 Welcome to the 28th meeting in 2014 of the Finance, Committee of the Scottish Parliament. Can I please remind everyone present to turn off any mobile phones or other electronic devices? Our first item of business today is to take evidence on the Scottish Government's draft budget 2015-16 from Philip Hogg, the chief executive, Homes for Scotland, John Hamilton, chairman of the Scottish Property Federation, Ian Honeyman, commercial director of the Scottish Property Federation, and David Stewart, policy manager of the Scottish Federation of Housing Associations. Welcome to you all this morning. Members have received papers from each of our witnesses, so we will go straight to two questions. What normal situation is, as I am sure you can imagine, is that I will start with a few opening questions and then I will open out the session to colleagues around the table. First, I want to say that I was very impressed by the quality of the submissions that you present to us this morning. They really were quite excellent. Some of the questions that my colleagues might ask will, to some extent, possibly be answered in the papers. For the committee record, it is important that we go through some of those in some greater detail. It is a question of which one to start at, I suppose, because there are so many questions to ask. Let us start with the Scottish Property Federation's submission first. When I ask a question, though one individual, please, if you wish to comment other than to the person that I am asking the question to, please feel free to do so. We want to get as wide a range of responses as possible. In the Scottish Property Federation, you talk about the approach to LBTT and suggest that it would be more prudent to have allowed Scottish Ministers greater freedom to set competitive tax rates and thresholds. I wonder whether you can go through briefly your thinking on that. I am not sure whether Mr Hamilton or Mr Honeyman would wish to answer that question. I am happy to answer on behalf of the SPF. The SPF welcomes the change to a progressive slab system. We think that that is an excellent introduction, which has been of benefit to both the residential and commercial markets. We also see that there is a position that the Scottish Government can now take in looking at an advantageous position in terms of the ability for developers to trade within the UK. We think that the bands and rates that are being introduced at the moment would merit some adjustment in order to give Scotland the advantageous trading position that we think that that might introduce. Before I go on, I would like to apologise to Mr Honeyman. I am afraid that my briefing on your list is being from the Scottish Property Federation, but you are in fact from the Scottish Building Federation, so I just want to make that clear. What impact would those changes have that you may suggest to have on revenue? One of the things about LBTT and its progressive nature is that the Scottish Government's view is that it wants to keep it broadly revenue-neutral. How would your suggestions ensure that we continue to have that revenue neutrality? We do not necessarily want to raise more taxes, it is just the distribution of taxes that has been raised through the legislation. We agree that the position of neutrality is one that we accept. The base information perhaps could be reconsidered in the first year or two of the introduction. It is difficult to predict exactly how the markets would respond to that kind of change. It is quite a major change to see Scotland introduce a new tax system, so there will be quite a lot of sensitivity in it. We see it as being an issue that is not going to be necessarily understood in the first year or two of its introduction exactly how it will impact on the market. Over a short period, depending on the quality of the data that is used to make market assessment, we think that the position of neutrality could still be achieved and allow some competition within Scotland to attract investment to the industry. You have suggested that a new banding is effectively created, which would have a softer move from the 2 per cent to the 10 per cent. What impact do you think that might have in terms of the wider property market? We think that the change in bands is too severe. It is possibly going to lead to some distortion in the market, where people may make decisions on whether or not they proceed with a transaction. That is both in terms of the residential and the commercial market. With that quite severe change in the bands and in the race, we do not see that as being adding a positive aspect to investment decisions that would be made in Scotland compared to the rest of the UK. Do any of the other colleagues on the panel wish to comment on what Mr Hamilton said? First of all, I would like to endorse what John has said, that we broadly welcome the model, the new system, removing the steps and the slabs that create distortion. For that, we are very supportive. Generally, our comments in the paper today and what I would like to discuss are suggesting how it could be tweaked rather than wholesale engineering, but to pick up on John's point, we acknowledge and welcome the fact that purchases below £325,000 are likely to pay either the same or less. The net effect of that is that the tax burden on those purchasing above £325,000 has to be considerably more. There will be a little sympathy, I suspect, for people purchasing in the very high hundreds of thousands. We believe that there is a critical price point between £325,000 to around about £500,000, where the tax increase will be in the region of about 40-odd per cent. A significant increase. Again, there may be a little sympathy for purchase in that area, but what we need to look at is not so much the emotions of it, but what it might do to the marketplace. To have an effective system, we need to have price movement, we need to have movement through the market, through all stages of the market, because we need people to move upwards to vacate properties at the entry level, to allow first-time buyers through there. If we create stagnation or lack of movement at any point in the marketplace, it could have the effect of stifling movement at the lower levels. That is our concern. We also suggested that a new band was inserted between £250,000 and £500,000 to relieve the tax burden a little bit. We are still suggesting that it would be more, but not as more, if you like. The consequence or the risk of that not happening is that we understand that the majority of the tax will fall on the 10 per cent of the very high number of purchases. We think that there is a risk there that if those purchases simply decide not to move because the tax is too high, then there could potentially be a risk that the forecast tax intake could be less than may be considered. What we have to note is that, as a result of the financial crisis and the housing market collapse, many people are sitting in properties that are probably worth a lot less than they were many years ago. Their equity in those properties is a lot less than it would have been many years ago, whereas, traditionally, people would have moved up the housing ladder and had equity that would have been used to have paid off the stamp duty. There is less of that around, so it is less affordable to move upwards. We believe that we could create that stagnation in that section of the market and ultimately impact on tax take and overall movement in the market. We are talking about 5 per cent of the overall housing market being disadvantaged. We are not given that anyone who buys a house under £324,300 likes to be better off in terms of the amount of tax. One of the issues that you have in terms of the geography is that, obviously, some areas of Scotland are poorer than others, so there is quite a differential in terms of the number of properties in specific areas. Is that a concern? For the areas that are more prosperous, that might be more impactful than other areas? I think that there is an element of that, but it is not necessarily more prosperous. The share cost of housing in some localities is just more expensive. That is one of the facts that certain geographies have more expensive properties. The most prosperous part of Scotland is the most expensive houses. It is clearly East Renfisher, Aberdeenshire, East Lothian and Edinburgh, where I am in Ayrshire. There are not really many houses that sell for more than £324,000, to be honest. What we are proposing is for a more even spread of the tax take through the bands rather than a very steep increase when it goes across that neutral point. We are just asking for it to be evened out. In our proposal, we still support that the people at the lower ends are given a tax advantage, although they pay less. However, we think that it could be more evened out rather than as steep as it might be at the moment. If, however, the 10 per cent tax above £1 million does have the impact of reducing house prices in overheated areas such as Edinburgh, Aberdeen, etc., would that not perhaps be perceived by some people as being a good thing? I think that we have to be careful about what we think about reducing house prices because our experience has shown, through our members, that homeowners have a belief of what their property is worth. Some of them or many of them, when they come to consider selling or consider moving, if they found out that the property is worth less than they had thought, will result in them simply not moving or having a higher expectation of what they think they should. That creates the stagnation that we thought. Our members have noted that and reported that back over significantly over the past few years, particularly when they are considering offering part exchange for home movers. When the home mover is told how much their property is worth, they simply say, that cannot be true, I paid X or I have heard that properties are moving up. That acceptance is difficult pill to swallow for many. As I say, if they accept that their property is worth less, that will impinge on their existing equity and their ability to pay that tax. It should be pointed out that the average price of a detached house in Edinburgh in August 2014 was under £242,000, so I will add that in for perspective. I think that the Scottish Property Federation would see it being more benefit to add stimulus to the lower end of the market and improve the quality of housing in the market rather than to impose the most severe rates of tax on the higher end of the market, which looks at the problem from the other angle. Mr Honey, in your submission, you say that the transition to aggressive system of taxation of property transactions will undoubtedly have a positive impact on the property market and the wider economy by eliminating current distortions in the market caused by the existing slab structure of STLT. Can you expand a view on that from your perspective? Obviously, the existing system that is there at the moment has issues. We believe that the transition to the LBTT tax is going to actually benefit probably more than it disadvantages. As you have pointed out, issues in terms of geographical, things where the perception of this particular tax is going to be different, and I do not think that you are going to change that just because we are geographically. One of the issues that the tax will address is that we believe that it will promote the growth at the bottom end of the market and probably more affordable housing, which is obvious that we are all crying out for us to get the housing market moving again. We believe that that particular issue is addressed by the tax. There are issues with regard to the step between the two to the 10 per cent. In essence, the concern that we have overall is that, if the tax is to be neutral overall, it is making it relatively fair across the board. It has to be seen to be fair if it disadvantages these things. The market around about the £325,000 has been flagged up as a line in the sand. There is an issue with that £325,000 mark. People may decide that they are not going to move, but they would rather stay where they are and invest. That could be quite good for the construction industry generally, but it is not going to help the housing market. People's aspirations to move up the ladder still exist. It is possible that that could be an area that does create a problem in the market, but not everywhere. You have pointed out that the majority of houses are probably in the lower bands that are going to be better off from that, and that is probably the thing that is going to stimulate the areas of more affluent Scotland. I think that they would feel that they have prepared to pay extra money, but as long as it is not seen to be punitive on their particular issues. I have to say that Professor McEw and her adviser have said that taxation at the higher end is not really as much a consideration for people as one might think when trying to move house, for example. How much of a consideration do you believe that it actually is? You have to remember that people want to move up the ladder. They have to be in a position to be able to afford to move, not when they are already there and have the equity and everything in the property. There has to be a transition that is a big step. Somebody is making a decision to move from a £180,000 house up to a £300,000 house if they could afford it. It is certainly going to be a bigger step than it would otherwise have been. That is the issue that I think that they may have to be looked at. The £180,000 house would still be better off. Yes, there would be, but when they step above that, the whole market is a chain to a certain extent. We believe that some of the chain would be addressed by the introduction of new housing. A lot of the first-time buyers are not looking for existing houses if there are more new properties on the market. That is what we believe that the stimulation to the housing side of things is going to be. Thank you for that. Mr Stewart, you are broader supportive of the proposals on progressions. I am not going to go into that particular area, because your submission focuses on other areas. I am not going to talk about the issue of low-carbon homes, because I am sure that other colleagues around the table would want to ask you specifically about that. I do not want to steal your thunder, but I wonder whether you can talk a wee bit about the issues in relation to housing, such as the mid-market rent through non-charitable subsidiaries, and the impact that the legislation might have on that particular area, because it is a wee bit different from some of the other submissions. In a way, housing associations developing mid-market rent might seem quite