 Good morning, and welcome to the 7th and final meeting in 2016 of the Finance and Constitution Committee. Welcome to witnesses and welcome to those who are in the public gallery. Just remind members as usual to put their mobile phones into the appropriate mode. The first item on our agenda is to decide whether to take item 5 in private. Members have agreed. The second item on our agenda is to take evidence from the Scottish Fiscal Commission as part of our scrutiny of the draft budget for 2017-18. We are joined for this session by Lady Susan Rice, who is the chair of the SFC, Professor Campbell Leith, who is a commissioner, Professor Charles Nolan, also a commissioner, and Sean Neill, who is the chief executive and a very much warmly welcome for witnesses to our proceedings this morning. I invite Lady Rice to make an opening statement. Thank you very much, convener, and good morning to all of you, and thank you for having us back. I'd like to say a few words about the commission first and then make a brief comment on each of the devolved taxes, and I will canter through. Since we last met in October, the commission has published its report on draft budget 2017-18, along with an accompanying non-technical summary. Following 11 scrutiny meetings, we independently concluded that the Government's forecasts were reasonable and, as is our want, and you'll know this, we also identified a number of areas for continued improvement in the forecast methodologies. Now, as this is the final year in which we will scrutinise the Scottish Government's forecasts and make a judgment about whether they're reasonable, before we take on that responsibility for forecasting within the commission, these recommendations, these suggestions are actually to ourselves, but I point that out. From next April, we'll begin to produce our own independent forecasts of Scottish tax revenues and Scottish onshore GDP. With that in mind, the work of the commission has evolved considerably over the past year. We were joined in the summer by a small team to manage the transition of the commission to a non-ministerial department, and Sean Neil has been our interim chief executive since that time. I'm pleased to report that, so far, the project is progressing pretty smoothly. It's a lot of work, but we are making progress as we anticipated. Permanent staff will begin to join the commission from January, and our way of working will further develop as we take on our new responsibilities. Returning to this year's work, I do want to say that the interim team has given us a lot of support in preparing the report for this year, but I really do have to call out the incredible amount of work that Professor Leith and Nolan did in creating the report, and personally thank them. For this year's work, we developed the beginning of protocol with the Scottish Government to set out clearly how we would interact with them for this year's budget process. I particularly want to note the high level of co-operation and transparency in our discussions with the Scottish Government. We really appreciated that because it greatly facilitated our ability to scrutinise properly and thoroughly the forecast methodologies. In each case, the commission looked for evidence to support the approach adopted by the Scottish Government. As you know, it's not the role of the commission to determine how the Scottish Government produces its forecasts. That's up to the Scottish Government, but where the commission felt there might be benefit from different or additional perspectives, we've shared those ideas with the forecasters. In each case, the forecasters themselves choose whether or not to pursue or adopt these alternative approaches. You will have seen in our report that it includes some sensitivity analysis, some what-ifs is what I would call them, as a way to deepen understanding of some of what might be important drivers of individual forecasts. Last year, our report quadrupled in size from the first year. We should all be grateful that we showed some constraint this year and we only doubled in size from last year, but it has become increasingly detailed and increasingly technical because the models have evolved, because we now have outturned data to consider, because we've added the income tax into this year's report, and because we've shared, through example, the nature of some of the approaches we've taken and made likely take in the future to flex the forecasts, so we're giving a bit of a preview in that sense. Because of this increased complexity, we've tried at the same time to improve accessibility to the report by publishing a non-technical summary for the first time, along with using additional media, such as Twitter, to communicate the work to a wider range of audiences. We'll continue to take this approach. We're keen to learn from these approaches because we want our reports to be accessible as well as authoritative. I'll now turn to a very brief overview of our main conclusions. This is the first year that we've been asked to provide independent scrutiny of the forecast of income tax liabilities. Forecasting income tax liabilities is indeed a complex task. The Scottish Government has developed a model building on demographic changes and growth in income. In reaching our assessment and the reasonableness of their forecasts, we focus particularly on their projections of earnings and employment growth. The commission considers the forecast produced by the Government to be reasonable. We've also identified a number of areas where we feel additional research and model development is required to improve the quality of the forecast in the future, in particular in relation to judgments around behavioural effects and how people will react to changes in tax policy. The evidence base in Scotland to inform such judgments is really limited, so it's not possible to be definitive about these. Looking ahead, it will be important to keep under review our understanding of these issues and consider whether evidence exists or might be generated that could shed further light on them in a Scotland-specific setting. We'll be building a lot of data and observations in the future. The forecast for residential LBTT, land and buildings transaction tax revenues this year are lower than last year, in part due to evidence that the housing market may be somewhat weaker than previously expected but mainly due to changes in forecasting methodology and changes in the base numbers that went into the forecast. In contrast, the forecast for additional dwelling supplement revenues, ADS, is higher than last year because we now have some available out-turn data that's improved our understanding of the scale of additional homes in Scotland. Information is still limited, however, especially around the refund rate, and this is something we'll be monitoring with interest in the future. Non-residential LBTT forecasting hasn't actually changed much from the budget process last year. However, we still feel there may be scope to explore using more Scotland-specific macroeconomic data to underpin the forecast for this tax, again something that we intend to explore in the future. Then Scottish landfill tax, on the other hand, has seen a dramatic shift in forecast methodology away from a simple target-based approach, which we had challenged in the past, and towards an approach that's centered around forecasting tonnages that will be sent to landfill. Initial work has been done to understand the link between the wider macroeconomy and waste erisings, and this is something that we can develop further. There are a couple of other areas that will keep a close eye on the development of incinerator capacity in Scotland. There are lots of plans that need to happen. The policies that local authorities and waste management companies adopt to ensure that the ban on biodegradable municipal waste going to landfill is successful when it's introduced. These will both have an impact on the tonnages that are sent to landfill and, therefore, on the revenue from landfill tax. It will also become responsible for NDR, non-domestic rate income, forecasts from next year, and plan to continue the Government's engagement with key stakeholders in this area to deepen our understanding of the main risks to this forecast, especially around large-scale development projects in a smaller environment. Very large projects can lead to a certain amount of volatility. Those are my comments. I would close simply with a reminder that the Scottish Government has produced these forecasts and that the Commission has taken an independent view of the reasonableness of these forecasts, but we've also begun to anticipate our new remit, and a lot of that is trailed through the report as well. If our report doubled in size last year, I think my opening remarks from last year have as well. I want to thank you for your patience. I now invite the convener and members of the Finance Committee to give us any feedback that you have about the report and, obviously, to ask your questions. Thank you very much. The paper growth may have slowed, but I guess the level of growth that the Scottish economy was growing at that level would all be a lot more excited. However, to turn to income tax forecasting, because it's obviously germane and very important about where we are, and the forecast for Scottish income tax over the period 21-22 suggests a cumulative benefit to Scotland's budget of around £1.5 billion. Some of that will be a consequence of the policy decision to only increase the 40p threshold by inflation. However, a number of growth forecasts that the committee has considered anticipate the Scottish economy growing slower than the UK economy. Given that, can you shed any light on why tax revenues in Scotland are forced forecasts to be higher than the adjustment to the block grant that is based on the per capita income tax revenue growth in the UK? I could take the first part of that. What drives the forecast of tax revenue on the macroeconomic front? Are the forecast paths for employment growth and aggregate earnings? Those are the two main macro inputs, if you like. The model works by forecasting employment growth, building that up from a breakdown from HMRC data, the survey of personal incomes, by age group, by income source and by sector. You're trying to build up the non-saving, non-dividend tax base, so you're trying to get a forecast of the number of taxpayers and their income. For those of working age, employment is the proxy for the number of taxpayers. That's about right, because in the 13-14 SPI data, 97 per cent of taxpayers under 65 have employment from income. Of that income, 95 per cent is non-saving, non-dividend income. Employment growth is the proxy for taxpayer growth. Similarly, for most of the non-saving, non-dividend income for those over 65, it's from pensions, and that's about 80 per cent of their non-saving, non-dividend liabilities. You're building up the knowledge of the taxpayers from the bottom up in the Scottish Government's approach. Forecasting employment consequently becomes very important, because most of the liabilities are coming from people in employment, taxpayers in employment. That's the first part of the connection of the income tax forecast with the wider macro picture. Related to that, given you've got some estimate of the number of taxpayers in employment, the key thing then is how the average earnings are growing. There, the forecast is driven by the OBR forecast for earnings, which is incorporated in the Scottish Government's macroeconomic model to produce an average earnings profile. In effect, those two things are put together, and there are lots of steps in between that I can talk about if you want, but you put those two things together and you get a distribution of income to which you can then apply the tax quota. There are obviously differences between what the Scottish Government is saying and what the OBR is saying in terms of forecasts. What's driving those differences? There will be two generic differences. One is that the models are different, so the OBR model of the Scottish non-saving non-dividend tax liability is basically a share of the UK non-saving non-dividend tax take. It's calculated using the Scottish share of the overall UK tax take, so it's sometimes described as a top-down approach. This share is calculated using the same data that the Scottish Government is using. It's using the 13, 14 SPI data, and then various changes are made to account for demographic changes and differential impacts on how tax changes would affect the rest of the UK and Scotland. However, the share is relatively constant—it's just over 7 per cent, 7.3 per cent, something like that—and it's been fairly constant through time. That's one difference. The models are slightly different, so they're liable to give you slightly different answers. The second thing is that policies are slightly different now, so the higher rate threshold differs through the forecast period and will differ between Scotland and our UK. Those differences will be part of the data, but the OBR didn't include the Scottish Government's plans in their forecast. The OBR's forecast for the tax take assumes that Scotland follows the UK Governments, so there's the other difference there. That would be the two reasons why the forecasts were different. I'm sorry to get into technical stuff so early, but I think that that helps us to understand overall position in terms of how we got to where we are. Ash, you may have some questions on income tax as well, am I right? Good morning. Obviously, at the moment, we might have some clouds gathering over the UK economy as a result of things to do with Brexit. The Scottish Government has made this decision not to pass on the tax cut for the top 10 per cent of earners, as you've mentioned, the changes to the higher rate threshold. As I understand it, 99 per cent of taxpayers are paying no more income tax this year, but revenue will be up. Obviously, the Scottish Government has forecasted revenue of £79 million for next year. That's increasing over the next few years, and then cumulatively, as Bruce Crawford mentioned earlier, £1.5 billion by the end of 2021-22. You've said that you consider the methodology used to come to these forecasts as being reasonable, so I believe that you either have a category of reasonable or not reasonable. Are you able to give a bit more detail around why you thought that they were reasonable? Why is the income tax model reasonable? To answer that in a slightly generic sense, I think that, as Susan said in previous opening remarks and as we write in our reports, we tried to assess taxes and tax methodology by saying that the approach taken is the evidence for pursuing it this way. With the income tax model, the obvious alternative way to do this would be to do some kind of projection on income by deciles, as opposed to build it up by the age cohorts or age groups that I mentioned. Some work was done during the year and we discussed it in our challenge meetings. Would that approach be more accurate than building up by age cohorts? The indications were that the age cohorts were probably more accurate. Given some of the demographic differences between Scotland and our UK, the Scottish Government judged that the modelling approach is probably more flexible for incorporating those effects if and when they arise and become material to understanding the tax take or labour market behaviour. It is a mixture of those kinds of discussions that you say. We do not necessarily agree with everything, but is this a reasonable approach? The approach as a rationale, as a justification, can be defended. It produces numbers that look reasonable. It makes sure of factors. I can just add to that that forecasts develop over time. I have signalled that in my opening comments as well. This is the first year for the income tax liabilities. We think that what they have done is reasonable. Reasonable is not a black and white judgment. It is what it is. It is within a spectrum. We fully expect the approach to evolve over time as we know more, do more, test more. Kimball, do you want to add to that at all? Yes. One of the things that we have repeatedly said at previous meetings is that we should imagine—just as the Bank of England uses—when it forecasts, we should imagine fan charts roundabout those forecasts. There is quite a range of uncertainty attached to them. One of the things that we have tried to do for almost all the taxes in the report this year is to undertake some kind of sensitivity analysis. What is it that generates those fan charts? What is it that generates the main, likely sources of divergence from forecasts that we will ultimately observe? In the case of income tax, the key driver is nominal wage growth. We have spent a lot of time looking at whether that was a bit lower or a bit higher than that. What would it do to the forecast? Is the nominal wage growth forecast from the macro forecast a reasonable forecast to employ because it is a key driver of income tax? It is by drilling down into saying what is materially important for driving the forecast, assessing whether we consider that to be a reasonable approach. That is what ultimately drives our assessment of reasonableness for the tax number that is ultimately generated. The Scottish Government has got a new model, so it is constructing more detailed forecasts now by age group, income source and sector. I think that you alluded to that in your opening remarks. You have said that it is important to further develop the economic modelling of the Scottish labour market because you think that that will be important in forecasting in the future. I am also wondering if some of that is based on the ONS projections on population growth. Is that a little bit more complicated now because of Brexit and possible changes to free movement of people? In terms of the population growth, that goes back to the modelling of taxpayers. The population growth underpins is the first step in calculating the future trajectory of taxpayers, so you apply a participation coefficient to that. Not everyone will be working, so a proportion will be working, a proportion will be unemployed and then what is left is the forecast for employment. The ONS principal population projections are used, which is what the OBR has used in their most recent forecast, to accommodate their latest thinking on Brexit. That is reflected in the Scottish population principal projections as well. At the moment, in the forecast, the Brexit scenario, if you like, as