 bewew música, please andtransникианьく Matchday Kid recipes at mea Welcome to the second meeting of the, emce of all 39 comprisoning of the amplify. The committee to 266. Can t i taxeshwil mumir to switch off their phones and at least put them on a mode in which the we can't hear them trying to agenda item 1 involves taking evidence on Scotland's fiscal framework and very much welcome the witnesses to the meeting this morning we've talked to Mnicka Bell research fellow~] National Institute of economic and social research professor David Hew جhd mewn gwirionedd, University of Glasgow, David Phillips, Senior Research Economist, the Institute of Fiscal Studies and Proof. David was carrying a bit of a cold this morning, I think, so we'll try not to be too hard on you, David. I know you've all come quite a long way, so I'm grateful for you coming along giving us evidence today. It's a very short evidence taken session, probably just over an hour, so I propose just to get straight into the guts of the real issues rather than ask a sort of general opening question. So, if you don't mind, I'd like to get into block grant adjustment issues and the indexations to begin with. David Phillips, in your written submission on page 30, you say that over the period 1990 to 2013, depending on the indexation method used, Scotland could either have some £1.5 billion or roughly 5 per cent of the Scottish Government's current budget better or worse off, depending on the method chosen if we had been following those new powers, obviously, from some time ago. In view then, which indexation method provides the best outcome for Scotland's budget and what are the reasons that underpin your choice and what would represent a fair and sustainable deal for Scotland on indexation? I have a big question to ask for a man that's feeling evil under the weather, so forgive me. In terms of which method would tend to give the most generous budget settlement to Scotland, our analysis suggests that that would be the per capita index deduction method, PCID, which is you take the block grant adjustment that you make in year 1 and then you increase it by the per capita revenue growth in the equivalent taxes in the rest of the UK. The reason that offers more generous funding for Scotland and the other two methods is that, compared to a method in which you don't take account of population growth, Scotland's population grows more slowly on average than that in the rest of the UK. If you try to compare Scotland's revenue growth to the aggregate growth in the rest of the UK, you don't take account of the population growth. Revenues per capita in Scotland have to grow more quickly to keep up because of the population growth in the rest of the UK. By taking that into account, the PCID method is a bit more generous in Scotland. The other method that we consider in our paper, we term the levels deduction method and what that does is every year it increases the block grant adjustment by the population share of the change in revenues in the rest of the UK. That method we chose to examine because that mirrors the Barnett formula, which allocates the population share of the change in spending in the rest of the UK. The reason that one is less generous to Scotland than the PCID method is that revenues per capita in Scotland start off lower. In England, say that revenue has got by £10 billion, that might be a 7% increase in revenues in England. Scotland's population share is about £10 billion, about £10 per cent, £1 billion. However, £1 billion growth in Scotland would not be 7% growth if it was more like 9% growth because revenues start off lower in Scotland. Under the levels deduction approach, we need revenues in Scotland to grow more quickly in percentage terms to keep up with the block grant adjustment, which is going up in the cash terms basis. The method that gives the most generous funding to Scotland under current conditions with relatively slow population growth and lower revenues per capita to start with is the per capita indexation deduction. There is a question about what is fair or not. That depends on what you think the degree of risk-sharing equalisation should be across the UK. If you think that the no detriment principle means that you would not want to design a system that would lead to the unwinding of any redistribution that currently exists between Scotland and the rest of the UK, you would want to choose a system that keeps that level of redistribution built in. That might mean that if revenues grow up by the same percentage points per capita, so revenues grow 5% per person in England and 5% per person in Scotland, you might think that, in that case, Scottish budget should be the same as it would without devolution because revenues grow at the same rate per person, Scotland is performing as well as the rest of the UK. That should be unaffected. You would want to choose PCID. On the other hand, you thought that devolution of a tax meant that it is no longer right to redistribute that tax across the whole of the UK, that, in future, extra tax revenues raised in England should not be partially transferred to Scotland, you would want to choose the levels deduction approach because that approach means that revenues raised in England stay in England and revenues raised in Scotland stay in Scotland. The per capita indexation approach, the PCID approach, means that there will be some transfer of revenues from England in future years to Scotland. It is clear what is better for Scotland in terms of the amount of budget, but what is fair depends on your view on whether there should be continuing redistribution of income tax around the UK. The committee has got on its website evidence of modelling by David Isa from Stirling and Anton Muscatelli from Glasgow. It is pretty obvious from that modelling that it is a per capita indexation method that meets the idea that the act of devolving tax powers is not going to be disadvantageous to Scotland. I support the per capita indexation method, but there is a bigger point. There is a lot of technical sounding argument about an essentially political point. If you read the Halton commission report and the House of Lords Economic Affairs Committee, it is obvious that Scotland gets too much money. In terms of the political context after the Scottish referendum, the Smith commission was supposed to do good things for Scotland. It has a very obvious political clash of expectations, but the point that I would make is that it is very important that the actual act of tax devolution does not, through the indexation method, damage the Scottish position. If you want to argue about whether Scotland is overfunded relative, for example, to Wales, you should argue that point explicitly. If you link through technical things that virtually nobody understands the reduction in the Scottish budget to how the indexation works, I think that you are going to discredit the tax devolution. I think that there is a discussion that we had about the indexation method, but if the levels deduction method is being used to sneak in extra convergence through the back door, that would be damaging to the fiscal framework in the UK and it would be a bad idea. If you want to deal with that issue, you need to deal with it directly. I would like to take one step back from politics and one back towards economics for a moment and make the point that, if it is the case that the PCID method does redistribute a bit more, especially over the business cycle, then this is something that the Scottish Parliament should also take into account. One of the issues around devolution is a potentially lack of risk sharing across the UK. If the Scottish Parliament would like to preserve some of that risk sharing, especially over the cycle, let us imagine the oil price drops and unemployment rises here in Scotland. You would not want to be in a position in which you would be forced into a sort of pro-cyclical austerity politics at that moment when you are facing difficult economic conditions. One of the ways in which you can guard against that is to ensure that there is still some redistributive element across the entire UK. So, there is a macroeconomic stability and sort of automatic stabilisers not being pushed into austerity in bad times argument to be made as well. All of the methods, levels reduction, index reduction and per capita index reduction offer that risk sharing to a degree on shocks that affect the whole of the UK because revenues fall in the rest of the UK. That means that the block grant reduction shrinks and offsets any falls in Scottish tax revenues. There is this risk insurance against shocks that hit the whole of the UK, but none of the methods that have been outlined offer any insurance against shocks that hit Scotland only. That has been the missing debate in the devolution debate. The Smith commission said that what should happen to shocks that hit the whole of the UK, UK Government should bear them, about gains and losses to do with policies that should be borne by the relevant Government, but not what should be, who should bear the risk of shocks that hit Scotland alone or hit Scotland disproportionately, like oil price shocks or other things. I think that there needs to be a discussion about should there be some kind of way of risk sharing those shocks, like the oil price shock. We will come on in a minute to issues to do with borrowing and how that might be used to help with the shocks and stabilisation. First of all, before we get there, I would like to ask a question about whether that might be the Scottish position and the best position for Scotland to be in the PCID method. What do you think the Treasury's view of that is going to be? It depends whether the Treasury wants to keep the presence. It wants the political