a small consideration. It is not a huge part of their businesses, and it tends to be focused in areas where the market is strong and where there is pressured area status, such as Edinburgh and Aberdeen. One point about the tax is that we are broadly supportive of. That is a cause for possible concern, as we understand where charitable subsidiaries of housing associations provide with non-charitable subsidiaries and are buying multiple properties from developers. The nature of the new tax is a result of the fact that it seeks to charge proportionately higher levels for higher value transactions. We understand that that would mean that, in such a case, a housing association would pay more than it did. That is something that we would like to see perhaps a further relief for exemption to avoid that being the case. I am keen to let colleagues in, so I will ask questions on what is one more area. I will switch back to Mr Hamilton, who is on commercial property sales. You said in paragraph 6.1 of your submission that the final top rate of LBTT is the bell weather by which the property investment industry will set its yields for investable property. In Scotland, a proposed commercial development appraisals, and you have some concerns about the 4.5 per cent rate. Can you talk us through that and what sort of investments we are actually talking about here? The main concern that we have is that, again, that will be seen as an added cost of investment in Scotland. It creates a differential between the cost of investing in development or developing an existing stock in Scotland, which sets it apart from the rest of the UK. Investment in property generally, much of the decision making is made at the margins, and, although it may not seem that a half of 1 per cent makes a great deal of difference at the margin of decision making, could make a great deal of difference. We are generally looking at projects such as the hay market development in Edinburgh, where there are multimillion-pound investment projects, and even a half per cent of the cost of that transaction would be seen as having a net detriment to investing in Scotland compared to England and Wales. Mr Honeyman, you get some interesting comments on that as well. I wonder if you can talk us through your views on that particular issue. In terms of the commercial, the figure that the transition happens is around about the £2 million mark. I have to say that, when you look at the actual overall figures, the half a per cent, once it gets over that, it claims that it is significant to make decisions and to put people off a project. If we are making a decision on a project that is of that level and the tax makes the difference between being profitable and non-profitable, I would find strange. However, there are issues in terms of the actual spend on a project. I have lost my train of thought there. The tax side of things is that there is a significant amount of volume in such things around about the £2 million mark. That is probably where the majority of those things lie, but I do not believe that I have lost my train of thought totally. I apologise gently, ladies. I move on to Mr Hogg. In your submission, it is crucial that Scotland remains a competitive place to invest and bring forward housing development. You also expressed concerns about the 0.5 per cent that it is not helpful. Surely there are many factors in terms of product development. For example, the cost of an acre or hectare of land in London compared to Glasgow must be massively different. Surely that is only one relatively small factor in terms of the investment decisions, as Mr Hyman pointed out. How important is it in terms of the decision-making process that I am trying to grapple with here? I am building on the comments that John made a moment or two ago. Many of the major UK-wide home builders operate an internal market of competition when they are looking at a range of potential development sites. Each of the regional companies that build the homes have to compete internally against their peer group for the group assets, the group finance. Anything that makes a development site in Scotland more expensive than one in the south will be looked at dispassionately by whoever is the group finance director or who is the decision maker to say that we can achieve a better return on our investment from the site in Durham compared to, for instance, Dundee. That is where the economics make a difference. It is also a fact that home building is more expensive in Scotland anyway, as a starting point, because of the higher energy thermal standards that we have. Construction costs are already more expensive. What we will be doing here is adding an extra, albeit that it may be seen as a marginal cost, but it is just that little bit extra that will make it more difficult to compete in an internal market for funds. We just thought that it was appropriate to flag that up, but it makes it a little bit more difficult and a little bit less attractive. I would like to explore this further with you. I have taken up a significant amount of time and I want my colleagues to have their opportunity. The next person to ask questions will be John Depp, to be followed by Jamie. The convener already touched on Mr Stewart at the mid-market rent area, and I was interested in that. Have you done any studies as to how much rent would be affected by this proportionally? Not as such. The issue was flagged by a member who operates mainly in Edinburgh and the Lothians and has over 400 properties for a mid-market rent. It was raised as an area of concern. It might not be so much that the rent would be affected. The rents tend to be set so that they sit somewhere between affordable or social housing rents, where people who would not otherwise be able to afford a house with and between what the market pays. I suppose that the concern would more be that it might either limit the number of units that an association might buy or actually around the cost of the public purse. To develop mid-market rent, you need either land to be transferred at nil value or below market value, or you need some form of grant or some mechanism, such as the national housing trust that the Scottish Government promoted. In some ways, it would not affect all the properties of the mid-market rent, and as I said, the mid-market rent is not the main part of the housing association's business. However, when we are in a period in which a lot of people can no longer afford to buy, certainly until they are older, it meets an important need. It is just to flag up that this might be a cost that could affect the ability to deliver. The mid-market rent is about 80 per cent of the private market. One of the phrases that you may say is meeting a housing need that would not be met by the market. Presumably, it is making it a bit more affordable for some people who would be struggling, but the reality is that they would have had to pay the market rate otherwise, so they have already got a 20 per cent advantage. I suppose that you could say that they may have had to pay the market rate, but that ultimately could affect their ability to go into employment or it could pose a greater burden on the benefit system, which is obviously a concern with welfare reform and changes to housing benefits. The aim of this type of housing is to meet a need of people who would normally be housed through social housing because there is so much pressure on it, but they would struggle to pay a market rent or to buy outright. The other point that you make is that you say in 3.33 under the energy efficiency, but it is surprising that the Government did not make an opportunity to incentivise energy efficiency. We spent quite a lot of time on this when the actual act or bill was looked at, which you may have seen. The feeling then was very much that it would not make a big difference to where people were buying. It is also an inefficient way of doing it because if you do not sell, you have no incentive to improve your house. Would you not think that it would be better to do it by grants or do you feel that the tax is still a bit... I think that in an ideal world it would be better to do it by grants. I suppose that what we are conscious of is that Scotland has very challenging climate change targets for carbon reduction, that has commitments in fuel poverty. We fully support those targets. I suppose that our view would be that in order to meet those challenging targets and to deal with the fact that fuel prices continue to rise, really every opportunity, every tool available, should be used to provide a push or to incentivise energy efficiency. We have tried to make it clear in our submission that we do not think on its own that using the tax would lead fully to greater awareness of energy efficiency and greater investment. What we feel is that along with a range of other measures, such as the minimum standards that the Scottish Government plans to consult on, such as available funds, such as the Home Energy Efficiency programme, it would provide a push in that direction. We feel that, given the importance of the issue and the Scottish Government's commitment to it, every opportunity should be taken. I was aiming at that, Mr Stewart, but that is fine. Moving on to the Scottish Building Federation, Mr Honeyman, I was interested in the third page. It talks about the respondents and how they saw the tax burden in the bold part. It talks about 50 per cent of residents said that the tax burden should be the same. 44 per cent thought that it should be lower, so 94 per cent either thought that the tax should be the same or lower. On the non-residential ones, it was 63 plus 32, which is 95 per cent think that it should be the same or lower. Is that just basically saying that we think that there should be no tax or very little tax, and that is just the whole thrust? It is probably reflective on the fact that our membership covers a wide range of operators effectively on both housing and commercial. Some of them operate on one-off houses and such, but they all want the tax to be nil. Generally, they are in favour of it being either staying as it was or being less. Nobody wants to pay more tax if they can have one. Taking into account the fact that we need to pay the teachers and we need to pay the nurses, is that not really a factor for them? It is difficult to say. The questions in such a way get answered. They probably look at it from the point of view of where it affects their business as opposed to anything else, rather than looking at it as where all this tax goes, because effectively all tax goes into the pot and nobody actually knows where it gets spent. Obviously, it is good to get spent. When you say that nobody knows where it gets spent, what does that mean? We are not saying that the tax that is recovered from property, people pay the taxes and such, and it goes into the Government pot and how that money is spent. We do know how the Government pot is spent, but it is not ring-fenced if that is what they mean. All the money that is raised from this is not necessarily going back into construction, for example. No, but it would be going into public service. Public service, yes. I appreciate that. Okay, that is great, thanks. Property Federation Mr Hamilton talked about the treasury and the block grant. I was interested in your comments on that. You said, in the absence of any apparent treasury demand and the block grant reduction, we do not understand why the finance secretary did not opt for this approach, i.e., aiming for projecting lower revenue. Can you explain what you mean by that? We are having problems with the block grant, and as far as we understand, the treasury is pushing to reduce the block grant more severely. I think that the point that we touched on earlier is that the amount of the reduction in the block grant is not yet known because we do not yet know how much of a stimulus or otherwise this change will make to the housing market and the commercial development market. The amount of tax that is taken is one thing to set a rate of tax and assume that the amount of revenue that you are going to tax is going to be constant. It will change partly as a result of the change in the tax regime and partly as a result of market conditions, which nobody can absolutely predict. Again, we see it as an area where we have to be cautious for the first year or two of how that is introduced until we fully understand what its impact on the market might be and, consequently, how there may be an impact on adjustment to the block grant. There will be other reasons for that happening. You made the point that the amount of tax that is based on transactions and house prices and that is affected both by the market and by the tax. I do not know if you have done any studies, but how would you compare those two? I would have thought that the market would have the huge impact either going up or down or whatever, and the tax would actually have very little impact. Do you agree with that? No, we do not agree with that. We are quite concerned about the issue that the industry can carry the added tax and it is only half of a per cent. As I said before, this is an added cost of investment and an added cost of doing business. That will not be welcomed by investors. Do you still do business in London because the cost is quite high? Yes, but the reason I do business in London is because it is seen as an attractive place to do business. The values in Scotland are not the size they are in London. If we can make Scotland an attractive place in other ways, as London is a higher, better educated workforce because we are putting more into the schools, universities and things, then we can counter some of those things. Yes, but how we would do that is by increasing the amount of business that is done in Scotland and the amount of investment that is made in Scotland by making it an attractive place to invest. Land prices must come in here because the competition point has been made by a number of the respondents. I would have thought again that the land price would be a much bigger factor in the cost of the overall project than whether the tax rate was four, four and a half per cent or that kind of thing. Is that not the case? Land is not a constant and it depends between commercial and residential, but typically it might be 20 per cent of the cost of a typical development. That is a sizable proportion of the amount of investment in a project. On the bigger projects, whether that tax is applied to the land element or on a forward sale to the full development value, that is a significant cost. If you look at a city like Glasgow, clearly the land costs are higher on the west end than on the east end, but people want to