from how one had anticipated in previous forecasts, the annual growth rate last year, fractionally lower, but largely down to the weather-based distortions earlier in the year, the fiscal outturn through 2018 was better than anticipated, and that, therefore, had led to an improvement across the forecast, supplemented by us taking a slightly more positive view about prospects for employment growth over that period. So, the underlying fiscal position had improved in that forecast more than you would have expected simply by looking at the economic position. Indeed, sufficiently so that if the Government had sat on its hands in terms of policy at the UK level, you would have seen us on course for the first time to deliver the balanced budget overall that is the Government's fiscal objective for the mid 2020s. As it happened, that windfall had already been spent in effect by the Prime Minister in the previous June with the announcement of the additional money for the NHS. The other policy measures back in the UK budget amounted to an additional giveaway in the near term, but one that, in the typical Augustinian pattern, turned into a small net tightening towards the end of the forecast. Essentially speaking, the combination of the better news in the underlying forecast and the Government's fiscal giveaway left the path of borrowing in the medium term not very different from how it had been in the previous forecast. In terms of timetable now, obviously the next forecast that we will have will be for the spring fiscal event. We don't know yet when that is going to be. The Government has obviously asked us to be prepared for something on the normal sort of timetable, which would normally be the first couple of weeks of March or there or so. We'll see where we are on that. For that forecast, we will get underway fairly soon with the first round of the economic and fiscal forecast. We go through three iterations in the run-up to the point at which we close the forecast and then only allow policy changes to affect it thereafter. As Susan mentioned in her evidence, we and the Fiscal Commission have to date based the forecast on the assumption of a relatively smooth, non-disorderly exit. Obviously, that's something that we will have to keep under review as we go through the successive iterations of this forecast as whether that is still the appropriate horse to be sitting on as we get towards the date there, and then we'll have choices to make on that. I suspect that Brexit will be coming up in questioning, so I'll probably leave some of the content for that. Let me leave it there, and I'm happy to expand on what you've got. Thank you for that opening, Robert. I'm very grateful to you. I'm going to go to James Kelly first. Okay, thanks a lot, convener, and good morning, Robert. I'm interested in the earnings and employment forecasts in terms of the SFC in relation to last year. For Scotland, they are showing weaker earnings growth and weaker employment rate growth at the weaker employment rates, whereas in relation to your forecast compared with last year, you've got an improved position in relation to earnings and employment rates. I don't expect you to comment on the SFC forecast, but just in terms of your forecast, how did you, what were the drivers that produced a more optimistic position? On the employment side, we reduced our estimate of the sustainable equilibrium level of unemployment from where it had been previously. That's something that we've done in a number of recent forecasts and has simply been a reflection of the fact that, as unemployment has fallen, quite often more rapidly than economists generally had anticipated, we have yet to see the substantive pick-up in inflationary pressure and wage pressure that you might have anticipated. On that basis, by pushing down the sustainable level of unemployment that the forecast will tend to in the long term, that gives you scope for greater employment growth over that period. That's the main reason on that side. In terms of earnings growth, obviously, you're taking into account recent outturn data, which, as you discussed in the previous session, there are different ways of measuring what's going on in earnings surveys of them directly, measures which basically look at the amount of income and divide it by the number of people and see how that's moving. We have information, a new source of information, real-time information from HMRC, which is still at this stage. Neither of us are placing huge amounts of waste on that, but it's an additional source of information as well. As I think Francis Breeden was saying over the medium term, the outlook for real earnings growth is driven by your judgments on real productivity growth. As you know, the big picture there is that we have seen much weaker real productivity growth over the period since the financial crisis, which would not surprisingly correspond to a period of weaker earnings growth. Looking forward, we took a judgment, a couple of forecasts ago, that we wouldn't expect productivity growth and therefore earnings growth to get back to the historically normal levels. It would fall some way between the performance we've seen over recent years and over the earlier decades. As I understand it, I suspect that the weaker outlook for earnings growth in the SFC's forecast relative to us over the medium term is primarily down to them taking a slightly more pessimistic view of underlying productivity growth. If you look at the overall GDP growth numbers, roughly speaking over the medium term, we have the UK economy growing by about one and a half per cent a year. The SFC has the Scottish economy growing by about one per cent a year. I think that the larger effect there is differences in population, but the difference that is accounted for by relative productivity growth is one that you would expect to feed through to a difference in the earnings profile. In terms of the way that you do your analysis, do you have any regional breakdown? We don't. We are primarily a forecaster UK-wide and we are looking at that aggregate basis. When we are producing the Scottish specific