it is unfolding, is reflected in the same way as it is in the OBR forecasts. Good morning. Just to follow up on those questions. The range of impacts that we have been told could emerge from the various different models that we will be living with post-Brexit, depending on whether the UK is inside or outside the single market, depending on whether Scotland has the same arrangement as the rest of the UK or a differentiated arrangement, the range of impacts are really quite stark. The most damaging from the Fraser of Allander report from a couple of months ago suggested real wages down 7 per cent, a number of people in employment down 3 per cent, some 80,000 jobs that amounts to as well as reductions in GDP productivity and exports. There must be some assumptions that we are working with about what fundamental context the economy will be operating in. Can you say what that assumption is and whether, when you take on the forecast and roll from the Scottish Government, you will take the same approach or will you generate different projections, different forecasts for those different assumptions about the conditions in which we will be operating? I will say something about how the Brexit situation is where it is reflected in the current income tax forecasts. The earnings input into the income tax model again follows the OBR wage projections, so that reflects the assumptions that they have made and the modelling that they have produced in their current economic and fiscal outlook for the next five years from 1718 onwards. That earnings profile is very important for the modelling of the Scottish earnings profile, so that Brexit part is in there. I have just mentioned that the principal population projections are used. The employment profile that is incorporated in the income tax forecast is also very close to the OBR's profile. In a sense, the macro forecasts that are going into the income tax model are already starting to reflect how forecasters are trying to get to grips with what Brexit means, which, of course, no one knows exactly what it means. Does that mean that the forecast is based on a midpoint in the range of possibilities of economic harm that will come from Brexit, or is it based on an assumption that the market arrangements will be as they are at the moment that will be inside the single market, and that, therefore, if that is not the case, we will have to revise all of this dramatically downwards? It is almost certainly going to be revised. I do not know whether it is going to be dramatically revised or it will be revised. The way things are playing out at the moment in macroeconomic forecasts is that, a couple of years down the line, the OBR assumes that Brexit happens, and they are shifting down in a net trade neutral way the path for imports and exports. They are having a level shift down in the path for imports and exports, and that is meant to reflect a more difficult international trading environment and a couple of years' time thereafter. However, they are very clear that this is a very rough and ready. They have no real sense of the detail of what the post-Brexit trade deal will look like. In the shorter term, that has not actually happened at the moment. The trading rules have not changed, but what is driving the short-term conjuncture, the short-term forces in the forecast are business investment starting to look much softer now and next year. A drop in the exchange rate is liable to push-up inflation, and we are seeing inflation expectations starting to pick up, and that is going to squeeze real earnings further down the line. So, just when business investment starts to recover, household consumption starts to soften a bit. The next couple of years look like overall growth will soften. Beyond that, it is clearly a very difficult judgment to make on how that situation is going to involve. I do not think anyone knows—I do not know—the second part of my question is about the approach that you intend to take when the commission itself takes on the forecasting function from the Scottish Government. Will you take the same broad approach of trying to produce a single central forecast, or will you use the phrase fan charts a few moments ago? Will you try to produce a range of forecasts based on the different scenarios that we might face, including, for example, based on the range of different policy choices that the Scottish Government might make? The idea that income tax rates in bands stay absolutely as they are at the moment until 2021 seems a bit far fetched as well? I do not want to commit to tie anyone's hands. I think that we would always want to look at scenarios. It is likely that, even in a couple of years' time, the future will not be particularly clear. Some things will have been resolved, new uncertainties will have emerged. I think that we would want to try and take some kind of evidence-based approach, which sectors of the Scottish economy are likely to be more affected by difficult changes in the trading environment or changes in international trading rules or differential regulations. Will our big export industries be affected by that? A lot of the EU tariffs are not that high, but for some sectors they are, of course. If certain sectors are forced to trade under the WTO rules, that could be more difficult for them. It is very difficult to say with any certainty how those things will play out, but I would imagine that we would want to look at very scenarios. You can only say what your central forecast is if you know what the stuff around about it looks like. We will produce a forecast as required in this area. We are not working in this area now, so what you have is what our current remit is. It is absolutely fair to say that we really have not plotted out exactly how we will approach the issue. We know that it is really important that we have done in this round with the Scottish Government. We have asked them about Brexit. We have said, have you been thinking about it? What have you been thinking? How have you incorporated your thinking into your forecast this year? Charles has explained that they have drawn on the OBR approach. That is a reasonable thing to do, given where we are. I think that we would take away your question, and that will be part of our discussion going forward about how we will approach this once we take on formal forecasting. I think that the OBR's approach essentially follows the consensus view of economists that Brexit will ultimately lead to a slowdown in the growth of trades, and it looks likely to slow down the rate of growth of migration as well. The exact balance between that—soft Brexit, hard Brexit and any other kind of Brexit—we just do not know yet. I think that the OBR's forecasts acknowledge that huge uncertainty, and they suggest that that uncertainty will ultimately weigh on business investment. The depreciation in sterling that we have seen will weigh on real wages, and that will then subduw consumption growth. That is the basic approach that the OBR has taken. As things evolve and uncertainties are resolved, we will be able to refine those forecasts. When ultimately we take over the job of forecasting, our remit is to produce a single number to inform the budget, but we would also expect to do a sensitivity analysis around that central forecast. Given that the methodology adopted to the fiscal framework, the per capita process that was agreed between the Scottish and UK Governments, if we have a situation where the rest of the UK is softening at the same rate as the Scottish economy and tax takes softening at the same rate as well, Scotland is no worse off than we would have been because of the block grant adjustment on not way as aggressive. If we have that about right, it is not just about your forecast, it is about the impact and how the rest of the UK is behaving as well. That relationship is indeed very important. If the Scottish economy softens at the same pace as the UK economy, because of the methodology adopted, there will be no impact on the block grant. That is right. The indexation method changes. I think that is right. That is correct. Yes, it is going to be the same condition to accept that. Didn't you have a question in this area as well? I did, thank you, convener. It was looking at the importance of the dynamic between employment levels and average earnings for the overall income tax take. I noticed that the forecast for private sector earnings was 4.9 per cent by 2021. Can you remind me, is that based on OBR, a Scotland derivation of OBR numbers? That is right. It reflects the OBR forecast for average weekly earnings growth. It is slightly more complex than that. It is put into the Scottish Government model and then there is a forecast for annual earnings, but the forecast hours are relatively flat. The underlying driver of the number is the OBR, but it reflects wider earnings. Public-private split, as well. We are talking about the private sector earnings rose 4.9 at the moment. The average earnings figure then comes out of the computer, and then there is an assumption about public sector pay growth, which is then deducted from that average earnings profile, which is the average of the public and private sector, and that delivers your private sector profile. I wonder whether there is any bottom-up analysis. The earnings profile in Scotland is slightly different to the earnings profile across the rest of the UK. If we use just a pro-rata OBR top-down analysis, does that really reflect the earnings profile in Scotland? There are a couple of points to make there. There is some manual survey of hours and earnings data that is also used in the income tax forecast model to plug the gap between the 13, 14 base and the 17, 18 forecast. That reflects some more of the fine grain in the split of earnings. However, the overall correlation between UK-wage changes and Scottish-wage changes is fairly close. There is probably not a huge issue there. One of the sensitivity analysis that we did was to change the earnings profile to see what it did. That is one of the reasons why you do sensitivity analysis, because those assumptions are just that. There are assumptions in forecasts, so you want to test-drive them a little bit, and that is one of the test-driving scenarios that we do. You are right that it is not a one-for-one movement between UK and Scottish wages, but it is quite close. We test drove some alternative assumptions and it did not change in the near term. The forecast liability is too much, but that scenario, if it is allowed to persist for a long time, does, in fact, have big effects. One of the things that we will be looking at going forward is Scotland's specific modelling of the labour market, and we highlight that in the report. Just one final question, if I may. Across the UK, we have seen an increasing move for businesses to incorporate for people to move away from a position of private employment and, perhaps, incorporate, therefore moving out of the personal income tax system into the corporate tax system. The Chancellor addressed that in the autumn statement in terms of the differential tax treatment between those two models of business. Do you think that that move towards incorporation might have an impact on the overall income tax taken for Scotland? Yes, there is an effect in there at the moment. After the basic forecast is produced, there are various off-model adjustments. The two principal ones are gifted and incorporated. There is an assumption in the UK tax forecast, which has an effect on incorporations, and there is a reflection of that in the Scottish income tax forecast as well. That effect is in there at the moment. It follows a similar profile to the UK. Thank you. James, I think that you have some questions around the earnings issue as well. Yes, I have some follow-up on that. You have built up this methodology where there is a link between employment, earnings growth and tax levels. You have explained that there is a difference between public sector wage growth and private sector wage growth and that the private sector has grown to 4.9 and the public sector remains static at 2.3. What does that then say about employment levels and employment growth in the public sector and private sector? The 2.2 per cent wage growth is the Scottish Government's assumption. That is based on earnings growth in the public sector in the period of austerity. It is meant to capture that the next few years should be a lot like the last few years in terms of overall public sector pay growth. As Campbell reminded me, the private sector wage growth then comes out as a residual from overall earnings growth in the economy once you take into account that path for public sector earnings growth. What that says about relative employment levels in the private sector and the public sector, the assumption that drives the model is a forecast for overall employment. You can drill down into the income tax model and presumably get out separate paths for employment in those sectors. The Scottish Government has not published that when we have not looked at it, but the key driver of the income tax forecast in terms of employment is overall employment growth. For example, the forecast for employment growth in 2018-19 is 0.2 per cent, but you are able to differentiate between public and private sector. However, the model is not detailed enough in order to differentiate between employment levels in the public and private sector. In place in the model, there will be some trajectory for employment in the public and private sector. I have not looked at those detailed breakdowns. You would agree with the logic that the figure seems to derive a logic that employment in the private sector is growing at a faster rate than employment in the public sector. Bear in mind the level of figures, you might actually be seeing a decline in employment in the public sector. I am not going to guess what the underlying model would imply about relative growth rates. I think that you are probably right that the assumption about the public sector is meant to be where fiscal restraint is driving that whole scenario. As I said, what that means about detailed forecasts for overall employment, I do not have an answer or a number for you. One of the bits of sensitivity analysis that we did was to allow private and public sector wages to grow at the same rates and not have this gap between them. It does not make a huge difference to the tax forecast. It is not a material driver of the tax forecast. The way that the model works is to extrapolate by age group rates of employment. Implicitly, those will be broken down by the private and public sector, but we have not formally built them back up again to see what the aggregate forecast for those is. However, it is not going to be a huge driver of the tax forecast. What is a huge driver of the tax forecast is the aggregate level of employment growth, but more importantly, wage growth. You have got some questions in this area as well. Has there been any analysis done of the level of the public sector employment rates related to the level of public sector expenditure? Obviously, the Government put forward the budget and overall spending plans to have an analysis of how that will affect public sector employment rates. The model is focused on forecasting, non-saving and non-dividing liabilities, so that has been very much our focus. If you change the assumptions on the public and private pay split, if you change the assumptions on the employment growth path, if you change the assumptions on earnings paths, does that change radically your forecast for non-saving and non-dividing liabilities? That is the thing that we have been mandated to look at, so we have kept to that. We have not really looked at the expenditure side of things that you have mentioned. Is it possible to get the forecast on the actual number of what is being forecast for public sector employment rates for next year? You need to be slightly careful. This is not a model that is built to forecast public sector employment rates. The Scottish Government would need to answer that question to you rather than us, but I suspect that it might say that this is not a model that is being designed to forecast public sector employment rates. That is not what it was designed to do. Out of the 0.3 per cent that is forecasted to increase, what proportion of that would be public sector growth? I do not know the answer to that. When we go on to a different area now in LBTT, first of all, before I say that, in terms of your role in the future, it is quite clear that the committee will need to have the commission back to talk about in the future how you are going about the forecasting, et cetera, because I realise that we are not getting much chance to concentrate on what you are going to be taking things forward after this budget. We will come back probably into the new financial year. I think that I have another discussion with you at that time to let you tell us a bit more about what your activity is going to be. I am afraid that today's evidence session inevitably is based on what the Scottish Government is going to forecast and is going to be about. With that said, we are on probably LBTT now and I will take more to that. I want to ask some questions about residential lands and buildings transaction tax, which Lady Susan Rice alluded to in her opening statement. I see from your report that you state that the estimated outturn for the current financial year is going to be 208 million, which is down 74 million on the forecast, which is a very significant reduction in the original forecast figures and puts into context the report that the committee did on LBTT a few weeks ago. Perhaps even more serious, as you alluded to, there has been a very significant, indeed catastrophic, drop in the forecast for LBTT for the next three years, amounting to £833 million or 46 per cent of the previous forecast total. Given that there is such a significant drop compared to what was previously forecast, how do we explain this? What has been going on here? I will turn to Campbell to give you some of the detail, but, as I said before, it is partly due to a change in forecast methodology and also a start point. LBTT is particularly sensitive to the fact that some remarkable things happen to housing during the early years of the financial crisis, and where you make your start point alters the numbers that come out of the end of the forecast. Campbell will give you a more technical response. The table that does this reconciliation is table 16 on