constraints, post referendum, post Smith commission. One of the attractions for the Treasury of the Barnett mechanism was that it avoided a lot of bilateral negotiation with Scotland, Wales and Northern Ireland about things where the Treasury did not know enough to be a very effective negotiator. The Treasury only has to worry about English and UK programmes. The Barnett consequentials of that are automatic. The great advantage of Barnett for the devolved demonstrations is that it keeps the Treasury off their individual budget lines. It does not have a position whereby the Treasury can say, we are going to disallow that expenditure because we disapprove of it. It goes back to George Younger in 1980. The expenditure-switching discretion was one of the great powers of secretive states after 1980, formalising what had been much more informal before. It has been one of the great powers of the Scottish Parliament. There are advantages for the Treasury and there are bureaucratic technical advantages for the Treasury for keeping the system working. However, there is a bigger political issue about whether you want the United Kingdoms to survive. How you judge the success of the fiscal framework depends on what you expect out of it. If the fiscal framework is seen as an attempt to bash the jocks because they had the cheek to ask for an independence referendum, or you see it as a way of getting more grievances to justify another independence referendum, very clearly the system is not going to work. If you want the system to work, it seems to me that there are advantages in not linking indexation adjustments to the question of whether Scotland gets too much money. One of the points to make about Barnett is that Barnett has a convergence property. Because of the lack of data, it is quite difficult to establish how far convergence has gone. The Treasury spent 25 years pretending not to understand parliamentary questions and freedom of information requests, asking for comparable expenditure. The level of ignorance is demonstrated by the fact that the House of Lords quotes identifiable expenditure as though that was solely driven by Barnett. I am going to defer on Barnett issues mainly to my colleagues and I will speak up quite a bit about borrowing. I think that the Scottish Government has been clear on its position. Swinney has said that Scotland wants a per capita indexation reduction method. We know that the block grant adjustment issue is one of the sticking points in the negotiation. It has been highlighted in the immediate stories about that. I think that it is likely that they are asking for different things. What might be the fact is not to be driving what the Treasury is thinking. One is that Professor Heald has mentioned the Barnett formula and how they quite like that methodology. They might be looking for more consistency with the Barnett formula, which points you towards the levels deduction approach, which is the one that we have shown is least advantageous to Scotland in the short one. They might also be thinking about devolving the taxes in the same way that business rates have been done. You might have noticed that the way that business rates that they have accounted for in the Barnett formula changed in the latest spending review period. They are basically doing that on a levels deduction approach. That might be indicative of where they are thinking for other taxes. I also think that what they will be thinking about might be different. What the Scottish Government might be more concerned about is potential long-run divergences in funding that results from the levels deduction approach, where you need to get your revenues growing quicker and quicker each year to keep up with the block grant adjustment. I think that what the Treasury might be more concerned with is that under the Procabdo indexation method, you increase the income tax rate in England by a percentage point to spend more on the English NHS. The way that will work through the whole system is that Scotland will get a population share of the extra funding by the Barnett formula, so revenue has got 10 billion pounds in England, and Scotland has got a billion pounds of that through the Barnett formula. The block grant adjustment goes up by seven per cent. In Scotland, that is 800 million pounds, so the block grant adjustment goes up by 800 million pounds. The net effect of those two things is that Scotland's budget goes up by 200 million pounds following a tax increase in the rest of the UK because the PCID method does not quite align with the Barnett formula. I think that the Treasury will be concerned about the politics of that in England. I do not know any privileged information about that, but I think that it is likely that the Treasury is moving towards a different system than what the Scottish Government is doing because of the differences in the incentives that it faces and the differences in the budgetary consequences. Professor Hill is right in thinking about the long-term consequences. It might be facing difficult decisions about what it thinks is the most fair system and what it thinks is the one that is most politically sustainable in the union. It might think that we want to go to the PCID method because we know that the Scottish Government will not accept a disadvantageous method, so I think that it is in quite a difficult position in knowing what to do. The crucial point of the discussions is that the system will be made transparent. You cannot have a debate about fairness unless the proper data is in the public domain. I have already made the point about the publication of comparable expenditure in England that drives the Scottish block and the different comparable expenditures for Wales and other islands. As another good example, it became the Treasury practice to publish a new version of funding policy document at the time of every spending review. The Treasury just decided not to publish it at spending review 2013 and 2015. It is crucial, particularly when you start a position of having devolved Administrations of the UK Government under different political control, it is absolutely essential that the numbers are put in the public domain at the right time. One of us expects governments to go see it privately, but when the deal is done, the full statistical information ought to be put immediately in the public domain and not depend on people like me putting down freedom of information requests to try to get the information a month later. I was intrigued by the idea that the drop in oil price and resultant unemployment would be a shock that would be borne by Scotland alone in that context, given that the revenues accrue to Treasury, and there are also employment implications out with Scotland as well as a result of it, but leaving that aside, I note that the command paper itself talks about the fiscal framework requiring Scotland to contribute proportionally to fiscal consolidation at the pace that is set out by the UK Government. There has been some talk here about, and Monica Bell spoke about not being forced into a position of austerity, but to me that is very much the language of whether you are going to be tied into austerity by this, whether you like it or not, or at least that is the indication that the UK Government is giving in its command paper, is it not? There is obviously a paradox there, because although a few minutes ago I was talking about the convergence properties of the ballot formula, but if you cut public spending, the ballot formula has a divergence property, not a convergence property. To come back to the premise of your question, once you have to recognise that it is not just oil revenues that come from the oil sector, clearly there is very significant income tax and VAT revenues from people employed in the oil sector. One of the points that I want to make is the question about how much risk the Scottish Government should take in the context of Scotland remaining part of the United Kingdom. There is a lot of talk about incentives for growth and giving Governments incentives for growth. I think that quite a lot of that is the revolt of the rich who do not actually want to pay into the equalisation system any more. The key economic levers remain with the United Kingdom Government, and that is where most of the risk should stay. The point that I was trying to make about shock hitting Scotland, perhaps a bit unequally to the rest of the UK, was one about automatic stabilisers. We know from looking at the way in which federations work in other countries, countries such as the US and Switzerland, where they work quite well. One of the things that tends to be maintained centrally is the social security system, things such as welfare spending, unemployment insurance and pensions, because those are risks that should be pooled across the entire country. Leaving that as it is, leaving social security as a UK-wide system, offers some stability to Scotland if it is hit by a shock, say a reduction in the oil price that leads to job losses in the oil and gas sector in Scotland, that the rest of the UK might not be hit by and indeed might be benefiting from the drop in the oil price in other ways. There is a question about exactly which types of spending you devolve and which types you leave centrally. On your question, there are two kinds of borrowing or different physical stances about what we want to be thinking about. The statement in the command paper is focusing on one of them. The first is a shock that hits Scotland, which requires temporary borrowing. The idea that there is lower revenues to Scotland because of the oil industry suffering would be that Scotland would need to have the capability to borrow to smooth that shock. If that statement was meant to suggest that that was not