forecast, obviously the SFC is taking a more bottom-up approach based on their particular analysis of the Scottish economic determinants, whereas we would be looking more at the UK-wide picture and what the Scottish share would be and whether there are particular factors that would be moving that around. I think that one consistent reason to help to explain why the SFC's forecast for Scottish income tax would be somewhat different from our weekly and ours would be that difference in them taking account of weaker expected earnings growth in Scotland. I am also interested in your view going ahead in terms of average hours worked. To give a better context, certainly an area I represent is a concern that, because people's wage levels are low, they sometimes have to do two and three jobs and therefore are having to work longer hours. Is that something that you are seeing in your forecast that people are having to work longer hours? That is somewhere where the data over the last few quarters has been quite volatile and therefore distilling a longer-term picture out of that was difficult. I think that we would, some way back, have assumed that average hours are on a generally quite long-standing downward trend, but in the light of recent data you might assume that that is flatter for the time being, so at that level you would see that. I think that one would be slightly wary of looking too much at the quarter-on-quarter changes on that since the last forecast. It is one of the areas where we would have expected a bounce back from what looked like an erratic number back at the beginning of last year, which has turned out to be more persistent in terms of a fall again that we have anticipated. Good morning, Mr Choat. Just looking at the overall economic and fiscal picture that you paint, you say that the performance of the real economy has been less impressive relative to expectations. You revised down your projections for real GDP growth in 2018. At the same time as that, we see that there is growing employment. We are seeing wages rising faster than previously expected, and we are seeing quite substantial improvement in the public finances. How can we have positive outcomes when GDP growth has been worse than we previously expected? In terms of the calendar year GDP growth rate, it was not that much weaker than anticipated. Most people were looking at something in the 1-1.5% territory, and that has proved broadly in the right ballpark. There was the particular issue last year of a weak first quarter because of the weather, and the way in which you calculate a year-on-year growth rate, what goes on in the quarters immediately before and after the turn of the year has a disproportionate effect on the numbers than if you get a surprise in the fourth quarter of the year. There is an element of that, so I would not overstate that. We were struck, as the numbers were evolving through last year, that you were seeing most of the major tax streams, so not just one of them kicking in considerably more money than was anticipated through this period. There seemed to be something more general going on. One possibility that we raised in the forecast report that we did back in October was the possibility that not necessarily real GDP growth, but nominal GDP growth, the cash size of the economy, may have been growing more quickly than the official figures were suggesting at the time. If you are thinking about tax revenues coming in, we tax away a proportion of people's cash income and spending, not a proportion of what the statisticians choose to regard as real growth versus changes in prices. In the latest set of numbers that the ONS has produced in the last few days, it has revised up its estimate of how quickly the cash size of the economy was growing through 2017, which would be consistent with that part of the story. That said, there were a number of other features, for example, on the income tax side, where there were positive surprises in 2018-19 in the strength of those receipts that you would not expect to push through into future years and which we did not push through into future years of the forecast. Among those policy changes, such as PAYE refresh, which is trying to capture underpayment of income tax earlier, has the effect of bringing forward receipts. You get more of them in the near term, but it does not increase the strength over the longer term. Within the composition of GDP, you also had a stronger employment growth over the summer than people anticipated, so that would be an element of it as well. Adam Murdo, thank you. You just got Murdo and Adam confused, didn't you? I did. It's very difficult to do that. I did manage it. I'm afraid that I want to ask about Brexit. This forecast was published in October, which was before the publication of the withdrawal agreement. You say in this forecast that, at that point, there was no meaningful basis to predict the outcome of what were then current negotiations. Of course, there is now a meaningful basis. In particular, there is a meaningful basis to analyse the economic differences between the deal being accepted and the alternative to the deal being accepted, which is that the United Kingdom would be likely to leave the European Union on a no-deal basis. Could you help the committee to understand what the difference is from your perspective between the deal that's on the table and a no-deal Brexit? We haven't done a direct comparison of those two. We set out in a paper last year the thinking that we would go through in terms of analysing what the eventual outcome is. In terms of policy, it's important to state that, although we are required by legislation to base our forecast on current Government policy, that we and they interpret as policy that is in the Government's hands to deliver and ensure is in place there. Obviously, there is still doubt about where we are going to be at the end point. As you exactly point out, it could be on the basis of that agreement on something else, on some delay in the process or on the possibility of a no-deal exit. In terms of thinking about what the impact of a no-deal exit might