build on the west end and they do not want to build on the east end. It is not just a question of finding the cheapest place to go. In that equation, the tax, even if you had four per cent in the east end and four and a half per cent in the west end, people would still want to be in the west end, would they? They would, but the whole distribution in values, as I said before, we do not see it as being helpful and rather negative to approach it from the point of view that you are dampening the interest in investing in one area compared to another. What we would rather see is stimulus being provided in the areas in which we want to see improving values, whether it is land values or overall property or commercial values, and there are better ways of doing that. Have you done actual studies on the impact of this half per cent difference on the commercial values? We have not had the opportunity to do that, but I think that starting from a base at which you are setting that rate and then waiting to see what happens is slightly risky. The studies can be done over time, but it may take a year or two for the industry and the Scottish Government to do that. Mr Hogan, your paper on the first page talks about the balance between supporting the first-time buyers and the mid to higher values and creating too much of an imbalance within the market. Some people would feel that there already is a huge imbalance in the market and in society for that matter and that some people have a huge amount of money and huge properties, other people have a little money and a little properties. Would you be open to that argument or how would you respond to that? Indeed, I am open to that argument and just to reiterate, we welcome broadly the proposal that has been put forward. What we are seeking to do today is to suggest what we think will be refinements. We are not suggesting a reduction in the overall tax take, we are just suggesting that the distribution of the tax could be more evenly spread. You will note in our paper that we are still supporting a reduction in the tax for the lower end of the market, we are supportive of that. We just think that it could be more evenly spread towards the middle section so that we get that smoother distribution. Just to add some context on to the whole picture, we are in the midst still of a housing crisis with only 15,000 new homes private and social homes built over the last year. We collect data from the majority of our members who deliver about 95 per cent of all the new homes built in Scotland. We have a reasonable finger on the pulse in terms of what is happening. In the early part of this year, we were seeing significant signs of growth. However, as the year has moved onwards, our forecasts are that this year's housing output will be broadly the same. We will see no increase in total housing output. Whichever way we look at it, we are not eating into the challenge, which is recognised by Scottish Government of the need to increase housing output. What we are looking to do is say how can the new LBTT system support that growth, support that increase? Therefore, our paper is purely recommended of ways that we think that we could engineer the system. As I say, we welcome the removal of the cyber system but ways to further engineer it and also to remove which David touched on some of the bulk purchase which will significantly impact large-scale investment, large volume investment. I might be switching around a little bit, but I think that it is relevant. The Scottish Government has recently supported our organisation with the appointment of what is called a private rented sector champion. His role is to attract institutional investment for the construction of large-scale, private rented properties that are professionally managed of the highest quality. Scottish Government is supporting us in that particular project. We need to have a professional run, as we have in many parts of Europe, a large-scale private rented sector. However, the new tax system, as it is proposed at the moment, undermines that because the tax that is proposed to be levied on large-scale multiple purchases is going to be significantly higher. All that we are looking to do is to work towards how we can get the tax system, recognising that the tax needs to be gathered for all the reasons that you have pointed out. However, we are looking to engineer to tweak that process to make it more effective in line with other policy requirements. You raised the point, which I think is an absolutely valid point, that we need more homes and houses. From a society's point of view, if we have a million pounds, do we want one house at a million pounds or do we want 10 for 100,000? It seems clear to me that, based on your argument, we need more houses. Let's have more at the bottom end, let's have more smaller houses or cheaper houses. That's what's going to benefit society. A few million pound houses isn't going to benefit us, so should we really be doing all we can to push the investment down at the bottom end and let the top end take care of itself? I think that we need a mix of housing because, as I said, we need to have a scale of people being able to move up through that. As people's life position changes, as they have families, as their jobs require them to move around, they need homes of suitable quality for their purposes. If we look at the north-east, the booming oil economy in Aberdeen, there's a need there for arguably higher value properties. If we don't cater for those particular higher net worth individuals, we have what's recognised as a commuter society. People who will fly in the working week, maybe live in rented accommodation or a flat or whatever, and then move outwards again. For the long-term sustainability of each economy, we need to have the appropriate mix of housing. Yes, we need housing at all levels across all tenures, and we're fully supportive of that argument. That's evidence stories, that's supported by each local authority, developing their housing needs and demand assessments, which then feed into the local plans. I would like to add to that as well. We think that the measures are correct in terms of having a low tax rate or zero tax rate at the lower end of the market, where clearly there's encouragement for those properties to be built and sold. That's good and that's fine, but in the overall tax take here, there's going to have to be enough of the bigger properties, which will, in effect, be applying a tax that will be collected in those properties in order to fund a tax that's not being collected in the lower market. That has to be balanced. I say very much, convener. Mr Hogg, in terms of your exchange there with the deputy convener, you're suggesting that the rates should be altered to even out the rates to the middle of the market. We know that you've suggested a new band of 7% from £250,000 to £500,000. I presume that's what you're talking about, but it's not really right to call that the middle of the market. It's the middle range in terms of rates, but we know that the Scottish average house price is £170,000 and even Edinburgh, where the house price is higher, is £235,000. So, to call the middle of the market isn't quite telling the full story, is it really? That's tall at the middle price band in the range that's been put forward in the paper. I'm not trying to attach a label with any socio-demographic meaning to it. I was talking in the range of bands, which are from 0 to 1 million. I'm talking of that notionally being the middle range of numbers as opposed to middle incomes or middle house prices. As I've said, and just to reiterate, we need the market to move at all levels. If the market stagnates at that point, that 325 to 500, then it won't release properties at the lower levels for the first-time buyers to move upwards. I'm sure that many of us have moved throughout our lives and we've been stuck in that notorious housing chain where you're waiting on the solicitor or you're waiting on your purchase that's buying yours before you move on to the next one. We're all familiar with the chain concept. Some of us may have had unfortunate experiences where the chains have broken down at various points. What we're saying is that we need that section of the market—let's not call it middle if that causes a problem—but we need that section of the market to be able to move also. I raised the point about diminishing equity. In previous years, many people moving on to their second or third properties had enough equity in their home to be able to afford the stamp duty. I'm looking at some figures here that Scottish house prices are still below their pre-crisis peak, looking at around about 4 per cent the figures that I have here. A lot of people don't have that equity that they would have had traditionally and we just think that that could create a problem. We're also already aware, as reported by a number of our members, that a number of customers who had already reserved homes that were due to be moving in from April 2015 onwards have already come back to some of our member companies and said, all of a sudden, I've realised that I've got a bigger tax bill. What are you going to do about it? If you're unable to cover that additional tax bill, we may have to cancel the purchase. There will be an element of trading and negotiation going on there, and that's part of commercial life. However, for someone who is a private seller or a second-hand property, that could jeopardise that chain. That could make the seller saying, well, I'm sorry, I can't lower my price any further because I can't afford to do it. There's already evidence of some movement around the bans. That's helpful, and I welcome the classic. I just thought that calling the middle market might be a bit misleading, but I think that you've clarified that quite usefully. On your paper, Mr Stewart, you did explore this again with the convener, the deputy convener, this whole issue of mid-market rental sector and how it could be affected. I think that you said that this was raised by one housing association. Could this be peculiar to areas in which house values are higher than others? You said it was in Edinburgh. How many houses are housing associations purchasing at over £135,000, which we know is the threshold for a new value? I think that the issue here is not so much over the cost of the individual house, but it's where it's multiple transactions. They're then treated as a larger sum, and then the tax is applied as if it was a commercial transaction. You are right that it wouldn't apply across Scotland or to every housing association. You only really get mid-market rent, where there's, as I said earlier, pressured market status. Maybe in the West End of Glasgow and Scotland's cities, certainly Aberdeen and Edinburgh. It's not something that applies to mid-market rent that's developed by the housing association. I'm absolutely clear that it's a relatively small proportion of transactions, but it would just be, for example, during the property crisis that Philip referred to, there were examples of quite large-scale purchases by housing associations where they bought properties from developers and then either completed them or they were completed and they rent them for mid-market rent. Is those sort of transactions in areas where maybe younger working people or people in slightly lower paid employment struggle otherwise to secure a quality property? I think that you've raised a reasonable concern here. Do you have, if we were to look at it, more significant studies in relation to this area or work that you've produced? I haven't discussed it with the particular member who raised the issue. The concern arose from attending an event where the speaker was a tax partner at a law firm, so he would certainly be happy to go back to that member or go to the tax expert that raised the issue and just try and quantify what sort of sums we're talking about and exactly which transactions that we'd effect, we'd be glad to do that. That would be helpful, even if it's a bit wider than that in terms of others, that that probably better still. I think that I might have an example to illustrate the point that David is making. We've worked an example through on 50 flats at an average price of £150,000, just to select a random number. That would be a total purchase of £7.5 million. That could well be the sort of unit size that a housing association or an investor may be looking to do. Under stamp duty land tax, the tax that's in place at the moment, the stamp duty payable would be £75,000. Under the proposed new system of LBTT, that would be £131,100. That's £56,000 more, a 75% increase. You can see that the magnitude is significant. It is a major increase. This is the reason why, for housing associations and large-scale investors, that increase of £56,000 could well be a deal-breaker. That is quite significant. To be clear, your housing association's main business is exempt, is what you were saying in your paper. This is a specific thing to associations who do mid-market rent and, because of the rules around charities, do that through non-charitable subsidiaries. That is quite a specific area and doesn't affect the majority of association developments. I do think that it is something that we should be looking at further. If Mr Street can provide us more information, that would be quite helpful. My last area is I wanted to raise with Mr Hamilton. I thought that it was interesting in exchange with the deputy convener, who said that the sector needs stimulus. I think that you seem to be talking again at the higher end, but surely those tax changes are providing stimulus. We know that 95% of transactions are going to be either the same or less. We know that, given the average house price, as I said, about £170,000, a person who goes through a transaction—a family who goes through a transaction—is nearly £1,000, even with the Scottish average for a detached property. You are looking at a saving of £257. Those tax changes are a stimulus, are they not? I did say that we did support the measures at the lower end of the market. That is the average, though. That is not the lower end of the market. No, but the whole market has to be, as we said before, balanced. We believe that there should be a full range of choice in the market. If people are pushed to making decisions that they would not otherwise make, we have set the tax regime or the whole basis of collecting the tax on assumptions. The assumption seems to be that people who build or buy expensive houses do not care about that. We do not think that that is right. We are talking mainly about residential property here. Anyone buying at any level of the market carefully considers the cost of that transaction. If