possible, if at that moment the UK was in a good position and was trying to not borrow, Scotland should not borrow, that would be damaging and constrained in Scotland. Obviously, the Chancellor's fiscal mandate puts him towards a position of zero borrowing and there is a question mark around whether that is going to be implicit in the fiscal framework that Scotland would have borrowing power but would be constrained due to the fiscal framework and the UK fiscal mandate to not be able to borrow. That is not quite clear at the present time to what extent Scotland's borrowing will count for the fiscal framework. If you think about Scotland's borrowing in the same way as local authority borrowing is treated, local authority borrowing is a component together with central government borrowing of the Government's target public sector net debt or public sector net borrowing figure. It is also a component of the Maastricht debt criteria. Currently, the institutional bias might well be towards treating Scottish debt as if it were local, in the same way as local authority debt is currently treated. In economic terms, there is a case for not considering subnational debt as part of the UK's fiscal framework in the sense that it would, from an economic perspective, make sense to treat Scottish debt as part of the overall UK fiscal framework mandate if there were either an explicit or a strong implicit guarantee by the UK Government on that debt. Whether Scottish debt should be a part of the UK's fiscal framework and the gold that the Treasury is setting for itself should depend on to what extent that debt is an obligation, either explicit or implicit, of the UK Government. I probably know the answer to this one, but do we have any indication therefore of what the Treasury thinking on that might be in terms of how it might categorise Scottish borrowing? I see shakes of the head. Not speaking for the Treasury, I would think that it would be astonishing if the Treasury would agree to a position of not including Scottish borrowing. One of them is about the United Kingdom's European Union obligations under Maastricht in terms of the European system of accounts. Also, in terms of the United Kingdom of the IMF's article for fiscal consultations on the United Kingdom, I would have thought that an attempt to park it somewhere separately and pretend that it was not there would not work. I do not think that, in a country as ffiscally centralised historically as the United Kingdom, people are actually going to believe that, if, for example, people said that there was a no bailout clause, I frankly do not think that anybody would believe it. It is just simply that, obviously, where the line is drawn in terms of where the indexation begins is going to be important on both sides. The likelihood is probably 2017-18 in terms of where we are looking in terms of fiscal projections. Is that going to be a good point for Scotland in terms of the sort of year zero for this in your opinion? The command paper suggests that you might want to use several years and average over them to get the base year for which you do the indexation. It is not clear if they will take just 2017-18 or they will average over, say, three or four years before that. Whether or not that is a good period depends on if you think 2017-18 will be a year when Scottish revenues are relatively high compared to the rest of the UK or relatively low compared to the rest of the UK. If you thought, for instance, that the problems in the North Sea meant that income tax and VAT receipts were temporarily low in Scotland in 2017, you might want to lock in that and have that as your base year. If and when there is a recovery in the North Sea sector and that boosts revenues, Scotland gets to keep those revenues because you have locked yourself in from a low starting point and you get to keep the upside. If, on the other hand, you think that most of the pain on the North Sea is still to come because it takes a while for the sector to wind down, then you might be starting at an relatively high point and the trajectory is downwards from that point. You are right that the starting point does matter. That is why I come back to this point that I think I made at the start, that there has not been this discussion about what degree of risk share should still be on the shocks that hit Scotland disproportionately, whether they are short-term shocks or whether the long-term, secular declines or improvements. Most other states with substantial sub-national devolution have some kind of equalisation of the differential trends over time. Germany has it, Canada has it, Australia. The system we are developing in the UK will not have that kind of thing and that makes things like starting points much more important. As I made the argument for per capita indexation, I think that gaming the starting point would be very foolish on either the Treasury's side or on the Scottish Government's side. People tend to assume 18 months ago that the base year issue would not be that important, but given what has happened to the oil sector, it may well be important. We also know in terms of the transition to land and building transactions tax that you can get substantial forestalling can take place. I think that that is obviously a difficult area and I would want to have it as neutral to try to get a verdict that is as neutral as possible, because there are questions about the legitimacy of the system. If the system is seen to be illegitimate on either side, I frankly do not think that it will survive. We are going to stray into borrowing, so I think that as you go to Alison Johnstone who went to the question of borrowing, Linda, I know that you have got a supplementary, but I am going to do it. Thank you, convener. I might just be interested to hear the panel's views on the issue of borrowing. Borrowing can obviously help in cases of shock, forecast, errors and volatility. It can also help us to invest in opportunities to build employment infrastructure and so on. I would just be interested in what you think an optimal borrowing framework would look like, what level of borrowing powers would be appropriate for this particular Scotland bill. I believe that David Phillips in response to Mark McDonald's question does think that having to contribute to UK fiscal consolidation would constrain and compromise the policy autonomy of the Parliament and Government, and I would be interested in Dr Rebell and Professor Heald's views on that, too. Scotland borrowing powers is a bit of a tricky issue, because it is an unusual set-up, and it is very different to the set-ups that we see in other federated countries. Places like the US and Switzerland are perhaps the most successful and well-functioning examples, maybe along with Canada. In all of those cases, you have 26 cantons of roughly equal size, or 50 US states or 14 Canadian provinces. Now, here we would have one quite small subnational unit and one compared to the rest of the country, and then, of course, two even smaller subnational units. That presents a different set of incentive problems around borrowing and around the credibility of no bail-out clauses. Indeed, borrowing can be very beneficial in order to smooth out shocks over the business cycle. It can also play a very important role in terms of accountability and setting the right incentives. If Scotland would like to invest in order to create jobs and promote growth, then by borrowing it is, in some sense, putting its money where its mouth is and making sure that it is taking the decisions that will really lead to growth because it is going to need to pay back the money that it has borrowed. It guards against, if I can be North Korean for a moment, putting up big statues to the dear leader on borrowed money. That, of course, works only to the extent that there is not a bail-out promise, be it explicit or implicit, from the central government. Now, one of the ways I like to think about this is around my three teenagers at home. If one of them were to exceed their borrowing limits, say they go over on their mobile phone contract, they download too many videos and it gets abroad and it gets very expensive, now I might be tempted to bail one of them out, but if I did, the other two would come running and say, hey, wait a minute, and it would set a very bad precedent, right? The other two would come along and start downloading irresponsibly and running up big builds as well. Now, this is close to the case that you have, say, in Swiss cantons and in the US states where there have never been bailouts of cantons that have gone over indebted or states that have gone over indebted. So, California is sort of a perennial difficult case. The canton of burn was in serious financial difficulties and it was not bailed out. Now, in the UK, we're looking at a slightly different situation in which we would only really have the one subnational unit, potentially two if Wales also gets similar powers that are quite small, and that would tend to be a sort of only child problem, right? You know, you tend to be more generous with this only child that can, I don't, I really don't mean to infantilise, I mean, I don't, I hope that nobody takes this as a, I've just realised that my example has a big pitfall that I doubted Ted quite explicitly, but you don't, you know, if there's only one subnational unit that is borrowing, then the temptation to bail out might be quite a bit larger. And so, I would imagine that the fiscal framework, the optimal fiscal framework, doesn't only depend on Scotland, it depends on how the rest of the UK deals with its own devolution issues, right? Whether it is actually, whether the Government is really serious about things like the Northern powerhouse. Do you think about that? One of the points here