be, what you have had was a useful analysis from the Bank of England towards the end of last year. They produced some assessments that were, on the one hand, pointed to some of the differences in essentially their view of the growth prospects that result from, in the long-term, greater or lesser continued engagement with the EU and closeness in terms of trading relationships, but then they also produced a couple of scenarios based on a disorderly or disruptive exit. They were very clear, although, needless to say, everybody leaps to the most interesting of the sets of numbers that they produced. They said that these are, in a sense, scenarios used for stress testing the health of the financial sector under these circumstances, not a specific forecast, particularly that their worst-case scenario was a worst-case scenario, not a central forecast of what would happen under the circumstances of no-deal. If you look at the paths that they set out there, a couple of things are striking. First of all, a disruptive exit would be a very unusual shock to hit the UK economy for which there is not good precedent in this country or indeed in other countries that economists would normally draw upon in saying, well, what are the closest examples of this that you can see in the past and draw conclusions from that. It would be a, in all probability, a simultaneous negative or damaging shock both to demand in the economy, to the willingness of consumers and businesses to spend, and simultaneously and particularly importantly to the supply capacity of the economy, the ability of the economy to produce goods and services and get them distributed. Looking back to instances where you have seen that in the past is quite hard. My colleague Charlie Bean, in evidence to your Westminster counterparts, highlighted the three-day week as one example of where you have had relatively abrupt quantity constraints on what the economy is doing there. In terms of the fiscal implications of that, there is the uncertainty around how big the initial hit is, and I think in the Bank of England's analysis there are two scenarios. As I say, this wasn't a distribution around a particular set of probabilities, it was a near-term hit of 3% or a near-term hit of 8% to GDP. There's obviously uncertainty about how big that would be, but key in terms of the fiscal implications is how persistent that effect would be. Clearly, it is much more of a concern for somebody thinking about long-term fiscal planning and long-term public expenditure if you think that that sort of shock would have a long-lasting effect. I would just move the economy down to a permanently significantly lower trend path of activity than you would otherwise expect, or whether you have a really bad six months, it goes down, it then bounces back, not all the way back to where you would have started, and that's the basis. Neither of those judgments is an easy one to base. As Susan said, it would depend a lot on exactly what the nature of the disruptions was, the nature of the mitigating measures that the UK Government was able to take, the attitude that other EU countries took, how accommodating they were of those sort of constraints as they come up. However, I think that this was interesting in the discussion with Constance about when will we know. Obviously, we would be in the process of having to produce a forecast, and if we have to do it on the basis of a no-deal outcome as a central expectation, we try to do that. What I would warn you about is that even when you start to get the out-turn data, not the forecast, but what the ONS and other people tell you about what was happening through that process, it's going to be the very, very early drafts of economic history, and the initial indications of what has happened to the economy over a one, two, three-quarter period may look very different with the passage of time. I think we'll certainly pop into the next forecast. I looked back at the range over the last 25 years of what the ONS thought happened in the first quarter of the three-day week, and the out-turn estimates, not the forecast, varied from it hit the economy by 3% to it hit the economy by 1%, and the numbers were changing on that years after the event. The caution I would have is the idea that even if we do enter into this process, you have the uncertainties around, as I say, forecasting in the near term what the hit is going to be, how persistent it would be. The other challenge would be is that I will be coming back to you in a year's time and saying, well, this is what the out-turn data is showing at the moment, but we need to be putting an enormous amount of, you know, dollop of salt on this as whether this is the same picture that the official statistics are going to be painting in a few years' time. That's helpful, thanks, and slightly anticipates what my supplementary was going to be, which is this, that you say in your forecast from October, and I quote that a disorderly Brexit, by which I assume you mean a no-deal Brexit, would have severe short-term implications for the economy, the exchange rate, asset prices, and the public finances. When you wrote that, you didn't have anything to compare a no-deal scenario with, but you now do, because we have a comprehensive 585-page withdrawal agreement, which has been in the public domain for a number of weeks now. Is there anything that you could tell us as to how much more severe the implications for the economy, the exchange rate, asset prices, and public finances a no-deal Brexit would be when compared with the withdrawal agreement? Not really, because, as I say, the degree of uncertainty around what the no-deal scenario would look like is considerable. In terms of this coming up in the last situation, it's not clear that the withdrawal agreement were that to pass through would be an outcome that lies outside the range of possibilities that is effectively incorporated in the forecast that we have at the moment. Obviously, a lot of the interest in where we end up with this affects not just the withdrawal agreement, but the end-state trade relationship that we end up with, the