we do not set those tax rates correctly, there will be distortion and problems in us effectively subsidising lower parts of the market. You are saying that that is a subsidy, but surely it is a stimulus that is going on for the stimulus. Is it a stimulus in an area where more people are going to take advantage of it? Yes, we agree with the stimulus, but the stimulus has to be funded. There is no tax being applied at the bottom rate. That is a good thing. That is absolutely correct. It is also the position now. Fundamentally, there is not a change in that. There is still funding. The pressure has been increased by £10,000? Yes. Other than £10,000, we do not see that as being negative at all. We think that that can be supported. Fundamentally, at the lowest bracket, tax is not being collected, and it has to be collected elsewhere. It can only be collected at the upper levels. The change in the tax band that is applied from 2 per cent to 10 per cent will lead to people making decisions not to proceed with transactions that we would like to see take place. There should be a more even spread of tax being applied. Mr Honeyman's organisation has 63 per cent of response to a survey of his organisation and took the members to indicate that the higher value property transaction should bear a larger share of the overall tax burden under LBTT compared to SDLT. That is what this is done. It does bear a higher tax burden. It already bears a higher burden. That is by comparison. It is not the principle that we are disputing. It is the amounts, the changes in the tax bands and the tax rates. Start with residential property. In that case, if the tax bandings and levels proposed go through in the budget, as is set out in the draft budget, can you give me your best case or central scenario on what you think the impact overall will be on the housing market to anyone on the panel? I think that we are already seeing evidence, which I mentioned a moment ago of, some short-term shuffling round of housing transactions. Those people who had reserved the property and new-built property and were planning to move in, let's say in January, March of next year, and are paying less than £325,000, are keen to defer, as you'd expect. Is there any chance that we can push our moving date back to a book that will pay less tax? Those who have a potentially higher tax bill are looking to do the opposite, trying to bring their purchase forward to get in under the existing rates. If it is not possible to do that, then they are looking to our members to subsidise or to try to share some of the burden. That is understandable. In any change of tax, there will be some short-term movement around. In the medium term, once the bands settle down and people become familiar with them, I have to say that there is some confusion around that. Although we support the system removal of the slab rate, some people are already assuming that I have to pay, for instance, a 10 per cent tax, when, of course, that is not the case, it is 10 per cent above the band. There is some market communication needed and some people have become aware that it is not as bad as you perceive it to be. My big concern is what happens in that middle—sorry, I will stop calling it the middle—in that band of 325 to about 500,000 of those properties. At this stage, we are all putting our finger in the air and guessing. I cannot add any more, apart from the short-term movement that we have seen just in and around when that change over date is proposed. Is it your contention then that if you have the higher rates on houses over ultimately 325, your view or your organisation's views does not impact those buyers and sellers that have an impact on the market as a whole in terms of that it is all interconnected? It is all interconnected and I gave you the illustration of the housing ladder that if we create inertia in one part of the market, it will have a push-down effect on other parts of the market. You need the chain to be moving fluently and freely to have a healthy functioning market. We think that if we could smooth out the graduation immediately above that 325 level, we would have a very good tax system. I think that the system that has been proposed is better than where we were. We are coming here today to suggest even better improvements on that. We think that even better improvements. There is a phenomenon in which we might refer to price crowding, which happens more with the slab tax system, where the market will price properties at the most attractive tax band. If it is not set correctly, then you may have too many properties that are being sold in the market at that price band. It is slightly easier to control that with the progressive rate of tax, but if you have very severe differences between the rates and the bands, you will still get that effect where there are too many properties being offered at a certain price point for the market to work effectively. On the issue that you are saying that some transactions might not go ahead, you talked about the idea that people might just stay put as it were. It is difficult to know, but how likely is that sort of behaviour to take place if people feel that they are going to be paying too much tax? Based on previous experience, even removing the issue of tax, price devaluation or deflation in the housing market is a real catalyst for stagnation, because people assume that their property is worth a certain amount. If they are considering moving, they will have in their mind what they think the property might be worth, and they may be having a reference point of a neighbour or a house adjacent that sold a year or two years back. Humane nature suggests that, if they achieve that price for theirs, ours must be at least worth x. In price deflation, when an agent or a property expert or a valuer comes to assess the property and says to the customer that your property, you thought was worth this, I am afraid that it is only worth that, many people are deterred from moving, either A thinking that I will sit tight and wait for properties' prices to improve, or simply say that I cannot afford to move, so that is the effect of that situation. I do not want to over stress it, but there is potentially in that price spanned area a risk of that happening. If that happens, you are saying that it is a potential, but if there are fewer transactions than the projector or predictor, that affects the tax take at various levels. That is a good point, because if the tax take at that level is dampened, that compromises the overall tax take, which is meant to offset the lower tax take intended at the lower level. There is a risk in that system, which is very difficult to, I suspect, to model and predict. Various organisations have suggested that amendments are tweaked to where we are. If we start with the Homes for Scotland, your proposal, as I have read, was that you think that there should be a rate of 7 per cent between £250,000 and £500,000, but, otherwise, you would leave everything else as it is? Residentially, yes. There are some other suggestions around reliefs and other areas, which we may or may not cover later, but broadly, yes, that is our proposal. We also suggested moving the minimum level up to 1.35, but that was the absence of the full model of the data. We suggested that to try and offset or rebalancing, but we do not have the full data to be able to work out a fully-costed model, knowing how that would deliver in total tax take. What was your reason for choosing the band of £250,000 to £500,000? Do you see that as a particular band within the market, as it currently exists? Yes. Our members tell us that that is important. The £250,000 has been, historically, a very significant price point in the market. As John has already mentioned, what has happened is that, because of the current tax system, there is an enormous tax increase—if I can tell you the number—between £250,000 and buying a property of £249,990 goes to £250,000. I think that the tax increase goes from £2,500 to £7,500. For the sake of an extra £1 on your property, you pay £5,000 in tax. What that has effectively created is that home builders cannot build, construct, design and market a property anywhere near £250,000 or £275,000. There is a gap in the market. We welcome easing that out, but that £250,000 to £500,000 is an important section of the market. Family homes for aspiring-growing families in some geographies—not all, I accept—are important to keep that part of the market moving beyond £500,000. We can all draw our own conclusions to the affordability, but we think that that part of the market is, under the proposed system, is getting an increase, as I said, of about 42 per cent increase in tax. We think that that could be spread a little bit further lower. Does the Scottish Property Federation have a similar view? Yes, we do. We also suggest that having a mid-rate of 5 to 6 per cent in the sort of band that Homes for Scotland is suggesting. The house up to £0.25 million these days, in terms of, generally, Homes for Scotland is looking at new-build property in its own business sector. One of the key aspects of new-build property is that it has to be constructed, and there is only a certain amount of flexibility in the cost of construction. As you move up the chain, there is potential for builders to provide a wider range of housing, high-quality housing, and people will aspire to move to better properties. We think that people should be encouraged to move to better properties. The more people that live in better properties, the better. We welcome the stimulus that can be provided in the lower sector of the market, but we also appreciate that people will look to move up the housing ladder. Most people will want to do that, and we think that the tax regime has to be set in a way that that can function. I move on to commercial now, which has been touched on already. Most of the discussion has been about the 4.5 per cent top rate. I feel for how significant 4.5 per cent is versus 4 in the minds of the finance director of whatever company. It clearly is a factor, as other committee members have pointed out. There will be other factors as well, whether it is the price of the land, the return on investment, the skillset of the workforce or anything. There will be a whole range of factors in there. Are you saying that the 4.5 per cent is a factor? How significant a factor in your view will that be when investment decisions are taken? The residential market has to be considered here as well in terms of the fact that the land aspect of any house building is a commercial transaction. House building is not set apart from that argument. Broadly, the housing market has been carried on the main by the larger UK house builders. A lot of the smaller players in the market have small house builders. Unfortunately, they have gone out of business over the past five or six years. I have a direct experience of the point that was made earlier by Philip in terms of a UK national house builder making its decision as to whether it invests buys land in West Lothian or in Yorkshire. That decision making process was being made at a time when those proposals had yet to come through. I know that that would impact potentially quite negatively on the chief executive's decision whether he buys a site in West Lothian or a site in Yorkshire. In the commercial area, as I said before, it is a cost, but there are a number of large commercial developers that operate only within the UK. For them, there is still that change in the regime between Scotland and the rest of the UK. Wider than that, some of the major projects that are invested are encouraging investment in the Edinburgh financial sector. I mentioned the Haymarket project before. Projects on that scale run to a cost of tens of millions of pounds. There are other examples in Glasgow, and Glasgow has an emerging financial sector as well. Investment, whether it is in London, Edinburgh or Glasgow, will still be made based on the cost of that transaction. It may be seen as marginal, but it is still a difference in the cost of carrying out and going through with that investment, which we would think would be more appropriately considered in terms of the potential loss of some transactions not proceeding. In the kind of projects that we are considering here, projects valued in tens of millions of pounds, there will be potentially thousands of jobs connected to those projects that are going ahead in Edinburgh or Glasgow or Aberdeen or going ahead in Leeds. The stimulation that that gives to the economy and the number of jobs that it creates should be considered directly against the benefit of applying an extra half per cent on the tax cost over the rest of the UK. If I understand it right, the crossover point for commercial properties is around about £2 million. If a project is under £2 million, it will end up paying slightly less tax going forward, but if it is over £2 million, it will end up paying more tax. Is that broadly? Yeah, that is similar to the C25 in residential. If people are looking from outside of Scotland, either operating UK-wide or only operating in the UK and looking about which part of the UK to invest in, what sort of proportion of inward investment projects, if you like, would be below the 2 million mark? What sort of proportion is above the 2 million mark? We think that the tax in terms of value, the amount over £2 million is about 75 per cent of the market value. It is proportionally a higher area in terms of value where that business has been done, so the amount of value that is being taxed there is being taxed at the full rate. There could be an argument for saying that to attract those particular types of projects, the larger projects in the financial sectors of Edinburgh and Glasgow, you might want to consider how you could create a stimulus to attract that investment. Part of that stimulus could be through, if not exactly, easing or reducing the top rate for larger projects. It could be considered that at that point, you just have to flatten the tax rate so that you are not creating an obstacle to that sort of investment that potentially would generate a lot of jobs. Just before I let Gina in, can you give me an example of those projects that could provide thousands of jobs? Gavin asked specifically what proportion of projects, not value but proportion of projects, would be over the 2 million rates. I am just wondering if you can answer those two questions. What are you? I did not mention value in his question, because your paper clearly says that it is 75 per cent of value, but you could have 10 projects from an inward investment point of view as opposed to projects in the hotel. Okay, thanks. You could have 