page 45 of the report. The table starts from the original forecast of 295, which was then downgraded to 282, given the ADS adjustment, and then tries to reconcile that with what we seem to be observing at outturned data at the moment. The first thing that would lead to the shortfall in the forecast is that the original forecast was starting from 2014-15 outturned data for house prices and transactions and so on. It then forecast these forwards based on a statistical model of average house price growth, which then tended towards long-term averages, which tended to forecast quite robust house price growth. Those two factors gave rise to a fairly buoyant initial forecast, and because of the progressivity of the tax, when house prices are forecast to grow quite strongly, you push more and more transactions into the 325-750 band, which generates lots and lots of revenues. It is very highly geared. If you have a buoyant market, you will generate lots of revenues. By the end of the forecast arising in the previous budget, there was a forecast for residential LBTT, which was quite large. To a large extent, that was based on transactions being dragged into the 325-750 bracket. What has happened since then is that the outturned data for 15-16 was not as favourable as forecast. Average prices in particular did not grow as well as median prices, which implies a shift away from the top end of the market. To a large extent, that could be due to forstalling activity. That would reduce the forecast to £243 million, so it clearly does not go all the way to explaining current outturned numbers. If we then sequentially replace the price and transactions forecasts from the 16-17 budget with the ones that we now have in the 17-18 budget, we progressively drill down to see why the forecast has been revised. The main thing is that prices in the markets meet the average of median and have not grown as expected. I think that I understand most of it. My follow-up question is how does this relate to what is happening elsewhere in the UK? I know that forecasts have been reduced for stamp-duty land tax in the rest of the UK, but not to the same extent. Can you talk a little about how what is happening in Scotland relates to what is happening in the UK? What is the knock-on effect through the fiscal framework on the Scottish finances? Our remit is to analyse residential LBTT in Scotland and not SDLT in the rest of the UK. We have not focused on that at all. Observations that I could make off the top of my head are that the residential LBTT in Scotland is relatively more progressive than in the rest of the UK, so it is going to be more geared towards changes in forecasts for house prices. At the same time, I think that the OBR's forecasts for the housing market in the rest of the UK are slightly more buoyant than the Scottish Government is currently forecasting, given its new methodology. Those combinations of factors may explain the difference. The market can often drive the UK forecast. In terms of the fiscal framework, the differential in tax take or projected tax take between LBTT and stamp-duty land tax elsewhere in the UK, what impact does that have on the money that is coming to the Scottish Government? As I said, we have not focused on block grant adjustments or the SDLT forecast revenues. Our remit is to focus on LBTT revenues. I just want to explore that whole area in a wee bit more detail. It clearly is a disconnect between the forecast last year and the forecast that we have this year. Reading through, based on section 5 of your big report, you are basically saying that the model is fine, but the issue is round about the forecast of the economic determinants. As you have picked that up in table 16, it can explain what is going on there. You drill down further into that and you are talking about the key issues, the mean and the median being at a counter rather than the number of transactions. When you break that down, the biggest impact is driven by the mean and the median being off compared to forecast. In 2015-16, the mean and median were both subdued relative to forecast, but the mean was relatively more subdued. This year, both were subdued relative to forecast, but there is no obvious additional shift in the mean relative to the median. They both seem to be growing relatively slowly. The issue on transaction numbers is not the main issue, and we have seen that in the analysis that we did earlier in terms of the trends in transactions. The key driver for revenues is that 60 per cent of the revenues are generated by the 325s, the 50 tax bands. Whenever you have a buoyant market, you push more into that band, and that generates more revenues. If that does not happen, revenues do not materialise. I am sure that I understand that. The number of transactions in the 325s, the 750 bracket area compared with the rest of the market did not shift that much. The 325s, the 750 band has a relatively small proportion of transactions, and less than 10 per cent of transactions are in that band, but it generates over 60 per cent of revenues. If you look back at the buoyant forecasts in the last budget, those were driven by an increasing share of transactions going to the 325s, 750s band. To get those large revenues in, you would have to go above 10 per cent share of transactions going to that tax band. That has not quite materialised. I apologise. I will go on to talk about the bands. We have established that there is not an issue with the number of transactions. If you look at the bands clearly when the changes were made to introduce LBTT, at the lower end it was made more favourable, cheaper, and the tax was lower, and it was increased at the higher end. You can see that in the shape of your log normal. If there was an issue about the higher tax driving down the number of transactions at the higher end, before the number of transactions has not changed, you would have seen a differential impact across the bands. However, if you look at what you have, if I am reading this right, tables 18 and 19 and 5.22, when you decompose all of that, the reality is that for all the bands up to 750, there is basically the same drop-off in terms of the number of transactions. What that says is that there has not been a differential impact as a consequence of the increase in LBTT in the 325 to 750 range. In actual fact, if you look at what has happened in the 750 plus and the 1 million plus, it has performed significantly better than forecast based on that log normal that you are originally used. Is that true to say? In the 15-16 out turns that we discussed in our previous out turn report, there was some evidence that in the 325 to 750 bands there was a clear episode of forstalling, but it might have persisted. The relatively low performance of that band might have persisted throughout the year and there was various reasons why that might be the case. For the 16-17 out turn numbers that we have so far, it looks as though both mean and median prices have not been growing as expected, so there has been no tilting away from that particular band. In proportional terms, the forecast error is common across the top three bands or bottom three bands, but because the 325 to 750 band accounts for most of the revenues, that is where most of the forecast error shows up. It is absolutely not true to say that that is caused by... There has not been any change in the shape of the... You actually said yourself that there is no major change in the shape of the distribution. In the 16-17 out turn data that we have today, so that is correct. Whereas if the higher tax rate was driving a behavioural change in that range, we would have seen a change in that distribution. Well, it could be that you observed the change in 1516 and it has persisted into 1617. When you also talk about misallocation between the top bands, which kind of ties in because clearly in the higher rate above 750, you have actually seen a strength in another market. That relates to the fact that even if you put in the out turn economic determinants, the model in aggregate forecasts quite well, but particularly amongst the top two bands, it kind of over predicts the revenues you get from 325 and under predicts the revenues you seem to get from the above 750 band. If you then account for that using what we observed in 1516, it doesn't make a huge impact on aggregate revenues and it makes a bit of an adjustment to what you would observe in the 325 750 band plus the top band, but it's about a 5% adjustment in that 325 750 band, so it's not a huge effect. Not huge, okay. The other impact that's obviously causing something to happen in here is this Aberdeen effect, which you talk about table 22, 5.27, and you're saying that accounts for the balance or the difference of the stuff you haven't found because clearly the Aberdeen Aberdeenshire market is way off the pace as a consequence of the oil impact up there. So I think we kind of present this as being a highly speculative thought experiment. So what we do in this particular case is we don't actually have revenue out turn data for Aberdeen city or the Aberdeen area, so one of the things we hope to do when meeting revenue Scotland in the new year is to look at ways at whether we can actually obtain this data. So what we're instead doing is we're saying, well, here's the state of the Aberdeen housing market in 1415. Here was the forecast for Scottish house prices that was made in the previous budget. Let's extrapolate that. Let's imagine that Aberdeen was expected to grow in line with the forecast for the Scottish economy as a whole. What revenues would that be expected to generate? And then looking at how the Aberdeen housing market has actually performed, what revenues would that be expected to generate? And we look at the difference. And that difference can account for about half of the forecast error this year, but it's a highly speculative exercise. We don't know if the model fits Aberdeen or not. Could I just sort of re-emphasise that point that the question we started with was, are there regional differences here? And then from that question, where might we look? Well, Aberdeen seemed, because of what we're seeing about housing activity there, Aberdeen seemed like a likely place to take a look. That's all that this is, but we don't really have the evidence behind this yet. But it's the kind of exploration we might do in the future. You do have a calculation in understanding those caveats, but you do have a calculation that does give a number that goes a long way to explaining what is left of any drop-off in your forecast. The last meeting that we came to, we said we would come at the data from any angle we could to try and see what's explaining it, and this is one of the angles. So what I'm hearing is then there's a number of reasons why we're off against the forecast, but none of them are anything to do with the fact that there's higher tax rates at the top end of the market. Can we talk a wee bit now about the sensitivity analysis? I gave you plenty of opportunity to say that, and we talked about Aberdeen, we talked about the meeting, we talked about the number of transactions. I think that I said that there was a shift from average relative to median in 2015-16, which appears to have not worsened, but has persisted into this year, and that could be a behavioural response. Clearly, going forward, then, because clearly there's been a disconnect there, do I just talk a bit about the sensitivity analysis that you've done, because clearly we don't want to be in the same position next year that we are this year in terms of being significantly off against the forecast? Yeah, so the Scottish Government has adjusted its way at forecasts, the economics determines this year, so in previous budgets it's essentially had a small statistical model to forecast average house prices, which it then kind of pasted on to an assumption that house prices would grow in line with some long-term average. They then assumed that median prices would grow alongside average prices in the same way, and that transactions would tend towards some long-run turnover rate. Now, following our recommendations, they've adopted statistical models for each one of these elements individually. They've also attempted to differentiate between what was happening before the financial crisis and what's been happening after the financial crisis. Where the previous forecasts tended to go to long-run averages, which included the fairly buoyant period before the financial crisis, the current forecasts tend to extrapolate to a greater extent the performance of the market that we've observed post-financial crisis, and this tends to lead to a far more subdued forecast. What we did is—we're looking at the same data—we're looking at the same types of models, but we made little changes to assumptions about how you would model things. Instead of using one type of statistical model, we used another. Instead of looking at the turnover ratio, we looked at the rate of growth of transactions. Instead of looking at the ratio of median to mean prices, we looked at the rate of growth of median prices. We see what forecasts they would throw out. We see whether or not the forecast would be material-affected by changing any of those elements. The conclusion that we reach is that the average and median prices are the key driver of those forecasts. That's the thing that you need to get right to forecast accurately, but the various bits of analysis that we threw out suggest that the Scottish Government's forecasts are not going to be reasonable. We couldn't find an obviously better way of doing things. Okay. Thank you. Right. Okay. We're bored down to a fair bit of detail in this discussion today. I did say to the clerk that it's a lot of detail in his response to me in the ever-positive way that it's good for the report. We're very grateful for you coming along today, for giving us this evidence session. I'm sure that those from the SFT are now looking forward to the same level of detail. We were sitting behind you about to enter into the next set of witnesses, but in the meantime, I suspend the meeting for a very short space of time just to allow a change over witnesses. Again, thank you very much for coming along. I hope that we have a good Christmas and a good new year. Thank you. Okay. Colleagues, we reconvene. The third item on our agenda today is to take evidence from the Scottish Futures Trust as part of our scrutiny of the draft budget for 2017-18. We're joined in this session by Barry White, the chief executive of the trust, and Peter Rickey, who's the director of investment. I welcome both our witnesses to the meeting. Is one there that Barry White wants to make an opening statement? Thank you very much, convener, and thank you for the opportunity to be here today. Before we make that statement, just as we did last year to register a number of interests, we don't think that there's any conflict, but nevertheless, just to be clear, I'm the public interest director on the MAIC project company. Peter is the public interest director on the AWPR project company. We both hold two charitable appointments, one being Peter in the Community Hub Foundation charity and me in the LAR housing trust. Those are all roles that SFT has asked us to fulfil, nor are they paid directly in any way to us, so it's not a personal thing. It's something that we represent the public sector on, so I just probably wanted to do that first of all. We've provided a written document that highlights elements of our work. In that, we included a section around the call for evidence last year on our work and some helpful suggestions that people made. We have responded to that, and we hope that that's useful to the committee. We last gave evidence on Input Lockry in the 18th of January this year, and during that session we gave evidence on the impact of changing the European accounting rules across the NPD and hub programmes. At that stage, we had just reached financial clues and Air Academy under the hub programme, which was something that we were very pleased to be able to get done quickly after we had been given the go-ahead from O&S under the restructuring of the hub programme. Since then, O&S has confirmed, as we indicated, as likely in our evidence that the other NPD project that was introduced will be publicly classified as the AWPR, which was already known about Edinburgh's Sick Children's Hospital, Dumfries and Galloway Rowland Firmory and the Blood Transfusion Service. The combined capital value of those projects is around £930 million. Also, since then, we appeared in front of the committee, there's been two further updates to the guidance affecting ESA 10, which now is believed to have brought a much more stable position for ESA 10 classification going forward. It's almost two years after being introduced and, after many iterations of guidance, two since January. Through that changing period of time, and since the start of this year, we, with our partners, have now closed 18 hub contracts for schools and community health investments, totaling around £600 million since the start of this year. That position is one of the top three countries in Europe for additional investment. To all the things that I'd like to add very quickly, we're very pleased that one of our traditionally funded projects in hub has trialled the project bank account initiative, which was formally introduced by government in October this year. I know for smaller businesses in the construction sector being paid promptly is the key issue. Project bank accounts don't solve that issue entirely, but it's a useful step forward in smoothing the payment process. I know that the Federation of Small Businesses feels very strongly about that. We've also seen significant progress in growth accelerator financing, and Dundee just signed this month. Those of you who know Edinburgh will see the great progress being made on the demolition of the St James Centre, which is catalyzed by the Edinburgh growth accelerator deal. I think that increasing dynamism and confidence in Scotland's cities is a very positive feature, and it's one that's all the more important as Scotland's public services become more reliant on income from the Scottish economy. One thing within the construction industry at the moment is that people are talking about Brexit, and as the Shepard and Wetterburn report recently highlighted, that there's a concern about workforce in particular and that industry relies on foreign skilled and non-skilled workforce. Within the construction