long-term migration policy that we end up with, will be things that will have an effect over a far longer horizon than the five years that we are looking at. I understand that, but politicians have a decision to make in the very short term. They have a decision to make about whether to back the deal that is on the table or not. You have very helpfully said that the consequences of a disorderly Brexit will be severe in the short term for the economy, the exchange rate for asset prices and for public finances. We now have something to compare that scenario with, and it would be helpful, I think, if you could assist us in understanding the magnitude of the difference between the deal that is on the table and the alternative to the deal that is on the table, which is as the law stands that we leave the European Union on 29 March with no deal. How much assistance can you give us on that very specific question? I can reiterate the point that a disruptive outcome would be a lot worse than one that is not a disruptive outcome. At the moment, the forecast is predicated hours and the SFC on a non-disruptive outcome, and the withdrawal agreement would be something that is consistent with the range of possibilities that is taken into account on that basis. The bigger uncertainty is not the difference between what either of us are assuming now and what you would assume if the withdrawal agreement went through completely. It's the difference between what we're assuming now and the wide range of different possibilities that a disruptive exit could look like. I think it is important to draw the distinction between a no deal that leads you, nonetheless, in a relatively orderly way to a sort of relatively distant trading relationship with the EU on a WTO scenario versus the sort of exit that implies severe, near-term supply constraints, the cues on motorways type scenario. That's a very different situation and, as I say, we do not have good historical precedents to be able to draw on with that. You don't know until you get there what mitigating measures it would be possible to take, what measures will be taken on the other side of the channel to put that there. The summary is that a disruptive outcome would be worse than a less disruptive outcome, and people should certainly take that into account. The other take-home message from that is that backing the deal avoids these short-term, severe economic implications that you've identified. That's very helpful. Thank you. As you know, that was not a recommendation as to how people should vote one way or the other, which is way above my pay grade. It's also very helpful that, once the deal falls next week, it makes sure that there's no going to be any situation where there's no deal. Angela, I think that you're the supplementary. I've got a few supplementaries, convener. I think that it's very interesting that a lot of the experts in front of us talk about a disruptive Brexit or a disorderly Brexit, and don't actually use the phrase, no deal Brexit. I wonder whether that's because all Brexit is on a spectrum of disruption. I thought that it was interesting that you were talking about more or less disruption. There is nothing about this process that isn't disruptive or indeed damaging. You said earlier that you spoke about reducing demand in the economy and a disruptive effect to supplying of goods and services over and on top of the potential risks to exchange rate, asset prices, public finances. I wondered if you could put some of that in human speak, what that means for ordinary people going about their daily life. Are we looking at food shortages or are we looking at three-day-week queues in the motorway? What will that mean in real life? I can do no more than point you at the sort of analysis that you would have seen out of the Bank of England and other institutions. The nature of those sorts of disruptions is not part of our remit. Exactly, the sorts of things that you're talking about are disruptions to the ability of the economy to produce goods and services, to get them distributed. That's obviously something that will clearly have impact on daily lives as well as on relatively abstract economic statistics. It's another reason why turning that into a quantitative estimate of what this is going to mean in terms of the way in which the ONS measures the amount of value added in the economy from one quarter to the next is a very difficult one. The other, of course, is that we don't know how policy would respond to those sorts of events. The Bank of England has spoken quite a lot about the challenges they would face. It's not like their response to the referendum vote when they perceived it as being a blow to people's confidence, their willingness to spend and that the Bank could therefore come in and buoy that by what they did on interest rates and other monetary support for the economy. They've pointed out that if you're hit by a shock, which is people's ability to get work, people's ability to get the products that their business is produced to their customers, that's a very different sort of economic blow and not one to which the automatic policy response is to take measures that encourage people to spend more. Looking at your executive summary in paragraph 1.16, you spoke of how the economy has already been weakened as a result of the Brexit vote or the EU referendum in terms of the pound being squeezed and the impact that has had on household incomes and consumptions and how business investment has been dampened. Could you speak a bit more about how this has already hurt our economy and the implications of that? That's the conclusion that we and I think most other people have reached. The classic problem here, of course, is that we cannot know with confidence what the world would have looked like had that vote never taken place. You can think about the way in which we've tried to quantify this effect in a couple of ways, one of which is we had a forecast prior to the referendum, assuming that the UK would remain in the, or that there would be a vote to remain in the EU, and we forecast roughly speaking that the economy