10 projects at £2 million and one at £60 million and three quarters of the value is the £60 million project, but I am just wondering how many of those projects we are actually talking about and how many would provide to answer your question if that is executive of a development company that serves land to two house builders. That is what I do in my day job. We do not sell, our typical transaction for service land only is six or eight million, which is the sort of scale at which a house builder will buy possibly 150 houses. House builders these days do not pay up front for development land. They pay the land owner or the main developer in installments, so that is a cost to us to sell that service land. I think that those sort of transactions and numbers—I do not have an exact number, but I would say that the number of those transactions that are going to be impacted by that will be quite high. A house builder will typically be buying land for 100 houses plus, and in most parts of Scotland in the housing market that is going to be a transaction just for land value of £4 million to £5 million or more, so that is a fairly typical transaction. Thank you, convener. Just a couple of points. Going back to your recommendation that there should be another tax band in what we will call the middle. For a moment, where would you see that tax then being increased? If we make that reduction, obviously that is a reduction in budget returns for the Government. Would you put it on the higher? Would you increase the higher band? Or would you change the tax bands on the lower properties? As I might have pointed out a moment ago, without seeing how the modelling has been, having access to the modelling, it is difficult to know what the difference is to make up, hence the reason that we suggested moving the bottom one up from 1.25 to 1.35, but not knowing what the gap is to plug, it is difficult to know where that might come in. The other fact to take into consideration is that, as we have said, taxes can have the effect of stifling activity or transactions, but the opposite is true. Taxes can actually stimulate activity, so there can be net contributory activity. I am not an economist, so I am not going to suggest for a moment that if we tweak that and did that, transactions would... That is the sort of thinking, I think, is... As I said, I want to reiterate, because we genuinely do believe that this is a good forward move in the right direction to the model. We think that it is a great opportunity for Scottish Government to see how they can use tax powers to actually stimulate the economy. We think that the model is a good first step. We are suggesting refinements to make that model even further, but I could not suggest what would need to be tweaked by what amount. In our own proposal, we are still suggesting that it would still mean that purchases... I look at my own figures. I think that purchases still above about £400,000 would still be paying more than they would do under the current system, so we are not suggesting giving them a free ride, but we are just saying to reduce that burden just from what it has suggested at the moment. What do you think is the greatest need for housing in Scotland today? What is the greatest demand for developers to build? Is it one-bedroom houses in order to... Is it two-bedroom houses... That part of the market probably is not being addressed adequately enough at the moment. As Philip said, we are only building about half of Scottish Government targets, which were set prior to the recession. Targets were being set at something like 30,000. The industry collapsed to a level where it was only building 10,000 or 11,000. The whole issue at that point became who is able to access mortgage funding to buy a property. Generally speaking, it was not the people who were looking to buy one-bedroom flats. It was middle-income families, growing families who were employment, two-people employment, with good credit records and could continue looking to buy new properties. That is the part of the market that has been held up over the past few years. It has created a shortage of choice again at the lower end in the flatted development market. Mortgage funding is beginning to ease now, and there are mortgage products available for the people who have been denied mortgages a few years ago. That is a huge part of the market that has to come back, but the social or RASel sector housing associations have filled part of the gap, but they will not make up that massive 50 or 60 per cent deficit that we have had in the housing market over the past few years. There has to be wider choice. It goes back to the point that we see it as being critical that the whole market has a wide range of choice for the whole of the housing market. There are not artificial barriers being put in place where people will choose to stay in less valuable property. In order for the whole market to work, there has to be trading in the market, both from the lower end and through the middle and into the upper ranges in the market. In your submission, you raised the issue of energy efficiency and allowances. What would that look like if it was addressed? Without presuming to develop a detailed proposal, that would be something that would best be done by the Scottish Government in consultation with stakeholders. What we are really suggesting is a variation on the tax, where either people pay slightly more if a property is less energy efficient and pays slightly less if it is more energy efficient than the average. We would not propose that this would have a huge impact on the level of the tax, but more that would send a signal that energy efficiency is something that should be valued as the Scottish Government set out in the sustainable housing strategy. We would be glad to contribute to the development of proposals, but it is really more an idea of being a nudge to encourage either a situation where a buyer maybe has the chance of looking at a couple of flats that are in the same area, roughly the same value, the same size. We feel it would make sense to favour through the taxation system the one that is most energy efficient, or where someone is looking to sell a property, they may then see the benefit in investing and lower cost energy efficiency measures such as cavity wall insulation or loft insulation if there is a taxation benefit and it makes it seem more attractive to buyers. To reiterate, we do not see this as being the solution that is going to hugely increase Scotland's energy efficiency of Scotland's properties. We see it as something that could be part of a suite of measures such as grant being available, minimum standards being set and gradually raised that could help Scotland to work towards making its climate change targets. I mean, I think that the vice convener did say that we took evidence already and really that stopped being an issue. It wasn't seen that this was the place to address it, energy efficiency, and it occurs to me that what you're saying is somebody would pay higher tax and then they pay higher fuel bills. I appreciate that point and that is something that any design of incentive would have to be careful of, but I think the aim would be that longer term by incentivising investment in energy efficiency homeowners would be paying lower fuel bills. I mean, it's predicted by the UK Office of Budget Responsibility that broadly speaking, fuel bills will rise above inflation for the next 17 years, so really even relatively minor investments or incentives to improve the energy efficiency of housing could help to address that issue and at the same time reduce carbon emissions. I mean, it seems to me, I don't know whether you will agree that the industry, your industry is fairly conservative, small C, in this respect. Do you think it's lagging behind in terms of energy efficiency and the kind of difference it could be making already to the houses that it's building? I wouldn't agree with that particularly. I would also say, and this doesn't apply just to social housing, but to all housing, the great challenge is not so much for new built housing, where there are energy efficiency standards to be met and where that broadly results in fuel bills being relatively affordable. The great challenge is in existing housing. Our members have the most energy efficient housing by tenure in Scotland, but with fuel bills rising, there's always the opportunity to do more. A particular issue if it comes to the energy efficiency of our members' housing is often a challenge for them where they own properties and mixed tenure stairs such as traditional tenements in Edinburgh or Glasgow. They might be the minority owner. They would like to invest and prove the energy efficiency of properties, but they might not be able to persuade either private owners or a wetting agent to participate in increasing the energy efficiency. Again, by having this mechanism, it would help to provide an incentive along with the Scottish Government grants for a private sector just to push people towards thinking about investing in energy efficiency. That's concluded the questions on committee, but I have just one or two to finish off with. First of all, I'll just follow on from Jean Orca's questions to Mr Stewart. I mean, we did take quite extensive evidence on this and the issue really in terms of the bill was that no one could come up with a workable scheme, frankly. You yourself said basically that the Scottish Government should come up with one, and you would contribute to that, but that's really the issue. No one has come forward with that. The Scottish Government and the committee really took the view that this wasn't the place to do it because it would overtly complicate the taxation bill. There would be other ways in which we could actually look at that particular issue. The question that I want to finish on is just to really kind of round up our discussions because it's not been touched on and it was extensively discussed in terms of the bill again, but it hasn't come up today. It's really the issue of sub-sale relief. Mr Hamilton, you've focused in sections 8.6 and 8.7 of your own submission on that, and you're obviously quite critical of what the Scottish Government has come up with. I'm just wondering if you can really talk us through your views on sub-sale relief. Yes, we would like to point out that the principle of sub-sale relief, as we understand, is still being maintained in the proposals. There are two instances where it's quite common place for sub-sale relief to take place. One would be in the example that I gave earlier of a landowner selling a piece of land to a developer, a master developer, and that master plan developer then selling the land forward, potentially and normally on the same day. The transaction takes place from the original landowner through a developer and then to a house builder. The principle of taxation on the two or in the transactions, that is one parcel of land. It's one item that has been taxed, but it would be taxed twice in the transaction between the landowner and the master plan developer and then that developer and the house builder. Sub-sale relief, that principle of relaxation from that, already exists. What we're concerned about is getting into a protracted process where relief on the double stamp, as it used to be called, is then obtained. In that situation, you're potentially trapping the original landowner into a process that could take many years to reclaim the tax. He's selling his land. It's not always an automatic option as to who actually pays the stamp duty as it was or LBTT now. In house building, as I said before, some of these plots of land could be very considerable in size and might take many years to develop. That wouldn't be an easy situation for a completion certificate to be generated that would allow reclaim of the tax. In a way, we think that it's a problem that doesn't need solving because it's accepted that tax has been applied twice and if that transaction occurs literally on the same day, then relief should be granted. In another view, it should be granted promptly as a commensurate with the original land transaction. You've said, obviously, that the notion of a relief where a tax is paid and might only be refunded at a later date subject to many risk and potential delays is not viable. Yes. Again, the instance that I gave there is in the case of a large-scale housing development, which, as I said, might take some years to be developed and might involve a number of completion certificates. The other area where we have a concern is on commercial development where there are situations of forward sale arrangements being made on a transaction. Fundamentally, again, we're talking about the same piece of land that is bought by a developer and is then improved and developed and possibly in a number of years will be sold on. It's not an easy process to try and assess when completion would occur and when a certificate would be available. The definition of the certificate that we see has been quite problematic. We think that it's too confusing or potentially a fraught process that would be applied to what we see as being a problem that doesn't really need to be solved, because the industry is not evading tax. Currently it's paying the correct amount of tax on the transaction. If it's paid twice and the rules are applied, then it's repaid. We think that that situation should continue. Just to concur with the point that John has made, from our member's perspective, we recognise the example that John has mentioned. Quite often there will be a situation where a lead developer will be buying a large piece of land from a landowner, but his intention is never to build all of that land out himself. It will be too large, so he would want to sell it parcels of it to smaller developers because there would be too much of a transaction, but the landowner prefers to deal with, on a one-to-one basis, with a lead developer. The system that we understand that has been proposed is that the tax would have to be paid upfront, but then the tax could only be reclaimed once the secondary or the sub-developers had produced completion certificates. That means that the lead developer is taking all of the risk and all of the forward funding of the cash flow and putting all of his trust and reliance on the sub-developers of keeping their part of the arrangement. Very few people predicted the financial crash that we've been through, but if we were to have another scenario like that, where the sub-developers, for whatever reason, didn't complete their parcels of work, didn't build their homes, the lead developer, through no fault of his own, is out of pocket. That risk is very clear to our members now, and