is that economists tend to talk in terms of the cyclical reasons, cyclical reasons and the differential cycle reasons for wanting to have boring powers. Clearly, if you have more devolved tax powers, you do need more boring powers for smoothing purposes. However, what worries me in the post referendum situation is that people seem to think that tax powers mean more spend, they seem to think that devolving welfare powers mean more welfare spend, and I'm sure that the argument will arise that people will want to use boring powers to offset the UK Government's austerity agenda. When I first proposed what became the Titan tax in 1976, one was assuming that there wasn't that much difference between what a devolved administration in Scotland, the West of Northern Ireland would want to do and what the UK Government would want to do. When you get a UK agenda about shrinking the state, which is not shared by the devolved administrations, you get a big gulf. It would be difficult to use tax powers to offset the shrink of the state agenda. Any notion that you can use borrowing to offset the state agenda is an extremely dangerous one. The idea that there can be no control on borrowing is fallacious. There have to be controls on borrowing. I'm more open-minded about what the mechanisms are, but there's no way that, either internally, I would favour it or in terms of the UK's international obligations. I will add a couple of points. In terms of the level of borrowing powers, there will have to be substantial increase, especially on the current borrowing side. At the moment, the current borrowing powers are really quite constrained. Scotland can only use them for forecast errors, but if you forecast a recession, you might still want to borrow to smooth the impact of that on your public spending. I think that there will need to be a change in the level and the type of circumstances in which those borrowing powers can be used. My colleagues David Bell and David Iser and I are going to be doing a paper that will try to quantify how big those borrowing powers need to be, given the potential volatility and risk in the Scottish budget with all those new powers. We'll try to get a number for you guys about whether 5 billion will be enough or 3 billion or 10 billion will be enough on those powers. I think that the end of the question is whether the UK Government will also be willing to not only allow Scotland's borrowing powers to smooth the cycle in effect but also to pursue longer term differential fiscal stance. Rather than surplus normal times, the Scottish Government is saying that we want to borrow 1% of GDP in normal times because we think that that is actually sustainable. I think that there is less chance that the UK Government acquies into that because that will be seen as not just giving Scotland the powers to manage its risks but also allowing it to take longer term fiscal stance that is different to the UK with the implicit backstop of the UK being there to bail out. I think that whether or not the UK Government will agree to do on borrowing powers might depend on the extent to which the idea of no bailout seems credible or not. On the capital side, that is a whole other issue. There has been a debate about whether that should be an extended capital limit or whether it should be prudential borrowing powers. I am not sure what is the right answer there but I think that what has often been said in that area is that this system has worked very well for local government where they have prudential borrowing powers. I think that that is the case for local government. I would say that it is not clear unnecessarily the case for the Scottish Government given that there are quite different political issues involved there, issues around bailout and issues around central government retaking control if they think that there has been prudential borrowing powers. I think that there is a good case to say that the Scottish Government should have prudential borrowing powers but I could also hear the Treasury saying that we think that we can override the powers by local government if it turns out to go badly. We can do that with Scotland and therefore there will be more reluctant to grant those powers than otherwise. The way that I would think about this would again come back to the credibility of the no bailout clause. If it is possible, and that is a big if, for the Treasury to credibly commit to not bailing out, then we know from the experience of other countries that countries with credible no bailout promises in those countries actually market mechanisms work very well in the sense that if a subnational unit of a Swiss canton or a US state overborrows, then it will find itself punished with higher interest rates. So in that sense that mechanism works well and in fact it works so well that most many Swiss cantons and the majority of US states have self-imposed fiscal rules on themselves, either of a sort of balanced budget over the cycle kind of constraint or a golden rule, some sort of net fiscal balance but setting aside investment. So in that sense when there is a credible bailout promise or no bailout promise, then the market mechanism works well and in fact it works so well that subnational units find it to their advantage to signal to the market that they are prudent by itself imposing a fiscal rule of some sort. Now the big open question is will it be possible to set up such a credible no bailout framework? You happy Allison? I knew you were interested in borrowing, do you want to come in just now or do you want to? Have you got enough from that one? I've heard quite a lot and I certainly, Allison, posed a couple of questions that I was considering. But the thing that struck me in terms of the answers, Dr Abel, you used the phrase of federated countries. The UK is not a federated country and irrespective as to the additional powers that are to come to here, the UK is still not a federated country and also with the four different nations. Within the UK there are various levels of devolution because also the devolution agreements are not standardised across the four nations and it's also touched upon in terms of the northern powerhouse agenda and also how that might also have a positive effect upon us to the north of England but there's still a question mark in terms of the levels of powers that will go along with that. I did listen to something that was said but at the same time I'm a bit confused in terms of the starting point from yourselves in terms of the level of powers and the constitution position within the four nations. As I said at the outset, this is a tricky discussion simply because it is an atypical case. Usually countries with subnational units that have the kind of revenue raising and expenditure powers that Scotland is set to receive are one of many similar units in a federated country. The only other country that I can think of or the main country I can think of that has a similar sort of asymmetric devolution framework is Spain and I'm not sure that given the recent difficulties especially around subnational borrowing in Spain that we would want to take their framework as any sort of a guide. The US with the different states there they're all different shapes and sizes and populations as well. They are but there are many of them right and each one is small relative to the whole and the federal government also understands that it is facing many many states it is facing potentially 50 states so if it gives in to one then the others are likely to come might there's a risk that they would come calling as well. That risk really doesn't exist in the same way in the UK and that is important. What we do also understand and what I is from federated countries is that those federated countries in which the revenue raising and the expenditure powers are closely matched that is those countries in which the subnational units the cantons or the states do not rely mainly on transfers but mainly rely on their own ability to raise taxes and their own ability to borrow they tend to perform better. There's a nice IMF international monetary fund study out recently that shows that those federations in which revenue raising powers and expenditures are matched closely with low dependence on transfers those tend to perform better that's the US, Canada and Switzerland primarily. One reason for that again I'm sorry to harp on the point of credibility may be that by having a small transfer dependence that actually makes the no bail out clause more credible right so again if my to go back to my teenager example if my teenager overspends but I can say well look you can do some babysitting you know or you can use your overdraft then I'm also much more able to say no to the to bailing out so I think that's an important point here as well. Can I come back to the premise of your question? My view is the United Kingdom is very dysfunctional. I think that if you look at where the big hits on fiscal consolidation at UK level has gone that they've gone heavily to local government in England heavily to local government in England and there's been a massive removal of redistribution within the local government finance system from within England and if you look at the hits that the northern cities northern and midlands industrial cities have had you will see the extent of that and I think the northern powerhouse I think is largely a political cover for the damage which has actually been done within done within England. The London and the south east is so dominant with the United Kingdom increasingly dominant it is the net recipient of much of the immigration into UK meaning that the population trend factors become more important and the rest of the United Kingdom has been writing implicit guarantees to the financial