sector, 22 per cent of current workers are over 50 and 15 per cent are over 60, so actually there is a concern about workforce going forward. I think that unfortunate account is one of the 22 per cent of over 50, rather than the 15 per cent of over 60. I never thought of myself as being an aged worker, but according to this Shepard and Wetterburn article, that would appear to be the case. That makes me feel great. I'm very happy to take questions about our work or about anything to do with the 1718 draft budget. I would like to get some stuff on the record today, if I can, about the whole issue around ASA 10. Obviously, that first came out in September 2014 and a number of NDP projects, as you've already described, had to be classified as on balance sheet, but in your written material to us, you provide on page 5, you describe the actions taken by SFD and the Scottish Government since to September 2014 to refocus activity, if that's the right terminology, in the light of ASA 10. Can you give us a bit more detail of what that meant to try to make sure that not as many of the projects, as could have been the case, were classified as on balance sheet? I think that that would be helpful just for the purposes of the record. I might ask Peter to come in specifically on the restructuring of the hub process, but across Europe, people were having to deal with a complex set of rules that were changing. That has affected a number of organisations, not least more recently housing associations, coming on balance sheet as well. Network rail being another example and the school's aggregator at UK level. Even a year after ASA 10 was introduced in September 2015, the European PPP Expertise Centre, hosted by the European Investment Bank, at a presentation in Flanders, said that ASA 10 was a moving target with a continuous addition of interpretations and that there's a hardening of Eurostat rules and interpretation and increasing importance of case opinions. What's happened in the two years since ASA 10 was introduced up to September 16 was a number of projects being scrutinised by classification bodies across Europe, and that has emerged with much clearer guidance in September this year. I'll ask Peter to come in on hub DBFM to restructuring. What that means going forward is in structuring stand-alone projects—again, PD projects were procured on a stand-alone basis—there is much clearer guidance now about how that could be done going forward. Across Europe, that is very much appreciated. Allianz gave evidence to the committee in writing last year as part of the call for evidence about SFT, saying that that was having an effect of stalling projects across Europe. That's where we are in terms of where the guidance now sits. It's now much clearer and much more stable going forward. The one challenging issue is if you were to do a business case for a new project now, it would probably take about a year to get a new business case done and potentially 18 months to procure it. To start a new project now, we would need to be clear on what the UK Government's intention was going to be in the run-up to Brexit or post-Brexit, ignoring the politics of Brexit and so on. Practically, we would need to know what the intention would be for the rules post-March 2019, if that is to be the date at which the UK would leave the European Union. The belief would be that those would be very much in line with the current Eurostat rules. There would need to be a set of rules of some sort. All others are suggesting that that would be a chance for the UK to do something different. I'm just looking forward for a minute. ESA 10 is stabilised, but it is stabilised within a time window that is limited then by—perhaps we can get reassurance from O&S and Trej and we will have those discussions on what is the likely regime beyond that. Peter, do you want to talk about the work that we did in restructuring HUB? Yes, certainly. The HUB programme is a partnership arrangement between the public and private sectors that operates in five separate territories across Scotland and is there to develop community infrastructure. There are lots of schools and health centres are built through that programme and they can be funded either through traditional capital budgets or through long-term revenue budgets under design, build, finance and maintain or DBFM route. Those DBFM projects are affected by the classification rules ESA 10. We spent a lot of time in 2015 restructuring the nature of that partnership between the public and private sectors to retain a private classification for these projects and allow us to pay out of long-term revenue budgets with the changing rules. The main change that we made to allow that to happen was the introduction of a charity, the HUB Community Foundation, as a 20% shareholder in the individual project companies that take forward those projects. That allows 20% ownership to be there and the returns from that ownership to be there for the public good without that being classified to the public sector for national accounts purposes. The public sector ownership has reduced down to 20% with 60% retained in the private sector, as has always been the case. It originally started off as 60% private, 40% public. It's now 60% private, 20% charity and 20% public. That restructuring has allowed us to maintain the balance between private profit and public good but to allow us to retain a private classification in the new rules. That was allowed to make a statement in November 2015 that these projects could go ahead and since then, as Barry said, we've closed 18 projects. Within that period and since the turn of this year, there was a further revision to the European guidance in March, which required us to do some very small changes to the contract documentation but not to the overall structure. Again, as Barry alluded to, there were further changes in September, which again have required us to make some small changes to the contract documentation but not to the overall structure. Through those two further changes, we've managed to maintain the pace of all the projects. We closed eight projects under the 2014 guidance, another seven under the 2016 guidance and another three under the September guidance this year. We've had to work very quickly with all of our public and private sector partners to allow those projects to go ahead in quite a rapidly changing arena of guidance, as Barry said, which we hope is now stable and will allow those projects and the additionality that comes from them over £600 million now additional investment to keep going through the hub programme into the future. Those 18 projects, in terms of the public sector element of the expenditure, what would that amount be? Had those all been classified to the public sector, then that £600 million would have countered against current capital budgets in this year and probably next year as they're built over a period of two years. That is now not the case because we've retained the private sector classification and they can be paid for out of revenue budgets over the life as they're used. I was keen to get that on the record because it shows that you've been pleat of foot in terms of trying to deal with the issues and challenges you've had and effectively secured that additional amount of expenditure that would have been hitting on to capital project costs. Marie, I think that you may have a question around capital stuff as well, am I right? I just really wanted to confirm that when we're looking at the spend for capital projects it does. It might be a very simple question, forgive me, but it's a lot bumpier and less predictable and fluctuates a great deal more than to revenue spend. Is that correct? It's almost impossible to make assumptions. When we look back at what's happened, there's been a delay in some projects, hasn't there? In terms of some projects had to be delayed because of the change in classification. There were a number of projects in the hub programme that were put on pause during late 2015 and those were the ones that were caught up in the first quarter of 2016 where most of the 18 projects were closed in the first quarter as we managed to get them going again. Nothing has not happened because of the change in accounting rules. All of the projects that were in the hub pipeline have continued and have now are now in construction that had faced that small delay. All we see is a slightly different pattern. Dean, you had some questions around classification issues as well. Thank you for your paper and explanation of the background to Issa 10. My understanding is that the trigger to bring those projects on balance sheet was the degree of public control over the project or the SPV controlling the project. With the restructuring to bring about a private classification, can you explain what level of public control is still in place over those projects and how you have managed to achieve that level of public control without bringing it back on balance sheet? I might ask Peter to talk to some of the specifics around that. All of our projects have a director on the board and that is still the case. From a point of view of one of the key things in terms of transparency, which is a big change in those projects and I think something very helpful for how those are managed, that continues to be the case. Peter, do you want to talk about some of the... There's two main ways that we get control of what happens in these projects. The first and most important is through the contract that says that the company that's established to deliver the project must deliver a project in the following way, in the following time, and it will be paid the following amount of money and it must maintain it to the right standards. That contract and the way that those standards are specified and the way that the payments are made are largely unchanged through all of this, so that's the way under any building contract you would say, I want this, I will pay you for that if it's done in the right way. Because project companies were set up for this sort of project, we also had some corporate controls over that company and some of those corporate controls have been relaxed in the way that the board works, so we now have, as Barry said, the transparency through having the board director in place, but we're not able to do some things that previously we thought would be a great idea and like for example stopping the company changing its name and things like that that come through the company's own constitution, less important than the overall control that you get through the contract, but the classifiers were particularly keen on the control of the project company and that's where we've had to make some changes. Just in terms of your, the public sector shareholding has dropped to 20 per cent, is that right? Does that mean you still have to have a pro-rata share on the balance sheet, 20 per cent of the project cost or capital spend on the balance sheet or is it all or nothing? Since it's now deemed as private classification, is all of it now off balance sheet? This is where things get a little bit tricky in the difference between budgeting and accounting and the goal of all of this in a way was to allow long-term revenue budgets to be allowed to pay for these buildings rather than capital dell budgets as they're constructed. So these rules, the European accounting rules and statistical treatments are what's relevant in the UK context for budgeting. Every individual body that procures one of these assets will account under IFRS standards, so the way the projects are accounted for is different from the way they're budgeted for. In budgeting terms it will all be from long-term revenue budgets whereas in accounting terms it's likely that on the books of one of the health boards for example you would see that asset because they have both a contract for it and an interest in the project. So the goal was a budgeting goal and that's what's been achieved. Let me just clarify that. That is a UK level. The national accounts with O and S are the ones that align with budgets and the IFRS accounts are sort of, I think, what are used for the whole of government accounts. So it's just two different purposes for two different sets of accounts. I'm just going back to your point about Brexit. Brexit would impact on EAS 20 but it wouldn't impact on the IFRS treatment because notwithstanding Brexit IFRS would still apply within the UK to the ONS for accounting purposes? I think the question for the ONS and Treasury going forward as part of what to do post Brexit will be to decide how do we do our national accounts because we'll still have to declare national accounts that will be scrutinised by people who want to lend the UK money or whatever else. So EAS of 10 is underpinned by a UN accounting system so anything we do will probably be underpinned by that same accounting system but whether we choose to keep EAS of 10 broadly or whether we choose to do something different will be a decision to be made by the UK Government and the ONS would become, I presume, the ultimate arbiter in terms of classification because we would be no longer subject, again I imagine, to Eurostat. Sorry, one final question. Any further changes expected to this accounting standard or do you think you're now at the final point? Eurostat have said that they hope this final change, which is quite a substantial rewrite that has involved PPP experts from the European Investment Bank and is therefore much more easy to interpret by practitioners. They've said that they intend that to be stable for a period of time although they've reserved the right to make changes should they see that as necessary. I've started a hair-runner in this area because four-foot want to have supplementaries on it so forgive me if we don't get into some of the other details of the areas of your action that the report you gave us. You described the situation where there was a tranche of 18 projects and you were able to classify those at least partly as publicly and that allowed you to smooth the expenditure against revenue budgets over a period of time. Can I ask about the four projects that have had to be classified publicly? You said at the start that the financial total for that was £930 million. What are the budgetary implications of that? I think that the budgetary implication—I can comment on it but it's really the detail that's more a matter for the Government because how they decide to budget for it. I believe that there's a letter from the Finance and Committee for 1516 setting out that £283 million of borrowing powers had been used to cover that for 1516. I believe that, for 1617, the final decision on how that's going to be covered will be taken later in the year. For my knowledge, that's what we believe to be the case, but we supply the information to the Government and they will decide the precise budgeting of it. I'm not really clear. You mentioned at the start that there's a figure of £930 million and there have been reports in the media that that means £930 million of money lost to the Scottish budget. I'm not endorsing those reports but I'm anxious to try and establish the facts of the matter. How has that £930 million had to be dealt with in terms of the Scottish Government budget as a result of the new account notes? The cost of that £930 has spread over a number of years. If we take 1516 and just expand on that example a little bit further, in 1516 there was about £400 million worth of investment that was off balance sheet and there was about £283 million from the projects that I've talked about, the four that are on balance sheet, and there was an agreement between Treasury and the Scottish Government again that, with a letter to the Finance and Committee explaining that £283 million of borrowing powers had been agreed with Treasury to use borrowing powers to cover that £203 million. In that year, that's how that was dealt with in that year. In the year ahead, in 1718, the four projects require that are on balance sheet, the NPD wants that are on balance sheet, have £190 million, roughly, of that are on balance sheet and again the Scottish Government will decide through the year, as I understand. Again, I'm getting bits where I'm saying, it's not for me to say what's going on, but they will again liaise with Treasury and decide how what is the most effective way of doing that. The one year of 1516 that I've talked about is the effect of that was to use up some of the Government's borrowing powers. Is the impact of this, to describe the situation where you're a tranche of 18 projects and you were able to revenue fund them over a period of years, is the effect of this that you're having to bring on more of the expenditure earlier? Is that the impact? So again, back to 1516, which is the one where Mr Swinney has written to the Finance Committee on, and again I think the precise details of how the mechanics of this is really much more for the Scottish Government to say, but by using borrowing powers there would be a mechanism to pay that over time rather than up front, because instead of borrowing from the national loans fund, now the precise details and the agreement between the Scottish Government and Treasury, I don't know, but it still has the effect of spreading the cost over time, as I understand it. I understand from the clerks that this letter may have come in March before, obviously, this existing committee came into being. It was the 4th of March, so we'll make sure that it's circulated around everybody, James. Somebody can see that, but I think that there are questions in here. We need to ask the Scottish Government to get a clearer perspective from their end about how they're bringing these things into booking the impact, but for these guys, I think it's a bit... Do you say in a way that it's done their best to try and answer the questions, but certainly from my point of view, I'm not clear about that area? Well, we need to make it clear. We need to make it clear, I accept that. Patrick. Thank you. Good morning. Can I apologise in advance if this is a bit of a daft laddie question? Mr Reekie expressed the purpose of these arrangements as avoiding the need for upfront capital expenditure by the Scottish Government and being able to move things on to longer-term revenue budgets. If everything else was equal, that might be all very well, but figures that we've seen under FOIs show that we're paying significantly higher interest rates than we would be paying under the national loans fund in one case more than 11 per