would grow by about four and a half per cent between the time of the referendum and now. In the first forecast that we produced after the referendum, we reduced that to about three per cent. I think that the latest outturn data suggests that growth has been around 3.2 per cent. That's consistent. It's not a spot-the-ball competition. The numbers can be revised and looked different, but it's consistent in that picture. The other way that people try to approach this task is to, you try to identify by looking at the behaviour of other economies relative to the UK. You try to identify what you might think of as a doppelganger economy for the UK. You have a sort of, let's say, different proportions of the UK typically grows and performs 40 per cent like France, 10 per cent like Hungary or whatever basket of countries that you do to put that together, and then you can look at how that basket of countries has continued to perform after the referendum and compare it with how the UK has actually performed after the referendum, and that gives you a rough picture of what you might think that the UK would have been doing had the vote not gone that way. Now, I think I can think of two or three economists or analytical groups that have done that sort of analysis, and they tend to suggest that the economy is about one and a half to two and a half per cent smaller than it otherwise would have been, and that, again, is consistent with this picture, particularly of the relative weakness of business investment in the wake of the referendum, the fact that the boost to net trade from the fall in the exchange rate has not been as great as some people would have anticipated, but there's clearly an enormous amount of uncertainty around that, but the fact that you have numbers of that magnitude is broadly consistent, again, with the changes in our forecast picture and the fact that you had the world economy doing better than you would have anticipated in the immediate period after the referendum than was anticipated beforehand. So, in a sense, we should have outperformed pre-referendum expectations as a result purely of that better global scenario, but that didn't happen. So, it's a broad picture. It does look as though the economy is weaker than it otherwise would have been, but the precise magnitude is clouded by considerable uncertainty. So, looking at what's going to happen next, and the World Bank had some interesting analysis today about Brexit and, obviously, what's happening with China and the US and trade sanctions as well, so looking to the future in terms of what happens next, none of it looks good and you've spoke about how you assess the change in circumstances as they become apparent, but what I'm particularly interested in is the impact on the tax take and other consequences of Brexit, particularly in relation to migration. We've discussed it this morning already in terms of current UK proposals that are being consulted on in terms of their white paper. That would reduce our working-age population because EU migration could potentially reduce by 80 per cent. That will have an impact on real GDP in Scotland by 6.8 per cent by 2040 and will reduce revenues over the period by £2 billion. So, I wonder what analysis have you done today and how changes in migration and tax take will potentially inform the future work that you'll do? Before the Brexit issue came along, we already have to take some sort of account in all our forecasts of what the prospective outlook for the population is, which is, you know, crucially affected by migration flows, but it's also affected by other things as well, mortality, longevity, et cetera. Again, the big picture conclusion is over a medium to longish horizon that lower net inward migration is a net negative for the public finances, primarily because inward migrants are more likely to be of working age than the population as a whole. From time to time, we basically have to decide from the available population projections that the Office for National Statistics produces which ones we should base our forecast on. When the referendum came along, if the vote had not gone the way that it did, I think we would have been inclined on the basis of what were then recent outturn data to have moved to assuming a higher flow of net inward migration simply because it had been higher than the official projections had suggested in the past. The judgment that we took in November 2016 was to stick with the principal population projection rather than adopting one that would have gone to a higher net inward migration flows, and that, as we set out in that forecast, has an impact on weaker growth in incomes and profits and spending and therefore a weaker position on the public finances. In terms of when we get down to a firm position on what the future migration policy will be, you need to take into account not just what that means for the volume of the flows, but also the composition of them. The forecasts that we have done to date have been based on the relatively simple assumption consistent in broad terms with the available evidence that the characteristics of a net migrant in terms of their likely productivity, their likely employment prospects, are the same adjusted for wage and gender as they would be for the native domestic population. One thing that we would have to do in the event of that sort of change in migration policy is to ask ourselves whether it was sufficient that we should assume that the post-policy change net migration flow would have a different higher productivity consequence than the existing population. I suspect that if we end up going down that path, given that we're talking here about the flows in and not the stock of people in the country at the moment, the quantitative effects would probably be relatively modest, but obviously the implications of changes in migrations that you discussed earlier on, in particular areas, in particular industries, could be more significant than the aggregate picture. On a Scottish context, our population growth is entirely predicated on positive EU migration. However, I would be keen to know whether