sector. If you do a thought experiment about what the regional impact would have been of the United Kingdom letting the banking and financial sector collapse in 2008 up very clearly it would have been massive hits for London and the south London and the south east. The actual fiscal repair from that damage has actually largely hit largely hit other parts of the United Kingdom particularly the north north of midlands. One of the things that really worries me and I think it's a fundamental point for this parliament is that given the strange animal, asymmetric animal that the United Kingdom is there's a natural alliance between Scotland, Wales and Northern Ireland in terms of having some kind of agreed position in relation to the UK Government of the Treasury. One of the things is of the last 10 years we've actually lost Wales and Wales is often associated with attacks on the attacks on the Scottish position and I think that that is partly attributable to the fact that the Labour Government did not at the UK level did not actually make an effort to sustain the system. In 2002, Alison McLeod and I published an Institute for Public Policy Research book chapter in which we explained what the then problems with Barnett were, what could actually be done to assuage fears in Wales and Northern Ireland about it but nothing was done. There was plenty of money around and people didn't worry very much about it and one's now seeing the consequences but you can't discuss Scotland without thinking about the broader context of the UK's regional dysfunctionality. I'll need to move on. I'll move to Malcolm Chisholm and areas to do with welfare which have picked up I think by somebody in the last set of questions. I think most of the discussion of the block grant adjustment has been in relation to taxpayers' prickly income tax but obviously there are completely different issues with welfare so I'd welcome your thoughts on the initial allocation of money to welfare which may not be quite so controversial but the block grant adjustment thereafter and to what extent that's complicated or made different by the fact that welfare is under Amy's annual managed expenditure rather than the Dell expenditure that we're used to. Having it under Amy's supposed to Dell makes it somewhat easier actually in terms you can kind of think of tax as being like Amy as well you don't know what you're going to spend in well you don't tax is like Amy in the same way as welfare is like Amy. You don't know what you're going to raise or you're going to spend particularly until you have it it's not like a Dell where it's fixed in advance so I don't think there's any particular issues with welfare being Amy in terms of the block grant additions and how you index those because you have the same issues with taxation. In terms of do you want to have a separate or more complicated way of indexing those block grant additions for welfare than you do on tax I'm not entirely convinced by that so you know in tax people are focused on you know two or three relatively simple methods whether it's a per capita indexation method or whether it's the levels deduction method. On welfare there's always been discussions about well welfare is not just about populations it's about the characteristics of the population particularly with disability benefits it's about the kind of population at risk the older and the less healthy population and we should have an indexation measure which accounts for those. Now in principle I think that that does seem plausible but I think in practice it could be difficult and it might be therefore more transparent and simpler to go with a more basic approach like per capita indexation and the reason being this first of all you could think about making an adjustment in the first year and then saying okay we know what the distribution of of disability benefit spending is across ages in year one and we can then track the population over time by these age groups and adjust on that basis but there's been very big shifts in how disability benefits are spent over different age groups in the last you know 20 years there's been big falls amongst older people and increases amongst younger people and if you don't account for that you get these quite you get quite you get allocations which don't actually reflect who requires the benefit spending and if you do try to account for that you have a very complicated system where you're changing the indexation method every year requires constant renegotiation and violates one of the other principles of the Smith commission. I also think if you take account not only age but also say the health of the population you're removing one of the main incentive effects one of the main benefits that have been discussed about this so when devolution of disability benefits has been discussed in the past it's done has been about well now we can integrate these better with our healthcare and social care services and if we do better on healthcare and social care and that means less ill health we get to reap the rewards and lower benefits at spending and have more to spend and you can you know shift that money over to to other areas of priority and if you adjust for these health trends you remove that that benefit of devolving the powers because health improves in Scotland you give less money to Scotland for welfare because the population is now more healthy you don't want to be kind of removing those incentive effects I think so my feeling would be stick with something more simple like the methods are being discussed for tax it'll do a it'll do a reasonably good job you might in principle be able to do a bit better with other methods but they are traded off in terms of complexity or in terms of the moving incentives I would tend to agree with David that incentives are important but I would maybe take a slightly more nuanced view and I will again use an example from abroad and so maybe you're familiar with Detroit the Detroit has recently filed for bankruptcy and the main reason for that is that Detroit found itself in a secular decline along with the auto industry it found that it had quite a large number of pensioners with the incumbent of course pension costs and healthcare costs that were locally financed now it found itself with rising costs for pensions and healthcare and a shrinking tax base and this put Detroit into quite a downward spiral right the difficulty was that you had they had to increase property tax rates the main local source of revenue further and further in order to finance the pensions from its shrinking tax base now by increasing those rates Detroit made itself even less attractive to business and actually accelerated the process of decline right until it crashed into a wall now I again sincerely hope that this is not a scenario that is relevant for Scotland but it is one to have in the back of one's mind at least not at least not in this extreme case but it maybe does highlight that there are some kinds of welfare spending where incentives are more important say disability benefits even unemployment insurance but there are other kinds say pensions where it's more difficult to see how there is much that the Scottish Government can do to change the number of pensioners right so in some sense you might want to treat these different kinds of welfare spending differently and in particular I would think that pensions are a good kind of you would want to adjust for the age structure when looking at the welfare benefits welfare grants one of the things I worry about is Barnett was essentially a simple system over time it's already become more complicated in terms of the split between resource del capital del financial transactions transactions capital rules about EYF and rules about budget exchange so I think that keeping the system as simple as possible to maintain a degree of intelligibility on the basis of much better published information is an extremely important point on the welfare side what essentially worries me about welfare is the numbers can be very big and what worries me is that people who don't know enough about the actual costings and the numbers will actually promise to offset by Scottish Government action changes by the UK government as soon as you start getting the idea that welfare devolution means more spend and you're going to offset austerity imposed at the UK level I think becomes extremely dangerous if people want the welfare system in Scotland to be more generous fine but I wish that tell me which main programs like health and education are going to be cut to to fund it in which taxes are going to be increased to pay for it welcome no that was extremely helpful and useful so I suppose I mean well given David Phillips in particular nailed his colours to the masses what what are the risks of that I mean potentially I mean you've done the risks for the different income tax scenarios I suppose it's just a bit worrying if we do have well if we're not getting pensions but obviously some of the benefits might be more skewed towards older people so are there potential risks there with the with the higher proportion of the population perhaps being elderly I would agree very much what monica bell was saying there in terms of you've got to think about the risks and rewards with each of the the different benefits now I think as monica said that with disability benefits it's more towards of awards because of the links with health and social care policy and the potential to make a real difference there by integrating the two but of course yeah there are risks so for instance if the somewhat more vapid ageing of the population in Scotland was to lead to disability benefit spending per capita to grow more quickly than in the rest of the UK if you only did a per capita indexation