cent compared with 1.6 per cent. We've also seen that public sector bodies like the NHS are paying, in some cases, three times what labour costs actually are, to have contractors undertake work, contractors charging three times for electrical work, what it costs per hour for an electrician to get their wages paid. Why does it cost so much more to do things this way? Certainly not a daft laddie question. I presume that this is referring to the article in the Guardian that had some of those figures in it. Taking the cost of finance first, it's clearly different if you're borrowing as a Government on a risk-free basis, i.e. you the borough must just pay back regardless of your borrowing money and transferring risk at the same time. In comparing cost of finance, there's a big difference between the two. The cost of senior debt in those projects, which is the bulk of the finance going into them, the particular article got wrong and actually it's closer to 3.5 per cent or around 3.5 per cent is the cost of senior debt in the project. At that level, yes, that is more expensive than the national loans fund was at that time, but is actually under the long-term average for the national loans fund for long-term borrowing and is also under the pooled rate at which local government would assess borrowing. A lot of the pooled rates in local government are around 5 per cent, I believe. The cost of finance secured in those deals is much more competitive than the long-term average for borrowing and much more competitive than the historic PFI deals that were secured at much higher cost of finance. We're talking about lower interest rates than the early PFI schemes, but still you would have to accept significantly higher than public sector borrowing. Yes, so for transferring risk to the private sector and bringing in private sector finance to bear risk, you will pay an additional premium. The risk in effect of transferring is that you don't have to pay for that asset unless it is properly maintained and looked after. There's a very strong contract in place to say that that must be looked after properly for its whole life or for 25 years. That's a really important element, because that longevity of making sure that something is properly maintained is a key aspect of how you stop spending that money again in 25 years' time and maintaining properly as part of that. There's a big task for us all in the public sector to look at how we're managing the existing contracts, the historical ones, because we do believe that there's work to be done to improve the performance standard of those older contracts under PPP and PFI. We have a team of people deployed to do that, working with health boards and local authorities that are making good in-road into it, but there's more work to be done in that. On the point about the public sector paying significantly more, in some cases, three times as much to have trades carried out than the trades people themselves are being paid. I think that NHS Lothian commented on that particular bit in the article and said that along the lines of a figure that doesn't include national insurance or the cost of employment, so he doesn't think that any of us gets somebody turning up at her house to work at that. If you employ a plumber at your house, you don't pay the rate that was set out in that article, if you know what I mean, in terms of the bear hourly rate. The cost of employment would be a factor of three. I could come back to you in the specific figures. I would need to go and have a look at them to come back to you on the specific figures. I think that it is a rate for a tradesman on-site rather than a reflection of purely the hourly rate. In general, you would see when people are quoting for work that that is what you would see. If you could come back with any more detailed answers on those matters, I think that it would be helpful. If people are going to have any confidence that the public sector is getting good value for money, I think that some of those questions need to be answered in more detail. Can I offer some more other information? One of the changes that has been made over the years is that by having a pre-price schedule that is assessed before contract signature, we say that if we have these small changes, we want to avoid some of the exorbitant costs of the past. The pre-price schedule is there to manage some of the excesses of the past. For any one of those projects, do you produce an overall figure or even an estimate about the proportion of what the public sector spends over the lifetime of the project that will be profit for the companies involved? What we do publish is a clear flow of unitary charges as deals are signed on the Government's website. In all the contracts, we have moved to a presumption of publication after three years. We have moved on to a much more transparent basis where the presumption is on publication two years after the facility is open. The details are precisely of how the models work will be available on each of those projects as and when that date happens. What does not tend to be the case and I do not think the case in any sort of procurement is that or fixed price procurement is that the construction contractor or the facilities management contractor as a company do not tend to have to declare at an individual project level whether they made profits or losses on individual projects. Most of the activity done under these contracts is the same as the activity done under individual standalone construction or facilities management contracts. That tends to be a matter for the individual company when it fixes a price for a contract whether it makes a profit or a loss on that. Patrick, I will let that go on a bit. We are beginning to stray away a fair bit from actual budget scrutiny. We have quite a bit of stuff in here around whether it is SFD Invest, SFD Home, SFP Place or SFD Green. Forgive me for that, but I still have a number of colleagues who want to come in. Can we make sure that from now on we can keep it as tightly to the budget as we can, folks, because this is the last chance that we get before we get to budget issues with the minister in the new year? Ivan? I am very brief because Patrick has covered a lot what I was going to cover. My question was about the reason why I would do this. I understand that I would do it because it keeps the debt-to-GDP ratio at a level that is acceptable to the markets. Is that the bottom line? In the context of the Scottish Government, clearly, there are borrowing limits, but in the context of the wider treasury? It is a fascinating question because, yes—a simple answer would be yes, but, because all this is published anyway, the ratings agencies will look at the other liabilities that the UK Government has as a whole. Even though it is off balance sheet, because it is public information, they will add that liability. They will also look at the pension liabilities that have come. The ratings agencies will look at the whole picture when they are looking at. It really should come down to the stuff that Patrick was talking about around what is the cheapest way to do it. That is something that I will not get into here, but probably something that I will look at as a finance committee. We can come back and do this stuff in a bit of detail if we wish us a bit later on. Marie? I had a very quick supplementary in terms of—you were very clear about Brexit, probably having an impact on infrastructure projects in terms of the two and a half year running between the idea and the project that is actually happening—business case plus procurement. Brexit is likely to happen in less than two and a half years. As I understood it, you said that it is likely to cause a pause in the same way as no. I would not say—for instance, what I was really saying is that if we wanted to do more project-financed infrastructure in Scotland, starting to do it now, the ESA 10 rules are much more stable, but we would need to agree with the UK Government what they thought the regime would be in two and a half years' time. If they could tell us that now, then that would give us stability looking forward. In the whole Brexit debate, it is very granular a bit, but for the particular bit that we are looking at, it would be important to know what the intention of the UK Government would be. It is not having an immediate impact because the Government has no projects waiting to happen through project-financed that are not happening. However, if we wanted to do more this way on top of the £450 million borrowing powers going forward, that would be something that we would have to address with the UK Government and the Office of National Statistics. Can the slow-moving world of infrastructure projects any fast-moving rule change has the potential to disrupt things? As very much, convener, it was just to pick up on the part in your paper on the digital infrastructure investment and how you see the relationship with the UK, developing a particular relation to mobile coverage and also with the European Union. When we know that the European Union has a fairly extensive and developed digital single market strategy and agenda, one part of which is removing roaming charges, which will disappear next year, it would be ridiculous in my view that when that happens, then when the UK leaves the European Union, it would take back control and have our own roaming charges again in 2019. In that sense, I would imagine that we will stay within the digital single market, if not the single market. How do you see the relationships developing post-Brexit, particularly the digital infrastructure investment? If we talk about the UK relationship first, one of the most important relationships that we have is with Ofcom and a lot of what happens in Scotland. Most of the investment in digital comes from the private sector, comes from fixed and mobile operators investing in that infrastructure. I think that there are a number of key issues with Ofcom. We put a submission along with the Scottish Government around the digital review and a digital communications review that suggested what they are now doing with open reach by putting at arms length from the rest of BT. In the medium term, that is the most workable solution to try to improve broadband roll-out in Scotland. That actually has an impact on mobile as well, because without having the fibre around the countryside to plug in mobile mass into it, the connectivity requires that as part of it. The second bit is about mobile connectivity. There are a number of things happening. First of all, as 5Gs introduced, how that is introduced at a UK level and how it is regulated in terms of coverage, because of each iteration, I think that the coverage in terms of geographical coverage as well as population coverage has improved a bit. Actually, as a new regime is introduced, the geographical coverage has become really important, particularly for Scotland's remote areas. What we are doing at the moment is working with the mobile operators, the Home Office emergency service contract that is putting a 4G network in place for the emergency services that should cover all the major road networks in rural Scotland to build up a map of where mobile communications are unlikely to go without the market or with the Home Office roll-out, and therefore saying where the Government might need to do something to get that more comprehensive coverage in the more remote communities. Back to the starting point—I will ask Peter to come to the European side—it is the regulation at UK level that is the most important dynamic for how Scotland's coverage and speed of communication and digital is improved and being more accessible. I am really just to say that we at SFT are not involved in the consumer marketplace for mobile communications. We are involved in thinking about the infrastructure that is required to allow that all to happen. There is a very big potential economic gain for Scotland in becoming world-class in our digital, not just in our digital infrastructure, but our use of digital. The infrastructure elements that will support that will be things like fibre, as Barry talked about, power to masks, ducts and the way that we tax and have business rates on the ducts and how we allow those to be owned and operated. Internet exchanges, which is another topic at the moment, the spectrum and how that is managed, which is a UK thing, as we know, and the masks themselves. All of those hard elements of delivering the service of the bits that we do tend to be UK or Scottish-controlled, the overall European market. We are not so involved in that. Maybe I should give a simple example. There is a review on business rates and on domestic rates at the moment. We have fed into that review that if we attach business rates to what is called dark fibres, if people put unused fibre in as they lay, one stretch of fibre, if you put two or three bits in at the same time but do not use it immediately, if you attach business rates to that, the likelihood of them putting unused capacity in is much less, whereas we really think that it is probably quite a good idea if people are putting a bigger pipe in when they are putting it in, even if they do not need all that capacity immediately. There are a series of things that we can do in Scotland that help incentivise the private sector to invest in infrastructure that is needed to build that bigger picture. In terms of the EU and roaming, we do not really have a locus. Personally, I think that the EU roaming has been great progress and actually the cost of phone calls as you move from Europe is so much less now than it used to be, and that roaming bid I think would be a shame to lose that, but I think that that may well rely on, I do not know, who knows what will happen on that. You have talked about Brexit and risks, and, in terms of financing projects, interest rates are pretty fundamental to borrowing. To what extent do you think that there will be a risk of interest rates going up over the next year to control inflation and what would be the impact on the budget of an increase in interest rates? Peter, do you want to? We are in a world of fairly uncertain and quite rapidly changing interest rates at the minute, so we have had some projects that have been financed on very good terms since the Brexit decision was made because the long-term rates have gone down, and now at a very low level they have bounced up a bit again since then. What we do for the long-term affordability of the programme is where projects do not have their long-term interest rate locked in, which happens on the day of the financial close, we include quite a significant buffer to allow for the potential for rates to go up because they are much more likely from where they are now to go up than they are to go down. So, all of our long-term affordability modelling that feeds into the Government's overall affordability modelling includes a margin for the potential for interest rates to go up. If we keep locking them in at these low levels, we will keep seeing the actual affordability be better than what we have predicted. Ash. I think that the most important point is that the assumption that we made in the programme about interest rates is that we are well beneath the assumption of the outset. The interest rates, while the Bank of England rate has stayed very static and the American rates have moved up a bit, the market rate for 2025-year debt has been moving up and down, even though all the rates have stayed static. At the moment, affordability is good, and getting those projects done in the early part of this year at low rates has been a fantastic opportunity to lock in that low cost for the next 25 years. Ash. I am just interested in asking you a little bit about SFT Invest, so the growth accelerator scheme. In my patch, that would be the St James' Centre in Edinburgh in the East End. You are saying that you are using public sector investment to catalyse private sector development. In the St James' Centre example, that is 60 million of public sector investment for a one billion private sector development. I am wondering if you can explain briefly a little bit about the model and how that works. Also, what sort of benefit does the public sector get, or what return does the public sector expect for their investment? The way that works fundamentally is to say that I would say that it is about the actual financial investment, but it is also about the confidence that comes from the public sector, showing that in this case the City of Edinburgh Council and Scottish Government are showing that we have confidence in that area and in that investment. The 60 million itself will go to enabling infrastructure that demonstrates commitment to the site and to the project going ahead, whether that be in the public realm or whether that be other infrastructure elements around the site. The agreement to put that in place has caused the private sector to make that investment decision and to invest its funds there, rather than perhaps to develop a different site that they have got, pretty mobile capital, they can deploy it wherever they wish. We have shown that both by putting the money in and by showing the long-term confidence to that site, that has drawn in the billion pounds for around about 1.7 million square feet of retail leisure and residential development in that area. The returns that will come for that to the public sector will be the returns that the public sector gets and the public as a whole gets from the economic growth that comes out of that development, so there will be an increased taxation take from the business rates and indeed the domestic rates if there is domestic development, but there will also be the jobs that come out of that and an ability to have quite a substantial amount of training done in that site both in the long-term and in the short-term as it is constructed. So, it is a whole series of wider ripples from the site itself in terms of the benefits of the economic uplift that it brings. I think at the moment the confidence that cities are showing in actually attracting investment is such a key element. I think that working with the cities as well as with rural areas, but the cities in terms of drawing overseas, so the St James Centre, for instance, a Dutch pension fund has just recently bought into that, so 75 per cent of the investment is now owned by a Dutch pension fund and I think that is because it has been made an attractive place to invest and I think that sending a message to the market that we are