you have or whether you will do some very specific analysis on the UK Government white paper migration paper that was published just over the Christmas period. Given that, in your executive summary, you take some effort to scope out potential changes on the national living wage, which there's going to be some form of consultation on. In terms of horizon scanning, you've looked at that particular issue and I'm wondering whether you will look in detail at the specific proposals that were put forward by the UK Government on migration, both at the UK level but also at the implications for Scotland. If and when the Government adopts that and proceeds with that, we would incorporate that in the forecast. However, you've done work. As an aside, there would be lots of people who would disagree with paragraph 1.2A in terms of the implications of increasing the national living wage and what that means for employment. You've done work there on a policy that is still potentially very vague. Nobody knows whether that will or not happen. You're saying that you haven't done similar work on the migration proposals because they've not been adopted but there's an actual consultation paper out. That's a fair point. It would be fair to say that the degree of the firmness of the living wage policy was determined relatively late in the process of writing the document. So, when we had known the degree of emphasis that was placed on that, whether it would have received the same degree of coverage is an interesting issue. I think then again in terms of the likely quantitative impact over the course of our forecast horizon, we would take into account, but as I say, this issue about whether you can determine once the policy is implemented, how, with these sorts of reasons, it comes up in areas like welfare reform as well, is you can have a clear, this is the objective, how long is it going to take to implement this? How will the process actually work in practice? Will there be the people in place to ensure that this can be implemented over what period in the time horizon? We've had our fingers burnt on many occasions on assuming that welfare reforms that are announced will come in on a particular timetable when, in fact, it turns out that it takes three times longer to get there. That would be in addition to any relatively high-level statement of what a future policy might look like. We would want to drill down much more into well, actually, how is this going to be implemented in practice? Patrick Stewart Thanks very much. Good morning. Sorry to keep you on Brexit for a little while longer, but one last point on this from me anyway. We all acknowledge the scale of uncertainty and chaos that this whole mess has created, including the fact that the House of Commons appears to have majorities against all the specific paths but, as yet, no majority in favour of anything specific. However, I think that it would be incomplete only to ask you, as Adam Tomkins did, to compare the withdrawal agreement with a no-deal scenario and what the differences in forecasting would be. There is the potential for a different path to be taken whether the public are asked whether they want to think again and cancel Brexit. I obviously wouldn't ask you to comment on the merits of that path, but the possibility exists. If that path was taken, would we simply be in a position of setting aside the range of scenarios in terms of economic forecasts and public finances projections? Would we simply be setting those aside? Or would the OBR and I assume the Fiscal Commission as well say, hang on, we need to go back and work out from scratch what those forecasts are going to look like in a no-Brexit scenario? I think the idea of simply looking back at the last table that you put in a report saying this was what the effect would be going in one direction and just taking it all out again would clearly be too simplistic a way to approach this. A lot of course would depend on, you'd have to make judgments about what implications that a move in that direction would have on business and consumer behaviour, you would see pretty much swiftly what scale of reaction there was in financial markets, for example in the exchange rate, what would be happening on equity prices, etc. It wouldn't be as simply as leaf back through the document, find the last set of numbers you put in and hike them out again. It's not like that scene in Dallas where she gets out of the shower and it was all a dream. You're still located in real-time several episodes on in the drama and that you have to start writing the script from that point. How long a period would it take for that work to be done, assuming that all of the Brexit scenarios are harmful, to figure out what is the new situation that we'd be in in terms of looking at the public finances in the future? In terms of the analysis that we do, we are constrained to produce a forecast on the timetable that is dictated by the UK Government's choices about when to have fiscal events. Obviously, the choices about when to have them, as you saw last year, can be affected by the timetable as well. In a sense, we would be prisoners of the decision of the UK Government as to when to have a fiscal event and how much information there was and how robust it was at the points in advance of those events that we have to start closing the forecast down. You guessed at the beginning, Robert, that a lot of this would be about Brexit. Let me make sure that there are no other supplementaries on Brexit before I move on to another area. No, there are none others. Willie, you wanted to raise issues about digital matters. Thank you very much, Bruce. Hello, Robert. I see in paragraph 1.41 of your report that you talk about the Government's intention to introduce a new tax on large digital businesses, digital companies. It was simply an initial to ask, is there any forecast being made on the value of that and the impact on that? At this stage, on these levels, we would do no more than produce the policy costing on the basis of the measure that was announced. I think in these sorts of areas, seeing exactly how this