the way that will manifest itself is that lots of lead developers will be very wary about taking that risk on behalf of someone else, someone that they have no control over. We would seriously ask consideration to be given to that. As John has said, we're not looking at any—there's no issue around tax avoidance—it's all about risk and cash flow, and we think that the system that has been proposed needs further consideration. Okay, well, that has concluded our evidence. I just want to ask our witnesses if there's any final points that they wish to make on any aspect of what we've discussed today. Basically, the proposal on the new tax and such is generally welcome to move things in the direction that's going to be beneficial to the industry. The thing that's been difficult to get the head round is that we don't—I think that all of us down here don't have access to the modelling in such like of the tax takes going to be, and that has a significant impact in terms of the numbers, because, obviously, if it's to be tax-neutral in terms of generating a full, almost a similar amount to what was being taken in previous years, then, obviously, where these bans in such like are set has a significant bearing on that. That's one of the things that—I think that if the bandings were set that makes the transition smoother and seem to be relatively fair across the spectrum, that's going to be beneficial. I think that the difficulty is that by tweaking one end that might stimulate the economy, it has an impact further up the line. That's the line that sits here. Obviously, we don't have access to the numbers that would allow that model to be tweaked out. I just need to call a five-minute recess for an actual break for members. We'll reconvene just after 10 past 11. The business today say evidence on further fiscal devolution. I therefore welcome to the meeting Professor Jim Gallacher, a member of Nuffield College Oxford and visiting Professor of Glasgow University. Members have copies of a paper from the witness, so we'll go straight to questions. Professor Gallacher, the way things work here, as I'm sure there are most committees is that I is convener. We'll ask opening questions. I could just put my feet up and pass it to the deputy convener, but I don't think that that would be appropriate. I'll ask some opening questions, trying not to hog all the juicy ones. We'll open up the session to colleagues. We'll then ask their own questions. First of all, let's quote directly from your paper. On a second page under the section, what further devolution is seeking to achieve? The objective of widening the powers of the Scottish Parliament is to enable it to deliver a different combination of taxes and public services from the UK as a whole, while still sustaining the risk-sharing benefits of being part of the UK. Increased tax powers play their part in this by giving the Parliament the opportunity to spend more or less, and you talk about whatever balances set must of the promises made in the campaigns to be kept be consistent with retaining Barnett. On the next page, we'll talk about income tax, which you say is the most obvious to devolve. You say that it is certainly possible to extend that, and you say that it would continue to be set by the UK Parliament in your view. To what extent should income tax be devolved, for example, rates and thresholds? Okay, that's very helpful, chairman. Perhaps I should just say in introduction that anything that I've got to say here today is purely what I think, because I've advised all sorts of people over the years and none of them is to blame for what I've got to say today. I think that you're right to preface your question by trying to state what the purpose of further devolution is. In my view, the purpose of further devolution is to give this Parliament the range of powers and responsibilities that will enable it to reflect a different set of preferences in Scotland for, among other things, the mixture of taxation and spending. If Scotland takes a different view from the rest of the UK, the Scottish Parliament should be able to implement that view, but to do so at a time in a way that preserves those risk-sharing benefits. That's quite important in understanding the nature of the revolutionary settlement. As far as income tax in particular is concerned, the obvious argument for the devolution of income tax is that, first of all, the Parliament even today has some influence over it, although it has never exercised that. In 2016, it will be required to set a Scottish rate of income tax under the Kalman scheme, with which I was associated. I think that there is certainly scope to go further than that. The challenges to doing so are as follows. The first is that income tax is a redistributive tax. It is the only substantial part of the taxation system that is redistributive across income groups. Rich people pay most of the income tax. I can't remember if I quoted the numbers in my evidence, but the numbers are well known. The vast majority of income tax receipts come from higher-rate taxpayers. That means that it is redistributive across social groups, and it is therefore also redistributive across geography, because rich folk live in one place and bless well all folk tend to live in another. It also means that, at the moment, when income tax is shared across the UK, the pooling of income tax is redistributive across the UK. The first and most interesting question is whether, over the long run, the complete devolution of income tax would be to Scotland's fiscal benefit or not. It may be that the view would be taken that it is sufficiently important to devolve income tax that Scotland would be willing to give up any potential upside, or if there were any potential downsides from sharing income tax. However, if so, it should do so with its eyes open. With an understanding that what it was doing was ceasing to pool and share that very salient element of taxation resource across the entire UK. The second challenges are more complex and maybe more amenable to technical solutions, but nevertheless would require to be addressed properly before a wise Parliament would argue for the complete devolution of income tax. The first question is not a partisan question, although it is often presented as such. If income tax is devolved in Scotland, what happens about income tax in the rest of the UK? Who makes that decision? In particular, let us use England to mean the rest of the UK, and I intend to no offence to people in Wales and Northern Ireland if I omit them from this, but the principle is the same. If an income tax becomes a Scottish tax, does it also become an English tax? If it is an English tax, which members of Parliament decide upon it and why? Unless that question is properly answered, I do not see a sensible scheme for the devolution of income tax to be devised. The third question, which requires to be answered, is what is the effect on the issue that you mentioned, Chairman, the Barnett formula? Let us imagine that the Barnett formula remained unchanged from what it is today, and income tax was devolved. If the UK Government decided, for the sake of argument, to increase income tax in the UK, to spend on some reserved service, social security, then Scots would get the benefit of that tax rise, additional social security payments, without paying any contribution. Conversely, if the UK Government decided to increase income tax, to spend, let us say, on the health service in England to increase the NHS budget, Scotland would get the Barnett formula applied, a commensurate benefit in the form of a consequential population share without paying the commensurate tax rise. How can one devolve income tax and preserve the Barnett formula as it is currently constructed? Those are the challenges that would have to be addressed if the whole of income tax were to be devolved. Those challenges do not require to be addressed under the scheme of the Scotland Act 2016. First, I do not think that you answered my question, so I will ask them again specifically, but one could say then that they could raise income tax to spend on trying, which Scotland might not want. However, to go back to the question that I asked, specifically, to what extent, given the caveats that you have introduced, should income tax be devolved? What is your view on the devolution of rates, bans and thresholds? Let me deal with rates, bans and thresholds first of all. I think that there is a strong argument for the maintenance of, first of all, a single definition of income for income tax purposes. What constitutes income and what doesn't, not least because that relates to other taxes such as capital gains, but also because it is absolutely critical for the operation of a sensible pension system across the UK. It is right to say that the threshold at which income tax becomes payable—that is to say, a personal allowance—should be retained on a UK basis, because it relates very closely to social security benefits and, noticeably, to income tax credits, which are paid through the income tax system but are, strictly speaking, a social security benefit. I think that one can make an argument, to be honest, either way for the variation of the bounds of the higher and top-rate bans. I think that there are arguments in both directions. In any view, it seems to me that one should regard the UK tax rates and bans as the benchmark, because that is the reality of how the financial system works. Indeed, it is also the political reality. Subject to that, I would be entirely relaxed about the Scottish Parliament having the power to vary those. How much do you think should be devolved in terms of to what extent should income tax be devolved? What is your personal view on that particular issue? I do not think that the first of the problems that I have identified is to say that the lack of sharing and redistribution is a problem that can be solved if income tax is devolved now, and it simply has to say that either I think that sharing resource is so important, and so much in Scotland's interest that not all of the income tax should be devolved. The argument goes either way in that. I think that I am personally on the side of going for it, not sure that I am. Subject only to the other problems that I have been describing, being able to be addressed and the process of devolting the way in which income tax is devolved, being such that those problems are solved. What about the opportunity to design a more efficient tax system at HMRC? For example, I have advised members that some 34.6 billion of the income tax take was not collected in 1112. Is there an opportunity in devolving income tax to develop a more effective or more efficient system of collection, given all the difficulties of the UK system? I do not think that there is any reason to suppose that a Scottish income tax would be any more or less efficient in its problem of collection than a UK income tax. My view is that it would be entirely unwise to create a Scottish separate Scottish collection system. I think that Scotland should rely on HMRC to do the tax collection. For two reasons, one, economies of scale, and two, it is much easier for employers and employees to deal with a single tax authority as they have employers with employees more than one part of the UK and employees who might move from one part of the UK to another. I do not dispute—in fact, I am sure that it is entirely the case—that HMRC could, if it had the resources and the power, collect more of the tax that is due, but there is no reason to assume that devolution to Scotland would make that any more or less likely. I favour an integrated tax collection system. If it was a principles-based system or a rules-based system that they have in the UK, would that be more effective? I will go into my next question on different methods of tax collection. In another part of my life, I deal with a principles-based system in the regulation of the financial services industry. As a matter of practice, I can tell you that it defaults into a rules-based system. Let us move on to other taxes. As you say, a number of other minor taxes may be devolved or might be considered for devolution. I am just wondering if you can talk us through those. For example, air passenger duty, inheritance tax, capital gains, excise duty, vehicle tax, those kinds of taxes. I am just wondering if you can tell us your views on which, if any of these, should be devolved and why? It is a perfectly good argument for air passenger duty being devolved. It was recommended by the Kalman commission. I think that the only issue that is required to be addressed there is whether it is scope for, as it were, predatory tax competition with north of England airports. Subject to that, I do not see why it should not be devolved. Excise duties create a problem. As the committee will be aware, Scotland is a big contributor to excise duties because we smoke and drink too much, but we would face the same difficulty as the UK as a whole does with white vans going back and forward across the channel. White vans might well go back and forward up and down the M74s. I think that there are real avoidance risks either way, whether Scotland taxes more or less in respect of excise duties. As far as I am talking there about excise duties on tobacco and alcohol, I personally would favour the devolution of vehicle excise duty because although cars move about, registered keepers do not. That is substantial tax, which could be devolved in my view. One sees it decentralised in some countries. It is decentralised in France, for example. There is a price to be paid. The price is that vehicles owned by fleet owners tend to register themselves in the lowest tax jurisdiction. It might be that some sort of anti-avoidance rule would have to be devised. That excise duty could be devolved. In principle, I have no difficulty with the devolution of capital gains tax, which is a personal tax, very like income tax, but I wonder whether the game is worth the candle. It does not raise very much money and it is a highly complex tax. The same would be true of inheritance tax, although international experience suggests that it is a tax that creates distortions. Rich people try to die in the lowest tax jurisdiction. There is Australian history on this. Look at the devolution of death duties in Queensland. That is an interesting example. In terms of financing welfare devolution, you talk about devolving some individual benefits, such as housing benefit and attendance allowance. Can you tell us your thinking as to why some should be devolved and why others should not? First of all, I take the view that the deal that the Scottish people signed up to in the referendum campaign was a deal in which there