serious about attracting investment through things like city deals, through things like growth accelerator and TIF and we have just launched two new TIF calls for TIF pilots. Those are all important signals to be sending to the investment community, whether that be UK or abroad, that Scotland is a good place to invest. I will just wind that out a little bit because obviously we are involved in doing growth accelerator work there, but there is also the Glasgow and Burness Aberdeen, and I declare on interest the Stirling city region deals. What involvement have you got with those other areas that are involved in the city deals and trying to help them to secure that additional impact for bringing private sector money to play in the way you have done in places like the St James Centre area? I think that the city deals in Scotland are really a tripartite arrangement between the city region, UK Government and Scottish Government and that is a crowded enough space as it is when you get a tripartite agreement. We support the Scottish Government on how it is structured but the actual interface is led by the Scottish Government with the UK Government and the local authority group in the area. Our expertise will go in to look at the robustness of the business plan and looking to say what are the capture mechanisms to say, how do we know that this is really having the effect but we feed that into the Scottish Government and put into it? Do you have anything to say in that addition, Peter? In areas such as Aberdeen and Inverness, we have been involved in specific elements where we have expertise, such as the digital elements of that programme to help the local authority to shape that investment to get the most boost from it. In the Stirling clap my handshire, we are probably slightly more involved at an early stage in helping the authorities to develop their prioritised project list so that they have identified and helped shape that to deliver the maximum impact for a set of projects. Can I ask a quick follow-up on that? I am very encouraged to hear that but one of the puzzles that I have about the Glasgow city deal is that we have 20 or 22 projects that are at various stages of development and getting any transparency around why those projects were selected and what the ones are still on the cutting room floor in terms of the evaluation as to why those projects, rather than others, would be the ones to deliver the growth that the city deal is all about, is quite a difficult process in the Glasgow case at the moment. Has there been any learning from city deal to city deal? Obviously, Glasgow was the first one in Scotland and we know that there have been others since and that others yet others are still in the pipeline, not only Stirling but also Edinburgh. Has there been any learning from one city deal to the next? In particular in this question of how you model the relationship between the infrastructure investment and the growth that you want to see as a result of the infrastructure investment? There will have been learning. There will be learning between the cities, through the city lines and other forums. We have not been involved in the earlier deals. We have always had a view that the prioritisation of investment and doing the right things as well as just doing things well is more important to do the right things than it is important to do the things that you are doing well. We absolutely would support the rate that Stirling is collapsing going down and others hopefully in the future of trying to draw those direct lines between what our city or our city region or indeed any region, what our vision for that area is economically, what it is for and whether there is any infrastructure barriers to that development and that vision or what infrastructure investments or indeed other investments will support the vision and draw in those lines between the projects. It is very hard to do it through an Excel spreadsheet or any form of model, but the better we can get, I would agree with you, at drawing the direct lines between the economic outcomes that we are looking for and the social outcomes that we are looking for and the investment decisions that we make and transparency around that would be good progress. I think that it is probably true to say that some of the original deals emanated from political agreements to do things and did not have the necessary business plans behind them, but more recently the city deals that have emerged have had pretty well worked up business plans to work with. That has been one of the factors from my experience. I would describe it as a journey, but I think that you are being more subtle, perhaps. I do subscribe to the view that it has made the cities much more outward facing to investors and having a much clearer vision and a much clearer vision about how they are going to tackle some of the bottlenecks. If you are an investor coming to look at that, I think that that is quite a positive story. You need to have the delivery falling behind the story and the degree of rigor in the city deals. We were not involved in Glasgow, but we are involved in the subsequent ones. That muted plan is an interesting terminology that says that you agree with me. Thank you for coming and giving us evidence. Sorry that it was not as broad-ranging as it might have been, but there is an imperative here to understand a lot of the issues that are going on from different members. Thank you very much for coming along and giving us evidence today. I hope that you have a happy festive period. We will now have a short suspension to allow for change over witnesses. I am very happy to give you all the evidence as well. Colleagues, the fourth item on our agenda is to take evidence on the draft budget for 2017 from a panel of stakeholders. I welcome you all to the meeting. We have Colin Borland, who is the senior head of external affairs at the Federation of Small Businesses in Scotland. Clare Mack, the director of policy and place at SCDI, and Dave Moxham, who is the deputy general secretary of the STUC. Welcome. Members have received copies of submissions from each of our witnesses. We will try to make this as free-flowing as we can. If somebody asks you a specific question of a specific member of the panel and you want to chip in beyond that, please feel free to do so. We will get under way. Adam Tomkins. Thank you very much, convener. Good morning. Welcome to the committee. Thank you for your written submissions, all of which were very helpful. I want to ask a question about growth and the extent to which, if at all, you think that this is a budget for growth. I was very struck by the FSB, who said in their written submission that they were very keen for the Scottish Government's spending plans to focus on measures that grow the economy and encourage the creation, sustainability and growth of business. The SCDI, at the beginning of their submission, talks about the underperformance and the Scottish economy, particularly as regards productivity and innovation, and the STUC in their submission also talks about the importance of growth policies. The opening question is, is this a budget for growth, and is it a budget that adequately provides for growth in the Scottish economy? If it doesn't, what more would you have wanted to say? Thank you very much. As you say, there were three things that we highlighted in our submission that we thought would be beneficial towards growth. First was maintaining a stable tax regime as far as possible in line with the rest of the UK, expanding the small business bonus scheme, getting the best value out of money that is spent, ensuring that most of the efficient joined-up government has a particular focus on digital public services, and, firstly, a focus on local investment, particularly local infrastructure. If you look at the budget, I think that we have done okay. I know that arguments and tax were pretty finely balanced at a time when weak consumer demand and sluggish economic growth, as dominating business owners worries, might make sense to put more money into your customers' pockets by using the tax powers and giving them a tax cut. On the other hand, at this time of economic fragility and political uncertainty, there is also merit in minimising uncertainty, disruption and extra admin for employers by keeping rates of thresholds the same as the UK. In the absence of any compelling modelling on either side, we ended up advocating the latter position simply because our position is always to simplify the tax system where we can, not further complicate it. Because we have not properly explored some of the practical consequences of having divergence from the rest of the UK. I noted in one of the Fraser of Allander Institute's commentary on the budget the issue—I am sure that you have explored it in detail, so we will not detain you with it—about the upper earnings limit for national insurance and how, if that stays the same when the upper threshold for income tax in Scotland moves, you can see some people with a marginal rate of 52 per cent. The fact that you have things like that emerging probably shows that it was the right thing to try to keep everything as uniform as possible could for the moment, not ruling it out in the future, obviously. We welcome the fact that rates were maintained. It would be interesting to see how this differential in the higher threshold plays out. We welcome the small business bonus. The fact that we have seen the threshold for 100 per cent increase on the threshold from 10,000 to 15,000 is obviously good news. If you look at the impact that that is having on businesses up and down the country, particularly in some of our harder-pressed economic areas, that has got to be—I do not know when we will talk about that more in detail, so, again, I will not go into that in too much detail. Here, the extra money for broadband infrastructure and mobile infrastructure was good news. Very quickly, we would like to have seen more stuff, I think, more on local roads, particularly local infrastructure. That is where the productivity gains are to be had. That is where most journeys happen, that is where most delays happen. That would have been good news. It probably would not be fair to expect it to be outlined in a budget statement, but, longer term, we need to look at how we are delivering public services, where, particularly when times are tight, we can get a little bit more value for the money that we are spending and where things such as duplication and overlap space around business support but elsewhere, as well, can be addressed. Obviously, our advocated growth is the key element of our statement that we made to you. The growth rate of about 1 per cent this year sits about a third of the UK, and that is something that closing that gap is absolutely critical to the economic health of the country. For us, productivity is absolutely key to that. Productivity is quite a difficult thing to unpack, but we have done a little bit of work on that. In terms of what we think is great about the budget, support for infrastructure investment is key to that. One of the concerns that we have expressed is perhaps the support for the enterprise agencies that we see as a particularly critical time for the Scottish economy, in that they are the key drivers of productivity, innovation and internationalisation, and we are keen to see the support mechanisms for them as strong as possible. What we would potentially have liked to have seen as we have argued in the past for Productivity Commission for Scotland, and we still think that that would be a really useful plan for us to go forward, and we are keen to do some more work on that in the coming year. Absolutely echoed the thoughts of Colin in terms of digital public services, with them making up such a huge part of the Scottish economy. We know that productivity in that area is slightly different from what we see in productivity in the private sector. We think that there is certainly a way of reinvigorating and digitising public services that could create stronger economic growth and set us apart as a world leader in that particular area. Points of agreement would be around infrastructure and digital, I will not repeat that. Frankly, though, if the aim is productivity, the amount of scrutiny that we are currently seeing in a somewhat rushed fashion of the role of the enterprise agencies and the budget that we have seen here to match, compared to the complete lack of scrutiny on something likely—I apologise to Colin in advance—the small business bonus scheme, which is assumed to deliver many of the things that it is claiming to do, but that has never been tested, never been examined by the Scottish Government or by anybody, I think, apart from the STUC. There is a real contrast there. If we are going to do that scrutiny, if we are going to invest that money, we have to show the same rulliga in terms of both of those investment pools and both of those means of driving productivity I still fail to see why the small business bonus scheme could be seen as something that is a particular contributor towards productivity. The other point we would obviously make, and you expect us to say this, is that public services matter in terms of boosting productivity. The services they provide, the infrastructure they provide, this is not a great budget for local government and we think that is a significant problem. It is obviously not a great budget either for public service workers who, if we are going to have some of the public service improvement that Colin talked about, need to do so from a stable basis, where they can actually be contributors towards developing those public services rather than suffering from their cuts. Thank you very much. There is a lot there to join on. I am sure that colleagues will want to pick up on a lot of different aspects of what you said, but can I just drill down into one or two aspects? First of all, infrastructure investment. I think that you were all in the back of the room when you heard the conversation at the end of the last panel about the relationship between infrastructure investment and growth. Some infrastructure investment leads to growth more quickly and more directly than others. I just wonder if you have any reflections on the kind of infrastructure, if growth is the priority, as at least two of you have said. Do you have any reflections on the kind of infrastructure investment that we should be prioritising in this budget cycle? Our submission made the point, as we have made elsewhere, that if you are looking for bang for your buck, then you want to be looking at local infrastructure investment. I was struck by the point that Stephen Boyle of RBS. I am sorry to interrupt, but can you explain what you mean by local infrastructure investment? Bluntly, local roads. Getting rid of 60 per cent of our members do almost all their business locally. A great proportion rely heavily on cars and bans, and that is where the delays occur. I was struck by what Stephen Boyle of RBS made the point in article earlier this year, where he said, we know what type of transport investment will give the highest returns, roads that unblock congestion, allowing networks to flow more freely. That is where the problems are, that is where people are getting head up, that is where the productivity losses occur. If you want to free up small businesses to do what they do best, make sales, get products delivered rather than sitting in traffic jams wasting their time, that has got to be the way forward. There is also a figure cited by Audit Scotland that, for every £1 reduction in local road maintenance, there is a knock-on effect or knock-on cost to the local economy of between £1.60 to £71.76. You would expect the converse to be true as well if we begin to invest in our roads, we should see productivity gain. Overall, that is where we would like to see it. On the digital side, the debate about broadband is fascinating. We would just issue a plea not to forget about mobile, because particularly mobile data is really important, especially for all sorts of businesses, but particularly for tourism businesses, hospitality businesses, who rely on visitors to Scotland being able to get off the plane or off the train, have a look at their phone, look at Google places and find out where they want to go that night. That would be where we would like to see particular attention focused. For us, we acknowledge and have acknowledged publicly that the Scottish Government has placed more emphasis on infrastructure investment perhaps than the UK Government has on successive budgets. We acknowledge that that budget package has been declining. Our thoughts on infrastructure are based more around the planning of infrastructure and trying to dovetail investments in different areas of the country to make sure that we get additional added value from them. To that end, I have suggested that a national infrastructure commission type body for Scotland could be helpful in that area and acknowledge it as well that the SFT could potentially have a role to play in there. It is important to think about maintaining as well as building infrastructure. We do know that there is a differential in there as well in terms of what it cannot for growth. We are very keen as well on developments in low-carbon infrastructure that we see Scotland as holding a key strength in that area. It is certainly something that globally is recognised. We are very keen to see that those are maintained and supported. In terms of transport infrastructure, we have been looking at that in some depth over the last year. We have been doing a connectivity commission to look at not just roads but rail, freight and all sorts of other new and future developments in that area and note to the UK Government's support for developments in future transport options. That is an area that we see is critically important going forward and can offer lots of efficiencies and give us new and innovative ways of doing things. In that sense, two things that have come out of there is that in order for us to get to where we would like to be in that world-class space is digital infrastructure is critically important. It just feels like the no-regrets infrastructure spend and the energy supply and security of energy supply are also very important across the board for all of our infrastructure spending. I am ffited to be last with our lists, so I am really just going to add housing. In terms of that issue around getting better value in the idea of the productivity commission, can you bring that alive with some examples of where you mean that we are not getting the best value that we should be getting? From a productivity perspective, I guess that it would be for us, the one that is on the table right in front of us is the digital public services productivity issue. We know that if we can increase that productivity, we will be able to bring it on a bit faster than we can from the private sector. We absolutely acknowledge and there is the Deloitte report that has been published that suggests that there is a certain amount of head count reduction that will happen in there. We think that there is a time that we can use this to plan well. All we have to do is look at the recent television programme on the council to see that it is not that easy to automate and bring robots in to do these sorts of jobs. They are very human front-facing jobs. What we are talking about is that there are some things that potentially could be automated, transactional tasks that would free people up to do the more complex jobs and address the more complex needs of the people in our society who rely on public services. We are also doing a little bit of work into digital public services, which we hope to publish in Q1 of next year. I am keen to get committee views on that. I have quite a number of people who want to come in. Ash? Obviously, right to relief features in the draft budget. Obviously, there is going to be a change in the threshold, which will mean that more businesses will benefit. This is really a question for the FSB about your submission. You said that you have recently carried out a survey of your members on the small business bonus scheme. Will you be able to give us a flavour of the sort of responses that you had? Yes, I am delighted to get on the record that there are lots of people who are looking at the small business bonus and its impact, including the FSB. The most recent figures that we have are from this summer, when we asked 1,000 members about their experiences. Of that, 37 per cent said that being in receipt of small business rates relief had let them invest in their business. 