crystallises in practice the issues around exactly which sorts of firms will be affected, what that sort of basis would be is the concrete information that you would need to come up with a relatively robust estimate in this area. But as you can appreciate, this is the sort of thing that once even when you have firm details, new taxes of this sort are always ones around—you always have a much greater degree of uncertainty around the expectations you would get from receipts from a new measure than you would do around tweaks around an existing one. Given the population of firms that would be likely to be affected by this sort of measure, that would be true in spades on this occasion. Of course, convener, it is also connected with the broader issue that we are going to be leaving the digital single market, Prime Minister stated that almost a year ago that we will be leaving that part of the market, too. Has there been any modelling from then to now about the potential impact of that? We do know that a number of IT companies and wider companies are beginning to move their operations from the UK to Europe, and there is an increasing number of them doing that. Has there been any modelling on the impact of that on the tax take? We have not done anything on that sort of sector-specific basis. What I do not know is whether the Treasury analysis that came out at the end of last year—which I think did have more sectoral analysis than, say, the banks did—how much they drilled down on to that sector particularly, but that is where I would point you to on the official side for that. It is not something that we have done more broadly. Our forecasts of corporate tax receipts are, as with most of our forecasts, done in a more top-down way than building them up from specific sectoral views. Is that something we could get a handle, a hold of, some of that kind of forecasting on there? We can certainly check if anybody back at the office is aware of other people who have done it. You might, I do not know whether people like Oxford Economics who do more sector-related macro or, in addition to a broad macro forecast, do them on a more sectoral basis. It is possible that, in the unofficial sector, somebody like that has done more of it, so if anybody is aware of it, I can certainly get back to you. Emma, do you still want to ask a question? No, I am actually okay, thank you. Okay, Tom. I just want to thank you, convener, and good morning. A similar question that I asked SFC earlier on is about average earnings. In the UK, as a whole, it is quite an imbalanced economy compared to some of our OECD fellow members, particularly with the concentration in the south-east of England. Does that create a degree of volatility in trying to calculate and forecast what average earnings will be, given that they will be inflated to some extent by particular sectors, such as financial services in the city of London? Yes, well, in terms of average earnings, one way you can do that is simply look at the overall amount of labour income divided by people, and there you have got an average. In terms of how useful this is to inform what is going on in your likely path of tax revenues, you are, of course, more interested in what might be going on in the distribution simply because you are getting wage growth at the top, delivering bigger increases in tax revenue than wage growth at the bottom. One of the striking features, if you look over the recent years of the degree of, when you are seeing people brought in at the bottom, you are not getting that much more revenues of the growth of self-employment, etc. That has been part of that story. One area where you might start to see more useful timely information in this area than we have had available to date is with the HMRC's real-time information data source, which will hopefully over time, and they are bringing more of this into public domain as they are happy with the robustness of it. As I say, I think it is a data source at the moment that both the commission and we look at but do not bet the farm on. That, I think, could give you a more granular view of what is going on with the pace of wage growth at different points in the income distribution, as I think you had in the previous session, the issue about whether some of the growth in the relative strength of income tax receipts in the rest of the UK may have been down to the fact that you were having more rapid growth at the top. That is certainly a plausible path, but that RTI data, over time, might be the best thing that we can draw. Do you have a sense of when that RTI data will start to become available? I am thinking ahead of the negotiations of the fiscal framework that will occur within the next few years, because clearly, if we block grant adjustment mechanisms, the forecast for income tax take in the rest of the UK of as it will be England in Northern Ireland in a few years' time will have a significant bearing on the money at the disposal of the Scottish Government. I think it would be keen to get an understanding, because London is such a unique city. It is effectively a city-state in itself, bolted on to a sort of above-average European economy, and I think it creates quite a distorted picture. I just wonder if that RTI information in that more granular detail will be available within the next few years to inform the deliberations that go on between the Scottish and UK Government in negotiating the fiscal framework. Over time, it will become more of a... What I am not sure about is the degree to which the regional and national breakdowns of that will be in their minds robust enough to lay particular weight on them. Therefore, I can imagine them being happier to put national aggregate numbers out before they were willing to do it at another level, but you would have to ask them. As I say, it is an area where it is telling us some interesting things at the moment, but you would be cautious about placing too much weight on it too early. I will take you back to the beginning, where James asked questions about issues to do with tax revenues and growth, etc. According to the latest forecasts, the