was social solidarity across the UK and that there was risk-sharing. The principle, but not only element of risk-sharing, is the social security system. Therefore, in my view, the core of the social security system should not be devolved. Old age pensions at the core of it, which are the largest single benefit, certainly should not be devolved. There are good principled reasons for that and it is, of course, in Scotland's interests because of our differential age structure, as is projected over the next several decades. It would cost us a lot more because we will have more old people. However, I am going back to when I started at chairman in these questions, at least to perception and perhaps it is the reality that the Scottish people would be willing to pay more taxes for a more generous welfare system. There are, in principle, two ways in which you could achieve that. We are on to the substance of welfare devolution before we talk about the financing of it. One way is to take certain individual benefits and devolve them and enable the Scottish Parliament to take a decision about them. The most obvious one in that context is housing benefit because housing benefit is received by most poor people. It is a very large benefit and it is already administered by local authorities, although it is to be folded into universal credit. In my view, that is entirely possible and we will give the Scottish Parliament real choices about the level of support that poor people received from the state. The alternative way of doing it is to give the Scottish Parliament power to alter the rates of UK benefits, perhaps universal credit or perhaps simply the housing element of universal credit. That would have the same net effect. It might be administratively easier. In either event, it seems to me that the fiscal challenge or the fiscal burden should be the one that falls upon the Scottish Parliament, which affects the Scottish devolved budget, should be, as it were, the difference between what the UK pays its citizens and any extra that the Scottish Parliament chooses to pay. That avoids the problem of widening the so-called vertical fiscal gap between the Parliament's own resources and its budget. On borrowing powers, you say that a good case can be made that all Scottish Government capital spending should be funded by borrowing from the markets and that it is subject to the control of not underwritten by the UK Government and that the Scottish Future Trust is similar to paper too. I am just wondering if you can elaborate a wee bit more on your thinking on this issue. As you will know, Chairman, at the moment, the Scottish Government has very limited borrowing powers. It has some small capital borrowing powers under the Kalman scheme and it has a short-term borrowing facility that so far it has never had to use. The principle that we are seeking to give effect to here is that the Scottish Parliament should have the ability to have a bigger or a smaller budget, if that is what the Scottish people want, subject to the risk-sharing arrangements. That taxation powers give you that in relation to revenue spending and it is borrowing that should give you that capacity in relation to capital spending. The Scottish Parliament's budget for capital is approximately £3 billion a year of that order. At the moment, that is not financed by borrowing but it is financed directly by a Treasury grant as part of the block grant. It seems to me that if we are in the borrowing powers business—and we should be in the borrowing powers business—it should apply to all of the Scottish Parliament's capital expenditure. The Scottish Parliament would then bear, of course, the interest cost that the Scottish budget would bear the interest cost, which seems to me is right. If those borrowing powers are to be widened, that can happen if and only if the tax powers of the Parliament are widened, but if the tax powers are widened, the scope for the Scottish Parliament to borrow and, of course, pay back should be widened as well. It seems to me that there is little actual need for the UK to set a cash limit on that borrowing, because the markets will set that cash limit anyway. The borrowing of the Scottish Parliament should be a first charge on devolved tax revenue, as legally it is for local authorities at the moment, and the markets will swiftly take a view as to how much borrowing it is prudent for the Scottish Parliament or the Scottish Government to undertake. Just one last question before we open up to colleagues around the table. It is about proceeding in stages. The Kalman process was agreed in December 2007 and will not be implemented until 2016, but you are talking about major changes that carry high risks on implementation, and they should be implemented in a phased way. Throughout your paper, you have talked about what the people of Scotland voted for, but there is obviously quite a head of steam in the electorate in Scotland that a lot of those proposals are implemented, those that are agreed sooner rather than later. I am just wondering if you can talk us through this particular aspect of your paper and what kind of time period you would be talking about the phasing of any additional devolved powers. I think that the challenge, Chairman, in all of this is twofold. The first is that we haven't had substantial tax devolution except in respect of local taxes since the Parliament was created. The Scottish Government does not have as yet a substantial treasury capability. It has Revenue Scotland, which is a very small organisation. The Scottish Government has yet to learn the skillset. It is not a criticism, it is just an expression of how the world is. The skillset of managing a budget in which it has an income might go up and down, depending on how the economy goes up and down, and a world in which it has to manage cash flow through borrowing. Leaping to a situation in which half of its budget was subject to that constraint seems to me to be quite risky. At the moment, if we implement the Scotland Act 2012, the Kalman scheme, that will mean that approximately 30 per cent of the revenue budget of the Parliament is subject to that kind of challenge. That is scheduled to be implemented in 2016. That seems to me to be a sensible place to start. The second constraint is purely electoral. That is to say if an administration is to be formed in this Parliament after an election, it is only reasonable that people who are being elected to it have a manifesto that says how they are going to use the powers that they have. It is quite neat that, in the elections of the 2016 Parliament, all of the parties here will have to take a view of what they will do with the Scottish income tax. It is arguable that we should do it in two chunks for in 2016 and 2020. I could be persuaded that it could be done more quickly than that, but the price would be that, halfway through a Parliament, big new tax powers would come and the administration, however, would exercise them without necessarily having had manifesto authority to do so. You are suggesting that the new powers that may be devolved as a result of the Smith commission deliberations should not be implemented in 2016? One is to go with the 2016 bundle that is Scotland Act 2012 and implement the Smith proposals after that. Secondly, to amend the 2016 bundle in the light of whatever Smith recommends. In either case, I think that it was prudent to do it in stages. I thank you very much for opening up the session now. The first colleague to ask questions is Michael McLeod, to be followed by Malcolm McLeod. The issue of welfare devolution. The convener explores some of those issues. In your paper, you comment on the analogy with Northern Ireland. I hope to explore that, but they have the principle of parity. Do you support that principle? My reading is that, for the first time, Northern Ireland has made a change to the welfare system that is refusing to roll out universal credit and not to take the bedroom tax. That has led to the UK Government having to provide the Northern Ireland Assembly with £100 million loan that has to be paid back. Is that the type of practical difficulty that you could see developing here if we go along with that analogy? That is a good question, Mr McMahon, because it illustrates exactly the issue here. First of all, I understand the Northern Ireland system. For reasons of history, which go back before 1923, the welfare system is devolved in Northern Ireland. The so-called principle of parity is that, so long as the Northern Ireland administration does exactly what the UK welfare system does, the Treasury will cough up exactly what the amount of money is needed. In a sense, that is what I would say is the principle that should underlie any welfare devolution in respect of Scotland. That is that the UK social security net sets a floor, and the Scottish Parliament should be able, if it wishes, to raise the money to supplement that. The only question in my view is whether that is supplementing it on individual identified benefits—housing benefit—or whether it is, as it were, a general power of supplementation. I can see arguments in either direction. What is happening in the moment, of course, in Northern Ireland, is that some of the parties, at least in the administration, want to have their cake and eat it. They want to have the devol power but are unwilling to find the money to exercise it. In particular, I think that they understandably do not want to implement the bedroom tax but are unwilling to make any cut elsewhere in their budget in order to do that. Of course, they do not have any meaningful tax powers that would enable them to pay for it through taxation. That illustrates the issue, I think, quite neatly. This Parliament has made certain measures, which, if I got it right now, will more or less completely remove the effect of the bedroom tax, but it has taken hit elsewhere in its spending programmes. Under the proposals that I would support, it would have the choice of taking the hit elsewhere in its spending programmes or increasing its tax income in order to do so. Does that help you? It clarifies exactly the position of the options that would be available when we take this. In any of this, guys? No, that is the bottom line. We have heard evidence from other experts who have spoken about the issue. You have to bear in mind that the idea of bringing devolved powers to Scotland does not necessarily mean that it means better or improved or fairer. The constitution is a means towards an end. It produces neither more money nor fairer outcomes nor greener country. One of the things that is pursued as a policy in order to try and create fairness is the minimum wage. Do you have any concerns over the minimum wage being devolved or the setting of the minimum wage in Scotland being devolved? I would favour a UK-wide minimum wage. I would favour that, because there is always a risk here of a race to the bottom between one region and another. If it were not a UK-wide minimum wage, I think that the pressure in the south-east for a higher minimum wage there might put Scotland at a disadvantage. I was interested in the whole of, well, all of it, but page 2 of your submission on the balance of resources from taxation and resources from grant, and you said that my view should be one of broad equivalence. I mean, how flexible are you on that? I suppose that a lot of the discussion now, obviously, is how much we should be responsible for our revenue, and you dismissed the idea that we should be responsible for all of it. Would you take a hard line on 50 per cent? What about 75 per cent? What would be the objection to that? There is no magic number here, but there are some numbers that are clearly out of order. It depends, obviously, on the scale of spending, first of all. Obviously, if the Parliament's budget were increased substantially to take on some new responsibility, it would be a lot harder to get to 75 per cent, and then it would, if the Parliament's budget were at its present level. I think that the principled question that we have to focus on—and I'm glad that you've raised that because it seems to me to be an issue that has been neglected in the Scottish debate—is, once again, we are within the United Kingdom in a system in which there is both risk, sharing and social solidarity. The risk, sharing and social solidarity apply entirely, if you like, in respect of reserved services, notably social security, and partially in respect of devolved services. That is to say that the budget of this Parliament should, in my view, as a matter of principle, be partly met from resources shared across the whole UK and partly met from resources under the control of this institution itself. That is entirely common worldwide. One looks across federal systems. You see, almost without exception, that there is this so-called vertical fiscal gap. There are good reasons for it. It's not simply an accident of history or food dragging by the central government. There are good economic reasons for it and there are good social reasons for it. What's the right number? 