Scotland would find itself worse off on the other hand the big trend actually if you've seen over the last 15 years is that disability benefit spending per capita in Scotland has been falling very substantially compared to the rest of the UK and that's because the trends driving it in the 1980s the big growth in disability benefits was to do with deindustrialisation there were huge numbers of older male workers effectively that got shifted on to disability benefits that affected mainly Scotland, Wales, north of England as that has started to shift off and more the disability benefit burden has moved on to things like mental health and other issues which affect people more across the country rather than spending has been going down in places like Scotland, Wales and going up in places like the south east of England now if that trend was to continue and it looks like there is still some scope for that it's been continuing over the last few years you might see that Scottish revenue still continues to fall per person so Scottish spending on disability benefits continues to fall per person and that means Scotland actually would still potentially gain under this under this system so I think there's potential for risk and reward and the devolution of welfare benefits and of course the potential to design a different system that could that could better suit Scotland or better suit Scottish government policy aims. Okay thank you that's by helpful yeah good that's one new question around that mate whatever the drivers might be in the economy if the welfare bill for Scottish Parliament and Scottish Government in the future was to increase and I think somebody made the point they would need to make some tough decisions either reducing expenditure in other areas or indeed potentially raising tax and the issue of how much we could raise by taxations once something had been interested in and I just wondered if we were to apply say a 1p increase only to the higher rate of income tax what would that give us in terms of income I'm not entitled on the numbers there I think the best people to ask are to be spiced because they have a model which allows you to simulate the impact of different changes in tax rates and I can see that over there so I think they're the best people to ask. We shall look to that a bit of information okay thank you. Linda you had some interest in welfare area you want to come on just now where I go to Stuart on? You just did it I'm sorry no that's quite all right no please just move on to Stuart. Stuart Maxwell. I want to ask a couple of questions about the no detriment principle or effectively the two no detriment principles the one roughly speaking the one that's based at devolution and then the one based about no detriment from decisions post the actual devolution of powers. In the in practice how do you see it working in terms of the Scottish Newheight Governments how would they determine what incurs a payment under the second no detriment principle I mean what rules would you see in force that would actually result in a payment taking place from a change in policy post the devolution of the power so the actual changes in the use of the powers once they're devolved? I think the first no detriment principle is I covered it actually before the idea that one doesn't the atractive devolution of tax doesn't actually affect Scotland's relative position whatever the arguments about that position are I think that the second no detriment principle is largely incoherent I think that one of the historical backgrounds for it I suspect was the big argument in the early days of devolution about the treasurer refusing to let the Scottish Parliament have the savings from attendance allowance when the Scottish Government introduces free personal care. I think that there are areas where one has got to be very careful and if you want the system to work on a very asymmetric basis with some welfare expenditure devolved one of the things that's going to cause difficulty is if the Scottish income tax system departs from the rest of UK income tax system it's going to have an interaction with the benefits system and I think the idea of the idea of payments flowing backwards and forwards across the border is actually implausible I think it will be extremely fractures I think the question of modelling what those numbers should be it will create lots of jobs for the big accountancy firms to produce rival estimates I don't think that's a productive thing I think one of the one of the things that one of the one of the kind of worries is about the border area and in terms of airport passenger duty I sometimes see arguments that sound like wanting to put Newcastle airport out of business and things which are clearly targeted and actually create resentments at either side of the border are things which if you want the system to work they should be avoided so I think that any kind of detail passing forward of compensation payments is a recipe for disaster I think it depends upon a degree of co-operation that for the between the government's thinking about issues like for example the interaction of the tax system and the benefit system one of the things we don't have is as good as data for example the HMRC surveys are done for HMRC purposes if with regional tax devolution and some regional welfare devolution it becomes much more important to have better data and that probably means that bigger surveys at the UK level I agree largely with much of that although I'm not sure I would go quite as far as saying that I don't think that these transfers should be made in any circumstances so I think that you know that Professor Hill is right that working out what the transfers you might want to make in a given policy change will be extremely complicated it'll be prone to disagreement because different assumptions are made about behavioural responses about labour supply effects or consumption effects. The example that I often give is on the 50p tax rate if Scotland was to increase the tax rate to 50p on the top incomes again there could be several different kinds of knock-on effects on their own using the rest of the UK one people might work less which means less national insurance as well which would hit the treasury and should the Scottish Government convert the treasury for those losses of national insurance people might also shift their income from labour income into dividends income because the 45p rate was still applied to that that means an increase in the revenues of the treasury should the treasury pay some of those back to Scotland what if you move to England to avoid the tax should the treasury pay back those revenues and you can imagine the kind of complexity around trying to work out all these different effects and the descriptive argument so I think as a general principle it should be avoided trying to reduce compensation payments but I do think there may be circumstances where you can work out some first round effects of these policies and I think maybe that should be a kind of a principle to have in mind that where there is a direct direct impact of a policy change on a tax or benefit or spending item in the rest of the UK and you can clearly work out the first round effects of that then maybe that's maybe where you might consider it so the example given you know in the previous kind of days the attendance allowance and the free personal care there would have been the potential to work out a first round effect of that another one would be with the interaction between universal credit and income tax Scottish Government cuts income tax people's net income increases ignoring any behavioural effects of that you can work out what that means in terms of less universal credit to being paid by the UK Government and the UK Government transfer those savings to Scotland so I think if it's direct and if it's first on effects only it can sometimes be done but as a general principle to be used in every time there's a knock on effect completely unworkable and scope for disagreement all over the place. I guess as I want to do I'm going to again look abroad and I'm really not aware although many of the federations that have been successful in the long term do have some sort of equalisation mechanism I'm really not aware of any federation that has a sort of no detriment principle and I would imagine that David is right that the first round effects are possibly workable but that if you really try to do this carefully then it's going to become a mess and there are probably good reasons that these sorts of no detriment principles generally have not been applied in other places. One of the points I would make because the condition forever making no detriment payments is is it symmetric? If the Scottish Government does it and benefits the UK Government does the UK Government have to pay and vice versa an asymmetric one whereby the Scottish Government had to pay the UK Government but the UK Government didn't have to pay the Scottish Government strikes me as something to be avoided. Looking at the idea of information analysis and transparency in all of this, a good fiscal framework needs sound financial reporting and obviously the fiscal commission in Scotland has been proposed as the mechanism for doing our forecasting as the OBR does it in London. So what needs to be done to improve fiscal reporting in Scotland so that the Parliament can monitor what's going on and secondly who should be the arbiter if the OBR and the Scottish fiscal commission don't agree? I think in terms of what's needed in terms of public information to ensure that this is transparent and to ensure that the Government is held to account. I think that it's not only Scottish fiscal forecasts. I think that there needs to be a proper public document laid before