gap between Scottish income tax revenues and income tax bj is expected to grow, albeit very slightly, in each of the subsequent years of the forecast period from 2020-21 onwards. However, that is despite the fact that the Scottish earnings are forecast to grow more slowly than OBR forecasts for the UK. Are you in a position to explain that contradiction, Robert? Well, I think that this may be down more to the... I mean, the block grant adjustment is, you know, is again way above my... You know, the choice of how to calculate that is above my pay grade. I suspect that the fact that we are taking a relatively top-down view based on, you know, more on the UK aggregates and our view of what's going on in the labour market across the UK and then drawing views about the share of receipts that apply to Scotland, whereas the Fiscal Commission are focusing more on their, you know, growing amount of forecasting at a Scotland specific level. I think that if the gap you're describing between the BGA and us is a reflective of the gap between our forecast for income tax and the Scottish Fiscal Commission's forecast of income tax, then their relatively weaker view of earnings growth and productivity growth probably underlies that. Clearly, on the income tax side at the moment, we're coming back to the earlier discussion you were having. We've got this interesting situation of the relatively large revision we've had to make of our estimate of the Scottish share as a result of the 1617 outturn data coming in considerably lower than the quote-unquote backward-looking forecast of that. Clearly, that's an area where we hope that we will have more useful information coming up for the next forecast that we produce in the spring, because we will have the 1617 SPI to compare against that outturn data. That will hopefully shed some light on some of these starting point issues, and in particular, whether the difference between the outturn data for 1617 and what we had inferred from the previous year's SPI is reflected just in the fact that there's a difference between what those two measures are showing versus whether there's a big move between the 1516 SPI and the 1617 SPI. That would shed some light on whether there are issues around people's behaviour responding in anticipation in the sort of migration and residency issues that you were discussing earlier. Given that debate you had earlier on, one thing I would caution about is that it's tempting to think of the SPI as a sort of rough stab at the true share, and then the outturn data based on the flagging of taxpayers is the right answer. We cannot be confident yet how long it's going to take for this flagging process to bed in, and therefore, whether the share that is shown up in the outturn data takes some time to settle down as the HMRC is getting to grips with whether it's got the right people flagged in the right way will remain a lingering uncertainty for some time. That's very interesting. Could you maybe expand a bit more on why that's proven to be a problem? We don't know yet whether that is a problem. As I say, there is a danger if you conclude from the outturn data for 16-17 that the SPI for 15-16 must have been wrong in some way. These are both numbers which have uncertainties around them. With the SPI you have all the uncertainties that are related to the fact that it's a sample, it's not looking at the whole population and therefore is that representative of the whole population. With the move to flagging, there is the issue about how are people picking this up, how are they choosing to define their residency and their taxpayer status and whether that's going to have to take some time to settle down, how much HMRC is going to feel it has to do to check whether people have given them the right answers. When we get the SPI for 16-17, it's obviously going to be interesting to look at whether there's simply a difference unrelated to behaviour between the post-codes that are in the SPI that you use to identify where people are as taxpayers and what people have told HMRC in the outturn data. The fact that those are different doesn't necessarily mean that people are lying or being disingenuous, that there may be differences there or people may be responding. We will have useful and interesting information when we get this, which we'll hopefully be able to shed some light on in the spring forecasters. Certainly, I know that commission colleagues will be wanting to look at over the coming year, but I would just be slightly hesitant about the view that, with the outturn data, you're absolutely clear what the share is. Again, it's an estimate. That's quite helpful. Obviously, it means that we need to take a much closer look at the SPI numbers when they come out in the spring than maybe previously we would have thought of it to do, just to make sure that they're at least both going in the right direction. Yes. As I say, looking at those differences, we'll shed some light but not clear up all the answers of what's been going on there, but it's certainly something that we will look at and I know that it's something that the commission will want to look at as well. Whether there's just basically a constant wedge between those two sources of information or whether they're moving over time in ways that we need to take account of. Okay. Is there any other colleagues who have any other supplementaries? In that case, no one else has. Robert, thank you very much for coming along this morning and giving us some of your expertise. It's been very helpful and understanding some of the work that you've been undertaking, not only has it been helpful in terms of the factual information, but you bring humor to these occasions. I remember the first time you came, you talked about the spot, the ball competition, how important that was, how relevant that was to forecasting, and now we have a shower killing with Bobby Ewing. Things I'll be able to quote all over the place for a long time to come. It's all, yes. It's humor over substances. I'm afraid that I can offer you, but there we are. We're now moving into private session. Thank you very much.