19 per cent said that they used it to invest in staff. When we said to them that what would happen if it was withdrawn, then 20 per cent said that that investment would be cancelled and 19 per cent would have to close. If that is not demonstrating a clear business case about the broader economic impact, I am not sure what it is. It is not just about the jobs and the businesses that we are sustaining ourselves, it is about the velocity of money. It is about us spending, hiring and commissioning services, buying goods and investing in the business. That is economic activity that we are trying to generate. The other point about the small business bonus is that it is about getting an element of proportionality or redistributive element into the business tax system because you either agree with tax thresholds or you do not. We do not look at any other, we do not look at income tax thresholds and say that you can only get that if you spend it, the money that you would save on things of which we approve. Why would we do it with this particular property-based tax? I am not entirely sure. I am more than happy to robustly defend the impact of the scheme, which has been in existence now, as we know, in one form or another for about 13 years. You have described it in your submission as a key support mechanism, but just to pick up on Dave Mockson's point earlier, do you think that you can prove a link between the small business bonus scheme and what it is doing for small businesses across Scotland and growth and to pick up on that point about productivity? Do you see a provable link there? The best evidence on this is to ask people who are on the front line and who are actually running businesses and know about what their margins are like and know what the effect, what this has allowed them to do and indeed, if it was not there, where they would have to find that money. If you are termed over 100 or so thousand a year operating a margin of two or three per cent, those few thousand pounds can really make the difference, but almost impossible to attribute moves in the economy to any particular change, because there is an awful lot going on there. There are employability initiatives, there is employment allowance, there are a raft of measures introduced and economists can probably argue long into the night about proving a direct causal link between the two, but from where we are sitting, we cannot see a better evidence source than asking people who know what they are talking about, the people who are on the front line doing the business, about what impact this is having for them and what was happening if it was not there. You have a different perspective on this. I suspect that Patrick Harvie's question around it might lead in today being able to answer as well, so I will go to Patrick. Thank you very much. Good morning, everybody. I have no doubt at all that if you ask people who have had a tax cut whether they like it, they will say yes, they do like it. I was interested that even your own figures, Colin, suggested that the large majority of the people you have spoken to do not even claim that the small business bonuses led to them investing or hiring additional staff. Let's assume that we all agreed that the same amount of money could ring ffenced for some kind of business rates relief scheme. Is it not reasonable to suggest that it could be designed better so that the vast bulk of what the public purchase is paying for in a rates relief scheme does result in investment or increases in employment? I would be happy. I did not want to detain the committee, but I can go through exactly how it is being spent. There is another chunk. If you add in the 37% of invested, the 19% that I have invested in staff, 37% invested in other aspects of the business, 35% using it to offset other increases in overheads, which we are seeing as well, which is crucial to business viability, there is a lot in there that demonstrates that this is being well used. However, your point about targeting is an interesting one because it is a sort of thing that I think sounds interesting. So yes, okay, so why wouldn't you have a targeted tax cut? I think there are two points. First one is a practical one about quite who would administer that, because if we talk in the language about this being the public giving money to businesses, which again it is not taking money from them, it is not quite the same thing, but it is costing the public parts. But, notionally, right, but if we accept that if everything stopped tomorrow, if the small business bonus and small business actually stopped tomorrow and everything else stayed the same, so no one would grow out of business, no one would cancel any investment, that would not have any knock-on effect on the rest of the public finances and the rest of the economy. If nothing else changed, then yes, you would be talking about £174 million, compared incidentally to a business rate take of £2.84 billion, so it was about 6 per cent of that. Even if we did that, even if you got all of that money, what would the administration cost be of being able to define that scheme, administer that scheme? There is something like 99,500 recipients this year, and that is going to increase next year. How would we go all round them to make sure that there were the sort of businesses of which we approved and who we thought should be deserving of this? I am sure that that depends on the detail of the kind of relief scheme that you would want to design and what you would be seeking to achieve, rather than just cutting every tax bill on a blanket basis. I wonder if Dave might have a chance to give a different perspective. There is another point as well. If this might make the second point about, yes, there is a practical point on how much this would be eaten up by the administration. Secondly, there is a point about the fairness and the point of that we do not assess any other sort of tax threshold against behaviour of which we happen to approve, because that is not what the scheme is designed to introduce. It is there to introduce an element of proportionality, an element of redistribution into a tax that is disproportionately difficult for the smallest businesses, and particularly the smallest businesses operating in the tougher circumstances. As Patrick McIntyre implies, asking somebody who has just asked you for a bowl of chocolate if they like chocolate is probably not the perfect foundational base. I know that Colin has spoken to his members and I do not doubt some of the uses to which those resources have been put to. I want to make it very clear that we are certainly not anti-small business. However, to be frank, when you hear figures about people using this to pay overheads, one response to that is that that is keeping some good businesses alive. One response to that being frank is that it is keeping some bad businesses alive. Two, there is an awful lot of competition and poor competition going on among small businesses, which we do not necessarily want to sustain with. I agree with Patrick. What should be thought of as a public contribution? I cannot design a new scheme off the top of my head, but I know that I used to be involved in the Future Jobs Fund. What the Future Jobs Fund used to do was to ask a whole range of businesses to come to it, a whole range of public sector organisers. It said, we are prepared to give you some money to create jobs as long as you are prepared to show us what you are going to use that job for. It was not a particularly high overhead scheme. The idea that you cannot design something that people can come to you to apply for and to say, we intend to use this for the purpose that will create a good and decent job in the pursuit of a stable small business seems to me. That idea does not seem to me to be beyond the wit. Again, just to return to this point of the enterprise agencies, the enterprise agencies are being looked at in very keen detail just now. Big questions are being asked about how they should be investing, whether they should be able to be prepared to take risks or not. That level of scrutiny should be applied to this rebate. Do you want me to come to income tax later, or just now? I was certainly interested in ASTUC's comments on income tax. You said that it is not the ideal circumstance at the moment or not the ideal economic conditions for an increase in the basic and higher rates. I would certainly agree that an increase in the basic rate would impact on a great many people who are already struggling, particularly at the lower half of the income scale. The lowest four deciles of society are already being hit by difficult circumstances and are looking at the prospect of inflation coming down the road and are having their incomes reduced by choices that the UK Government has made. It is not a requirement under the new legislation that we only have one basic rate and a more progressive approach could be used, but I wonder whether you would like to elaborate on why you think that it is the wrong time to increase the higher rate when high earners have also had their incomes increased by the UK Government's choices. Is it not the right time to be reversing that? I need to look through my notes because, as far as I am concerned, we are saying that it is difficult conditions in which to do that, but that it should be done. If it does not say that in the submission, it really should. We advocate the use of the 50p rate and we are advocating the increase of the basic rate by 1p as well. What we are doing in our paper is recognising that that is not an easy decision to make in the current economic circumstances, so I do not know if that kind of helps. That is certainly clearer. I would have argued that it is actually very easy to make the case, given that high earners have had their incomes increased by the UK Government. It is pretty easy for me to make the case that the Scottish Government could do something that reverses that concentration of wealth. It is not just about fairness, it is about whether the wealth of the economy is going to be more concentrated in fewer hands and therefore less productive. We are agreeing about the use of the measure. I want to comment upon that before I come to Murdo. No? Murdo? Perhaps I could ask the same question as Patrick, but in a slightly different way from a slightly different perspective. Maybe to start off with Claire Mack. In the SCDI submission, you make the point a number of times about the need for Scotland to remain competitive to attract both investment and talent. What we have seen in this budget and in previous policy announcements are a number of differential tax proposals from the Scottish Government. We have seen Derek Mackay propose that the increase in the threshold for the higher rate of tax will not be matched by the Scottish Government. We have seen LBTT rates in Scotland that are higher on the R side of the border. We have seen on business rates the continuation of the large business supplement, albeit its reach has been reduced in terms of the latest budget, but it will remain at double the UK rate. Do you have any view on what those measures mean for the competitiveness of the Scottish economy? We are looking at everything in a holistic pattern in that we are obviously working with businesses, so there is a consumer element to this as well, but we are focusing on businesses just now. There are a lot of things that businesses are expected to do and a lot of things that they do gladly. We do not see a lot of businesses looking to shut up shop as a result of any of these things, but some of our members are certainly coming to us and explaining that they find that this is making it more difficult for them to do business. We need to look at where the growth areas are and places such as retail. 13 per cent of new firms last year were from the retail sector, and they are one of our largest private sector employers. For them, the large business supplement is a very big issue. The other thing is that the behavioural link to taxation, and we need to be very clear in Scotland that we have absolutely good and strong data as to how those things are impacting, particularly on businesses. We live very close to our nearest neighbour, and the mobility of capital and people is relatively easy. That is one of the points that has definitely come out. We need to be quite clear as well that, in our economy, we can see the real fluctuations between sectors very easily because of its current fragility, and that is an issue that is part of the global part. We need to take very good care when we make those decisions. We are still seeing growth at the moment supported by consumer spending, which is where income tax is interesting. It is, again, a difficult decision to make, not to suggest that it is the right or the wrong decision. When faced with a set of different things to think about, the high rate of income tax is always the one that tends to take the attention and tends to be the one that takes the marginal rate hit. We need to be very clear about the behavioural impacts that could result in that, either through avoidance or, potentially, migration of incomes or whatever. One of the things that, in doing some research into our sort of looking into this, the consumer spending issue, in Scotland we have lower saving ratios, and with wage growth we have to be really clear about what the difficulties are with all of this. We need to be clear about the link between household disposable incomes and growth for our entire economy. I cannot remember who it was that said that economics is the art of telling everyone what is going to happen, then explaining why it did not. However, I was struck by the point in the Fraser of Allander submission that the behavioural consequences of changes, particularly in a devolved setup, where you have control over some levers and not others, can be greater than you might expect or can certainly be harder to establish. That is why I said in my opening answer to Mr Tomkins that that is why, on balance, we came down in the side of saying that at the moment no change is probably the best thing to do this year, because, yes, I take your point about putting more money in people's pockets has got to be a good thing. Given some of the anomalies, like the national insurance one that I mentioned earlier, that we are seeing emerging, given the fact that I certainly did not see any robust modelling on either side of the argument, saying that this would be a particularly good or bad thing to do, we came down to that. Given everything else that is going on at the moment, given the fact that we are possible, I would like to simplify things rather than make them more complicated, on this occasion, this was the correct thing to do. To maintain the rates in step with the rest of the UK, in an ideal world, we would have maintained income tax, banned thresholds as well, but we will see how that plays out in practice. I think that it's just worth pointing out that reducing taxes and putting more money in people's pockets doesn't increase the quantum of money in the economy, it just changes the way that it's spent. Our view would be, which is why we have actually advocated increases in taxation, although modest, is that this is a particularly good time for the type of investments that we need in people, frankly, that government and local government are very good at, and show very significant outflows in terms of benefits. None of this is a question about increasing the quantum, none of us have got the real anti-austerity tools at our disposal here, but our view, our considered view, even in the current economic climate, is that that transfer of resources towards equalisation and towards public investment is the best choice that we could make. I had a question about the potential mobility of high-income individuals and whether the revenues would go down. From the evidence that the committee has seen, there is a question mark about that at the additional rate band, the very highest earners. It's a question mark rather than an absolute clarity that a lot of the discussion ends up with the phrase, we just don't know. I'm not aware of having seen anything that shows there's evidence that that effect would happen at the higher rate rather than the additional rate. We were talking about a modest increase in the higher rate as one of the options. Are you aware of evidence that that kind of