both parliaments which sets out how the block grant has been calculated each year, a full working of the Barnett formula, not just the resulting totals but line by line how the Barnett block grant was worked out and then line by line how the block grant adjustment was made and the assumptions that underlie that so that people understand yes, we are forecasting revenue growth of this revenue growth of that and then subsequently documents published that show the reconciliation of those are the actual out turns for revenues in the rest of the UK. So I think it's more than just kind of better forecast of Scotland, it's better information on how the actual fiscal framework is operating year to year. In terms of his disagreements between the OBR and the Scottish fiscal commission, I think I would this time point to what happens overseas. So if you look in Australia, it's going to call the Commonwealth Grants Commission which makes recommendations on how the grants should be set and based on evidence that it takes from the states and from the federal government. It makes a recommendation and usually the recommendation is acted upon by the federal government but ultimately it's the federal government that makes the decision in the end. Now is the question of would such an approach be seen as acceptable in the UK that you have these two reports, they differ somewhat, ultimately the federal, the UK, the central government makes the decision or would it be some form of political negotiation between the two. We saw with the devolution of stamp duty that there were big differences in the OBR verified forecasts and the fiscal commission forecast from Scotland on revenues. In the end there was a negotiation between the two finance ministers and they split the difference in the middle. Not ideal but I think these are political issues and I think whilst the technocrat in me would like to see some kind of external kind of arbiter that can kind of impose a judgment on it, I don't think that's feasible and I think it'll ultimately kind of politics and be the politicians who make the decision. I think it has to be a political negotiation but it needs to be a political negotiation on the basis of institutions that have the expertise and the information made transparent so that other people can actually see what has happened. I guess I would add to that that one mechanism, one potential mechanism for reducing conflict is to introduce some sort of ex post compensation to the party that turned out to have been say correct or misjudged so say the OBR and the fiscal commission were to have disagreed that had an impact, have disagreed on their forecast that had an impact on say a spending allocation or a block grant. Now if those forecasts say we used the OBR forecast if that forecast turned out to be wrong and that turned out to be to the detriment of Scotland you could think about some sort of ex post compensation writing that into a rule right or it could have gone the other way right say the OBR was wrong that turned out to be the benefit of Scotland right the flip side of that would be you might have to accept an ex post adjustment but I think there could be a positive incentive effect of such just the threat of such an ex post adjustment in the sense that that would reduce the incentives for either side to game their forecasts right if you know that ultimately what matters is the outcome then you're going to try to give your best forecast and any disagreement will then really be a sort of reasonable people reasonable people can disagree about this kind of outcome I think that is is is correct and I think the actual the plan is that there will be these reconciliations in subsequent years so the plan as I understand it is that there will be a an initial adjustment to the block what made just before the fiscal year starts then when the out turn data comes in so the adjustment is forecasting your t minus one for your t when the outcome data comes in your t plus one you then readjust and there's some kind of offset mechanism there so I think that the method that Monica Bell mentioned is what is in the plan I think that will actually as she says given that ultimately what matters is the out turn rather than the forecasts that will mean that each side has an incentive to give their best forecast because they know at some point in future that it'll be the outcome that that matters rather than the forecast I think I'm in favour of independent fiscal institutions but I think one has to be one has to be careful I think that the independent fiscal institutions operate in a fact that we don't actually know what's going to happen happen in the economy and there can be very very big uncertainties and what we saw at the time we saw at the time of the autumn statement that the chancellor suddenly found an extra 27 billion now if there hadn't been an independent OBR the treasury would not have dared to claim there was an extra 27 billion because we'd have all laughed at them so the independent fiscal institutions are part of the part of the political game themselves and facing a situation of big uncertainty and I think that could have I read in the newspaper that OBR provided five successive numbers for the treasury now unsurprisingly the treasury chose the best one for its purposes Tavish so are you arguing therefore that all these since so-called independent bodies aren't independent at all they're just gaming every bit as bad as Government does no I wasn't saying that at all I think that they are operating in a you know that they are technocrats operating in a framework of lots of uncertainty about what's going to happen in the world things can change as the world changes and as the most recent data change up but the politicians will get politicians will will gain them and that the the the say the political judgment of the treasury in the context of the autumn statement would not to being gone to Andrew Tyre in the treasury committee and say we've suddenly after all this trouble about tax credits we've suddenly found an extra 27 billion because Andrew Tyre would have laughed at them totally by that but I'm more interested in in the principle of how we move forward and I don't understand how if all forecasting is to be independent of course at the moment we haven't got that in the Scottish fiscal commission some of the forecasting the governor yet to agree should be completely independent I hope they'll agree to that but if this gaming is to go on then the game is all political all the time isn't it I mean how do you I thought we had independent forecasters because they gave an independent forecast on that was that I don't actually understand this whole point about needing a I can't remember your exact phrase Dr Eible about some mechanism to get it right afterwards I can't see how that could work in a practical sense well if what I'm saying is that if you make sure that it matters ultimately is the outcome rather than the forecast that then gives the right incentives to your body however independent or even not independent it is to get it right yeah and that's ultimately what you want right independence is always a bit relative right you know we we know that people in um who are members of independent commissions might um might have their own political leanings or not um so I think that just making sure that out turns matter from it if we don't get it right at the start and we don't have confidence by which I mean academics parliament I don't even government I mean academics parliament people watching this process if they don't have confidence in the fiscal commission or for that matter the OBR at the start then this game is impossible well it has to be complete confidence that these institutions are independently assessing the numbers given to them and are coming up with their best valid judgment of what those numbers should be right but but economists would have economists have different views about how the world works uh they also there is also the problem of a problem of when data becomes a becomes available so so the you know there is a sense in which you rather than everybody criticizing the treasury for forecast people now criticize the OBR for the forecast so there's a considerable element of blame avoidance and blame shifting blame shifting going on I mean there is there is obviously a potential difficulty if there's a conflict between the fiscal commission and the OBR one of the points I would make is that New Zealand has actually attracted considerable criticism from the IMF in the context of article four consultations about not having as far as I know still doesn't have an independent fiscal commission but one of the points that the New Zealand treasury has made to me is first of all they've got a very good record in terms of fiscal forecasting and the secondly in a small country context you have to be worried about the dispersal of expertise and I think that's an issue for Scotland as well I mean you the kind of unless you're willing to put very significant resources into expertise you're not necessarily going to improve the position yes well I just wanted to underline the point that among economists you know all among economists independent economists with the best of intentions we do tend to disagree with each other and it is there are many issues about which reasonable economists can disagree that's your point do it I was going to give it kind of a quite a simple numerical example to explain why this outcomes versus forecasts kind of gives right incentives to the two fiscal commissions not to try to gain the system to try to give the independent honest forecasts so let's say that you're going to be devolving income tax of Scotland and you ask the two fiscal commissions to estimate what they think