effect would happen at the higher rate rather than the additional rate? I've only looked at evidence probably more broadly than Scotland. I don't have anything that would suggest that there would be any particular Scottish element to that. I think that what is known internationally is that particularly in American and their taxation system is different to ours, I do acknowledge, is that it's not necessarily that there would be more mobility, it's potential for avoidance. People who have got the ability to book their income slightly differently and are able to take advantage of tax reliefs potentially will do in those instances. Would it necessarily apply to someone who's just on a salaried position at £45,600? It's worth pointing out the high density of those types of jobs, which you can't carry the types of jobs that Patrick is referring to around in a suitcase. There are Scottish jobs, which will remain Scottish jobs. A slightly different question for Colin Borland. On business rates, the budget proposes matching the rest of the UK business rate, which I'm sure we'll be welcome to your members, but of course we have a revaluation due next year. I've already picked up from constituents, particularly in the hotel sector, concerns about potential, substantial rises in their rates bills because of the revaluation. I'm just wondering if you had any sense from your own members what their feeling was about the overall burden of business rates. Obviously those who are in the small business bonus scheme will not have this impact, but many of your members will be at a scale beyond that, particularly in retail and hospitality. Do you have any sense of what their rates bills are likely to be looking at after the revaluation? Obviously we've just seen the draft revaluation that's been published on the assessor's website, so I would imagine that people have not quite been queuing up to have a look at them just yet. In the new year we will be doing a lot of work to make sure that people are looking at them and if they think they're wrong doing something about it. I think you're right, I think some of the things we have looked at might suggest that there might be issues in particular sectors. At the moment the Government and Ministers have the advantage on us because they've had the data for a while, they know what the impact is going to be, so we have to take them at the word when they say that something like a transitional relief scheme wouldn't be appropriate, particularly as that would tend to be funded by the winners subsidising the losers, and of course all of the other calculations about poundage and everything else would make a lot more sense when we get a feel for what the new rateable values are going to be. However, as always the way with counter-cyclical taxes it's unlikely that lots of people are going to see the rateable values drop. OK, thank you. Maybe there's something that you can come back to the committee on in the new year once you've had the chance to look at the figures. I think it's almost certain that we're going to be looking at this in a lot of detail, so yes, we'll be more than happy to, if you let us know exactly what it is you're looking for. Revaluation increases in some areas, big surprise, no really. It always happens, doesn't it? So there's going to be a winner and there's going to be losers, but Neil? We've talked about obviously growth in productivity in terms of the impact that I'll have on revenues, Adam. Tom, can you start that off? Colin, you mentioned the importance of local roads and Dave, you mentioned housing, I just want to ask, would it be fair that we need to give greater consideration of the local government settlement, which shouldn't just be about the focus on spending on services but about the impact that that can have for investment on local roads and housing and in turn how much productivity and growth can be generated locally? I mean, local authorities as the drivers of local growth are absolutely vitally important, slightly surprised that, for instance, the business gateway was left out of the enterprise review, so interested to see where that sits. I mean, we're obviously concerned about the quantum of the local government settlement. I know there's been various interpretations of how that should be seen, and there are good things happening. The Scottish Government budget has done some good things. We're very clear that the investment in the living wage for another year in social care, as long as it's properly implemented, will help to drive equality, but also to drive growth. But overall, if you're asking, are we concerned at the level of investment that local authorities will be able to make in their staff, in their services, in the answers, yes? We obviously are working with a number of local authorities on their city region deals and that kind of thing, so the economic development functions that sit in the local government are key interests to us and obviously their role in addressing inequality. We live in many constrained times and accept that the reductions to local government budgets are potentially going to have an impact at that end. Economic development spending goes way beyond the traditional enterprise network, and it includes everything from potholes to primary schools and an awful lot in between. The more that we look at where we've gone wrong in terms of our economic development strategies in recent decades, the more that we're coming round to the view that focus on the local, and what's happening in particular in local economies, is going to be much more important than, for example, looking for the next grand design. So, absolutely, this sort of economic regeneration game is a package deal that everyone has got something to contribute to. Can you just tell us a bit more about what the SDI is doing around city deals, because obviously, I think that from the evidence that we heard earlier from Collins just said and Dave just said, these are going to be pretty important determiners of driving economy forward and increasing productivity. So what's been the SDI's role on that with the local authorities? We've been working most specifically with the years growth deal and we're doing some work now with the two cities deal to help them think about private sector investment, how to attract more businesses to their area, how to assess their strategic cases, business cases, to try and get as much additional value out of them as possible. We've had somebody seconded directly into these projects to help do business engagement as well, to try and draw together business view as to what would help the regions that they are located in, what would help their employees, what would help them grow their businesses as part of the city deal mechanism. Dean, I think that you have a question. Yes, it's a slightly different question in relation to the role of the enterprise agencies. The enterprise looking at the budget, the enterprise budget has been cut by 85 million pounds across Scottish Enterprise, HIE and a guest business gateway. Given the need to increase exports, productivity and internationalisation, can I get your thoughts about if there is going to be a lower level of enterprise support? What are the key areas that we should be prioritising, what we should be ring fencing in a tighter budgetary environment? We've always identified that as one of our issues that's come through from the budget by any calculation that seems to be a 30 per cent reduction, and we have to question the ability for the agencies to deliver there. In terms of prioritisation, it's very similar to what we've put forward in our blueprint document, which you ask for it all and we would hope that it would all be there. Productivity, innovation and internationalisation are the three key things that we think are important for the Scottish economy to grow. Productivity in particular will have that impact on wage growth, which is what we need, which will feed through into taxation growth, which should help public sector revenues. As I said to Mr Bibby, the economic development spending goes way beyond what goes to enterprise network. As somebody who sat in front of this committee and others for many years, making the point that, in its current incarnation, the relevance of S.E. with its very specific remit on specific types of businesses and specific work means that it's of less direct relevance to our members. It wouldn't be consistent for me to then sit here and say, well, if it's getting this cut in its budget, that's somehow a disaster for us. However, if we are looking at ways that money can be better spent, the enterprise review and indeed the Audit Scotland report that preceded that, I would imagine is a pretty rich seam to mine, because we do see things like identified S.E. High and the Scottish Government all having specialist growth teams who are delivering very similar things. For example, the Scottish Government spends £11 million a year delivering grants and activities for the food and drink sector, although the three sector teams will communicate and collaborate in specific pieces of work. There is duplication of effort, because they are all burning about doing research and analysis and doing a liaison with different organisations. I think that it will probably come out in the second stage of the enterprise review that there is significant potential to de-duplicate and streamline and focus those efforts. It's a new order of the lexicon. I don't have a quite deal to add on that question. Dave. You're right, Willie. I was just to continue with the theme of my question from the previous panel, and we understand that you were all agreed and you're opening some of your initial responses on digital public services and that investment there. What do you think the potential consequences could be for Scotland if the UK was to pull out of something like the digital single market? Are we inextricably linked to that in terms of technology and infrastructure investment, and how in earth could you pull away from that? It really is a question that we should be asking ourselves. What do you think the implications for Scotland's economy might be if that were the direction of travel that we were to face? There's a lot in there, digital is something that I'm a huge proponent of in terms of that productivity piece as well. I thought it was interesting when Barry White was talking about private sector investment. It is true to say that that private sector investment has certainly been in there and has given us a boost. The most recent off-configures show phenomenal increases in some of our rural areas. I guess what we have to remember is that the commercial investment in those areas was initially zero, and it wasn't until both came in at the same time that that made something happen. That very much was part of that EU framework and EU thinking about what the aspiration is from a digital point of view. In terms of a digital economy for Scotland, we need to start thinking a bit bigger, particularly with the potential impact of Brexit coming along, which is that we have focused very much on consumer-led roll-out and availability and skills, which I think is absolutely valid. We do need to get some good data on business connectivity and business availability and how we can make sure that that is exactly how we need it to be for our businesses to trade internationally very successfully. There's also some opportunities potentially from the stance that Scotland, the slightly different stance that Scotland is taking, opportunities in their first particular sectors, at some of whom are particularly reliant on very, very good digital infrastructure to locate here. Dave, call. Can't match that level of expertise, I'm afraid. In terms of the impact that new technology has on people with disadvantaged communities and so on, there's a huge divide there, we know about it. The impact that technology can have can help bridge those gaps and it can enable people to access public services and it can enable people to work into trading by online. Do you think that that's a crucial factor in taking Scotland's economy forward and what is the implications of us not being part of that European agenda if we lose that? For us it is about that aspiration towards world class and digital is a brilliant leveler for that. We are smaller, we do have a particular sort of geography that we need to contend with but digital can help level out all of that and I think that that's where it's important. I think that there is some scope for us to develop digitally. I 100% agree with you that we could have massive impacts on inequality done well. It's about that equality of availability as well. For us we are keen to see some really really good data. There is already good data at postcode level, we don't deny that but it would be great to see cuts of that data to look at the business sector as well. I think that there is potential from a regulatory point of view to perhaps take an innovative approach, not necessarily reliant on population and geographic targets which we know for Scotland are incredibly difficult because of the way that our population is dispersed. It does mean that you can hit UK-level targets and even Scotland-level targets and still leave a lot of the areas that we would like to see served. Particularly in mobile, in thinking about upcoming mobile auctions, we would be keen to see some innovative thinking either on how the spectrum is allocated or on some of the conditions that are placed on mobile operators. For us the best option is the hard fibre option. It's got the resilience in there, it's got lots and lots of capacity in there and it is a great investment from that point of view. Mobile is also very critically important particularly for small businesses who are very mobile and particularly for businesses that we would want to see grow. On the question of e-government specifically, I think that you are right that there is a massive potential here for what we could do, for resources that we could free up and allocate elsewhere if we got the e-governance side of government sorted out. It's fair to say that I don't think we've really scratched the surface in Scotland in terms of what's about. One example to return to business rates is about three different bits of government that you have to engage with to check, appeal, pay your bill. Why in earth couldn't you put that through a single portal and go on and say, oh yes, that looks about right, right, I've paid it and called it and move on. Why is that so difficult? Our experience of this is while we've all tried to cajole and encourage and through the use of appealing to people's better instincts, get them to co-operate a bit better and to play towards the same agenda, it's been really difficult. I would suggest that, if we don't see an improvement soon, the Scottish Parliament could be thinking about some sort of statutory duty on public bodies to play together and work towards that and to cede a bit of authority to each other to deliver on some of these common projects because, as you say, when money is tight and we're even to get money to front-line services in the most vulnerable community, this has got to be a prime candidate. I'm a bit worried about your statutory instruments, Colin, but I do think that there's a real point here, and it's a mantra that I've repeated at various committees, that the staff that are involved in delivering at the front end are properly involved in the process of doing the sort of things that Colin wants to do. I think too often we lose the expertise of the people who are actually doing the work at the front line because middle managers provide blockages, so we're very keen to see the front-line staff involved in that sort of discussion. The Scottish Government wage forecasts over the period to 2021 are that, in terms of public sector wage position, that would remain static at 2.2 per cent, but the private sector wage growth would grow to a rate of 4.9 per cent. Do you think that that's a desirable policy outcome from the budget process? Okay, Dave, on you go. More wage growth in both sectors is obviously what we'd like to see, and it is absolutely vital that wages continue to grow in the private sector, particularly if they're in that better quality job that we're driving towards, that better quality job that we require for more productivity. My fear in the private sector is that we won't see that sort of wage growth in services, and part of that will be because of poor employment regulation that allows that to happen, notwithstanding the fact that the Scottish Government has limited powers to deal with that. Turning to the public sector, it is a major concern, and we do believe that the public sector pay cap should have been lifted. We do believe that there's going to be two major outcomes, number one, obviously suffering for our members, but number two, a drawing of resources from the local communities that we talked about earlier. Significantly concerned that that's the trajectory. Recognise the fact that some of that, indeed a significant part of that, is imposed on the Scottish Government by the UK Government and that they have limited room for manoeuvre, but we would certainly be arguing for the lifting of the public sector pay cap and a slightly more generous offer to our members. Two of you want to? Okay, I guess the neighbour will fall up to that then, in terms of where we are in the public sector in general. The difference in approach between the Scottish Government and the UK Government around the no compulsory redundancy issue in the public sector is something that you've got. I'd like to put a number of things on record to repeat the point that I made earlier about the Scottish Government's living wage commitment and the additional commitment to care workers. The no compulsory redundancy guarantee has been important. To make the case that A, the Scottish Government is not motivated to do some good thinnings for public service workers or that it has a free hand to do anything it wants would be entirely correct. We do believe at this point that the trajectory that James described is something that needs to be looked at very carefully. Okay, I wouldn't have any indication from anybody else that I want to contribute. I wish our panelists a happy festive period and thank you very much kindly for coming along today to give us evidence. I now suspend this meeting, but we'll move on to private, we'll move on to private very quickly though rather than have a break. So thank you very much.