those revenues should be how much should you take off the block grant and the Scottish fiscal commission says we think to be 10 billion the UK OBR says it's going to be 11 billion and then the government started to negotiate you know some compromise and they say 10.5 billion now it turns out actually it's 10.7 billion pounds is raised in that income tax in that first year and the method we've got says that you know you should then take 10.7 billion pounds off the block grant so what you're initially to go for that 10.5 you say the the the fudge they've come up with and then two years down the line when you work out what the real number would say well actually no we were a bit wrong there we're going to take a further 200 million off so it matches that 10.7 billion now whether the OBR had said 12 billion and the fiscal commission said 9 billion or or any other number you would still come to that 10.7 billion number in the end so because they know what they forecast ultimately it doesn't matter they have no incentive to try to gain the forecasts because they know the out turn is what matters actually they have an incentive to get the forecast as good as possible for their own credibility so I think that that's why making it outcomes related to helps give you this the independence and the credibility of the forecast I think that's the point your argument David Phillips is that the those outcomes should be reported to Parliament on an annual basis as part of what the budgetary process or and then you make an adjustment to the block one adjustment once those outcomes come in that's very good that's fine I'm going to leave the last question to Linda quickly on VAT because I haven't covered that right now it seems to me that everything we've covered today sounds very complicated and packed full of risk for Scotland so for the last question can I ask is it less complicated and less of a risk when we look at the assignation of VAT in terms of the initial mechanism and the ongoing? I think that one of the one of the issues arose at the time of the Smith commission one wanted to devolve as much as possible and so assignment of VAT got into that into that picture I think there are significant there are significant risks about VAT and many of the same indexation issues the same indexation issues arise but the point the point I want to make is Angus Armstrong and Monique have got a paper in national institute economic review in which they talk about the Scottish Parliament being one of the most powerful devolved parliaments in the world and the numbers they use is controlled of 65 percent of spend and 45 percent of revenue now I don't accept that description I don't accept that description because frankly I don't think it matters what proportion of revenue the Scottish Parliament notionally raises I think the key question is whether you actually have any credible varying powers so that one of the big differences between the US states and US states Canadian provinces and Swiss cantons is they have a credible tax varying capacity now one of the things what I brought an article in 1997 having having very been very much a tartan tax supporter I actually wrote a paper saying I worried about the attriff potential attriffing of the system and my big worry my big worry going forward is that after all these debates all the political controversy all the legislative process we will we may get ourselves in a position whereby the tax powers are not usable so what matters is the usability of the tax powers now you clearly the UK government's got responsibility because I've already made a point to the committee before that the Scottish Parliament has got to notify HMRC by the 30th of November what its Scottish income tax rates are going to be bands are going to bands and rates are going to be the chancellor has till March to potentially sabotage that arrangement sabotage that arrangement now if the UK government starts doing that it will totally destabilise the system and I think that it was unfortunate that the tartan tax attriffing but I think that we would all agree the stakes are much higher now so I would like to respond to that briefly because I think that that was a somewhat misleading representation of my views on and Angus I don't intend to what I do I do want to stick to the 80 and rate setting powers and of course it's crucially important right the the ability to set out set rates is important for incentives and is an important measure of fiscal autonomy for a subnational government now there's a good reason again for good again looking abroad there's a good reason that VAT revenues are not often shared and when VAT a VAT like tax is delegated to a subnational unit it is usually not a VAT but a sales tax so we know that from say the US and Canada they impose retail sales taxes the difference the distinction is you do not need to follow the entire chain of value added and disentangle where was value added at each step along the process all that matters is where is the final point of sale and that is a much easier way to disentangle now I'm afraid that I it's rather unlikely that the rest of the UK will agree to shift to a sales tax because that would make devolution easier but it would and it would also of course that kind of devolution would involve real rate setting powers right that would allow Scotland to set its own rate of sales tax which might well be different from that in the rest of the UK system with UK's membership of the European Union. I was going to echo a lot of what Monique was saying in terms of actually the way this is devolved and actually calculating the adjustments working out Scotland's share of VAT I think it is incredibly complicated if you look at the way that the estimates that can kind of calculate for jurors and the HMRC ones they're not based on any real VAT data they're based on estimates from household surveys and national accounts and gross value added and public sector accounts it's not an actual measure of the tax revenues it's a it's a pure estimate. The estimate also jumps up and down a bit because of the sampling error in the surveys and I don't think that's going to be appropriate for this tax only way to see you working is one of an impossible move to a sales tax or two a difficult move to separate accounting which has been discussed in the context of corporation tax in Northern Ireland might that also be required for VAT in Scotland where you ask companies to account for kind of transactions across the Scottish UK Scottish English border which becomes quite complicated and actually starts to undermine the single market of the UK so I think that is very complicated. In terms of whether or not there's any benefit of the assignment or not I'm not quite as negative I do think that even if there's no power to vary the rate actually having an assignation of something can still provide some incentives the UK Government has a policy in England on assigning business rates revenues to the councils at least partially so they have incentives to grow it the Scottish Government has the business rates incentivisation scheme where they can't change business rates but councils get to keep a proportion of the growth in business rates the idea being that that gives them more incentive so I think there is some incentive even if it's an assignation but clearly it's a lot of complexity for less incentive and less autonomy than you get with full devolution and full right varying powers. Okay, I'm afraid we're going to have to conclude today's witness session at this stage but I thank you all for a very helpful session I think across a range of areas which is very helpful now obviously we'll either have or will not have a fiscal agreement at some stage but if we do have a fiscal agreement I would welcome any views that you have at that time to put to the committee in writing at that stage about what your views would be very helpful but that brings this particular evidence session to an end I mean now moving to private so thank you I'm sorry we're not going to private another item yet before we go into private so forgive me I've got item number two which I'm going to go straight into and that's the correspondence from the Scottish Government on intergovernmental relations Stephen I'm going to hand over to you quickly on that. Just briefly conveno just to inform members obviously the committee will recall that in its recent report on intergovernmental relations one of your recommendations specifically recommendation number three was that there should be a new written agreement on parliamentary oversight of intergovernmental relations drawn up between the Scottish Government and the Scottish Parliament Mr Swinney has written to the committee on the 15th of December indicating his support in principle for written agreement and offering his officials to have some initial discussions with parliamentary officials on that so with the committee's approval I would be happy to take forward those initial discussions with Scottish Government officials to produce perhaps some drafts and bring those back to the committee formally to look at and of course happy to have a conversation with any member prior to that to make sure I fully understand the key things that members want to see in that written agreement before drafts are produced. Views, are we content with that approach? Okay thank you very much in that case we'll shortly go into private but before we do I'd like to make sure that we know that next week we'll be taking further evidence on fiscal frame what's specifically this time on the aspects of welfare and we'll also have an update on the Scotland Bill Committee I now move this session into private session this committee meeting into private session and we'll just continue straight from now