9010 is not the right number in either direction. If it's 90 per cent grant, the United Kingdom Government is essentially determining the budget of this Parliament. Conversely, if it's 10 per cent grant, the public services on which Scots rely are going to be wholly dependent—almost wholly dependent—on Scottish tax revenue. That would be both risky and, in my view, in the long-run, disadvantageous to Scotland. Is it anywhere between 1640 seems to me to be reasonable? I think that, as a matter of judgment, 75 is pushing it a bit. One reason I think that 75 is pushing it a bit is that if the fiscal transfer from the United Kingdom Parliament were 20 or 30 per cent of the total budget of this institution, it would become swiftly very evident that the relative spending lead that Scotland currently enjoys in relation to devolved services was almost entirely met by a grant from the Westminster Government. I think that that would be tactically unwise. Is the risk from shortfalls your main concern? We're talking about risk-sharing and risk-sharing in respect of public services, notably, but not only health and education. My view is that the services such as those on which people depend on which are regarded rightly as social rights should not be wholly at risk from long-term or short-term fluctuations in Scottish tax revenue. That's the question of balance. You mentioned just in passing that VAT cannot be devolved, but a share of it could be assigned. Do you have a strong view on that? On balance, I am disinclined to assign, but there are those, and there will certainly be members of the committee who take the view that maximising the number of its own resources is an objective in itself. If you regard that as an objective, you could achieve it by assigning a share of VAT. Let me remind you of the risks involved in that. This is all a balance of risk and reward. The risk involved in assigning a share of VAT is that you take the revenue fluctuations—VAT goes up and down, economy goes up and down—but you do not, because you cannot have any of the tax rate tools to manage those fluctuations. If VAT falls, the Parliament would be unable to increase the rate to increase its income. I would rather give the Parliament a power to rely on a tax which it could influence rather than a tax on which it was simply a price taker. Is there not an argument for having a mix of taxes? I suppose that a situation that I have been thinking about just recently—I had an account to me until recently—is that if you have got all or a substantial part of income tax but none of VAT, you then have a risk in terms of the behaviour of the UK Government. Although my own party has pledged not to increase VAT, we know that the Conservative Party in the past has increased VAT in order to keep income tax down. If the UK Parliament raised VAT and cut income tax, would that not create a difficulty for the Scottish Parliament because we could not cut income tax without affecting our public services? Therefore, Scottish taxpayers would have the disadvantage of having to pay the higher rate of income tax plus the higher rate of VAT. I do not think so. Obviously, that depends on the grant mechanism, but the grant mechanism, as I would envisage it operating, would not carry that risk. The interesting question is whether VAT is a UK tax and must be a UK tax under EU law. There are good economic arguments why that should be so. It is all about tax competition. If VAT were increased, UK tax revenue would increase. That would feed through into this Parliament's share of UK tax revenue through the Barnett formula. Therefore, it would be open to this Parliament either to maintain its devolved taxes or to decrease them. I am not sure whether that is the case, because surely it is the totaled tax that matters. The UK Parliament could keep its taxation at the same level but just change the balance between VAT and income tax. You are right to raise that, Mr Jismund. Of course, that is the point that I was making when I began to talk about the conditions for the devolution of income tax. They include ensuring that the Barnett formula can continue, but appropriately, so that those risks do not emerge. There are ways of doing that, but it would require a bit of algebra, which I cannot write in the air for you. Moving on to welfare, the general power of supplementation. You illustrated it from housing benefit. Are you open-minded or positive about that being extended to a much wider range, obviously not pensions, but to a much wider range of social security benefits? Yes, in principle. I think that one has to be quite careful and work one's way through the long list. The obvious benefit in this context is universal credit, which I think is the one that most people would consider for supplementation. Benefits can be divided helpfully into two classes. Those that are cyclical, which include universal credit, and those that are not cyclical, which include attendance allowance, disability of living allowance and some other benefits. It is easier to devolve the second category into the Scottish budget, because the Scottish budget typically does not include cyclical items. My preference would be to take a big benefit and devolve it, such as housing benefit, because that enables the Scottish Parliament to play tunes as it were, particularly in respect of housing. The reason why housing benefit is so big is because, during the 1980s, the then Government decided to transfer resources from bricks-and-mortar provision of housing into cash provision of housing support. The complete devolution of housing benefit would give the Parliament the opportunity if it wished to take a different view and say that, for some people, it would be better if we provided houses rather than provided rental support. On the other hand, I can see the argument that a wider power of supplementation is simpler to operate and would enable the Parliament to say collectively that, if the people of Scotland believe that, we would rather that poor people in our society were better supported and that people who pay taxes paid a bit more tax. Obviously, if that were the policy of the Parliament, that would be a decision that it then could make. Sorry, perhaps I misunderstood you, but I thought from your paper that you were talking about housing benefit when you went on to talk about the Northern Ireland system, so I assumed that you were slightly cagey about having the full… I would take the view that, if you go for the supplementation, essentially it is on universal credit, either all of universal credit or the housing element of universal credit. I suppose that, if you are going for supplementations, you do all of universal credit. I certainly would not do it in respect of pensions because I think that that is a key element of UK social solidarity. In terms of the traditional argument for devolving housing benefit, which I have supported for a long time, that would require much more fundamental changes. If you were going to shift the spend on housing supply rather than housing benefit, could that work with supplementation? No, it would not work with supplementation. That is an alternative. It would be to carve housing benefit of universal credit, make it the responsibility of this Parliament, have a funding arrangement under which the UK guarantees to provide an annually managed expenditure what housing benefit would have cost, which is a slightly technical calculation. However, the Parliament then has the opportunity to use that flow of income, either in the form of direct cash or of bricks and mortar. I do not think that we are going to move into a world in which we would go back to, is it where, mass provision of housing, because that would cost a great deal more, but there are certainly groups of people who receive housing benefit for whom more direct provision of housing would be a much, much better option. When I read your paper, I thought that you seemed very cautious about the devolution of income tax, but did I pick you up right when you said to the committee that you are actually subject to things being ironed out, some of the issues that you pick up and you are actually in favour of it? What I said in the paper is that there is a list of really quite serious issues that I would think would require to be properly addressed before all of income tax could be devolved. To be honest, one of them is unfixable, and that is the question of redistribution and sharing. What I said to the chairman is that if this Parliament wanted to argue for the complete devolution of income tax, it should do so with its eyes open and not for, if I may be blunt, simply ideological reasons for whatever power we want, whatever power we can get, we should grab. I get that. I came through in your paper, but I thought you said to the convener that you are in favour of it. If the other issues that I mentioned have been addressed, that is to say, the dealing with this problem of English votes for English taxes, second, ensuring that the Barnett formula is sustained and retained, but in a way that does not either unfairly advantage or disadvantage Scotland, and I will give you the examples of how it might do the unfair advantage, but let's just think for a moment about the unfair disadvantage. Let's imagine that income tax was completely devolved, but that a Government in the United Kingdom decided to cut income tax because it decided that a much better way of providing health would be to charge 50 quid every time you visited the GP. Income tax would go down and health spending would go down. Health spending going down would reduce the Barnett consequential to the Scottish Government from health, but income tax in Scotland would not have gone down. That would be an unacceptable consequence, so that set of issues would need to be fixed before income tax could be devolved. You said that you would still think that it would make sense for HMRC to be the collection bodies, but you also made the point that there are issues about their capacity to collect just now, primarily a resourcing issue. I think that the chairman made those points. I thought that you were accepting them, but is there also an issue here in terms of whether we are dealing with a devolved function? How can we say—the finance committee specifically—how could we seek to hold HMRC to account when they are not a creature of statute emanating from this place in the same way that Revenue Scotland does? Do you think that that could be an issue? I think that we addressed this, if I remember right, in the Kalman report, because, of course, under the Scotland Act 2012, HMRC collects the Scottish income tax and remits it here. I think that, perhaps, from the legislation recently, a line of direct accountability from HMRC for its performance in collecting Scottish income tax in the way that there is a line of accountability for its collection of UK taxes. My recollection, and I am now well beyond my recent history in this one, is that the revenue commissioners designated one of their number as the Scottish commissioners for this purpose, but I may be wrong in that now. It is a way well since I looked at it. I suppose that accountability was maybe the wrong term. I was thinking more in terms of we, as a parent, had a need for the legislative change for the tax collection. We would not be able to implement that in relation to HMRC, because we could for a devolved body. If you devolve the tax completely as you have done with stamp duty, you can completely change the structure and whip revenue Scotland if they do not do a good job and you can change their powers. My view is that, for the reasons that I explained to the chairman earlier, that is to say that employers and employees will benefit from a single UK income tax framework. One of the things that is important to remember about income tax, you may well have had HMRC in front of you. If you had, I am sure that you would have said this, so forgive me if I repeat it. Income tax is unusual among taxes in that the state does not collect most of it. Employers collect it, and any changes to income tax impact very heavily on employers. Many employers, of course, are cross-border employers. The maximum coherence in the tax-based and tax administration is, I think, something to be achieved if you can get it. I am on the welfare reform committee. We had a discussion about the whole area of further devolution at our meeting yesterday in the parity principle in relation to another panel. We will discuss it and will not rehearse it again. I will point out Professor Spicker, who was giving, as evidence. He felt that, by its very nature, that would be an appropriate model for devolution, because he thinks that it would be incompatible with the terms of the Smith commission, who are set up to divine, to deliver substantial devolution. On a more specific point, he also raised the prospect of this panel being able to create new forms of support through the social security system, which, presently, we are not able to do. That is a reserved matter in the Scotland Act. Of course, you are well aware that he gave the example. He was not advocating, but he just paused it as an example. He said that we wanted to create a funeral grant. Right now, we would not be able to do that. If there was to be some form of devolution that you are talking about, we would be able to supplement the existing social security system. Do you think that it would be sensible that the Parliament should have the leeway to look at other forms of support that are not presently established? One way of looking at the answer to that question is to realise that support comes in different forms today. The way that we have divided the welfare state in this country post-evolution is that what would be called redistributive forms of welfare are largely reserved—that is to say, cash benefits—but distributive forms of welfare and provision of services are largely devolved. Of course, in all of these cases, there is a boundary in which there can be a choice made between the provision of a service and the provision of cash. The Parliament already has many powers that, in effect, enable it to supplement UK benefits. I will come back to the detail point that you made in a moment. Let me give you an example of that today. Attendance allowance is a cash benefit that is intended to enable an elderly person who needs help at home to pay for attendance, whereas, of course, this Parliament already provides personal care free. The principle of allowing this institution to provide supplements is not absolutely wrong. I would not wholly rule out the idea that the supplementation could be in the form of, as it were, an addition that is not simply altering the rate of an existing benefit. I think that there are two challenges, however. One is administrative. Creating a whole new bureaucracy to do that would obviously be daft, but the challenge of inviting the DWP to create a whole new set of beneficiaries only for Scotland might be administratively very expensive for them and therefore for the Parliament. In principle, I think that might be conceivable. That is not a short answer, but it is not wholly straightforward. I suppose that I would observe where functions have been devolved thus far, albeit on a very limited basis. The Parliament and the Government have chosen not to go via the DWP. They have worked in partnership primarily with local authorities, so there is a model that could work, I suppose. Yes, there is. Of course, those powers already exist. If you look in the Social Work Scotland Act 1968, local authorities have the power to give cash payments in a welfare mode already. I think that you will find that, if you had the money and the imagination, you could probably use those powers in many of the ways in which I suspect that you might like to. On a related issue, I came up with the reform committee and Mr Mann has explored it. Perhaps I did not hear you correctly in my way, but I thought I heard you say that the pressure for and the evolution of the minimum wage, you said that the pressure for a higher minimum wage in the south-east of England could put Scotland at a disadvantage. I do not understand. If you had a geographically variable minimum wage, the economic pressure would be to have it higher in areas where wages are in general higher. That is the south-east. It is already the case that wages are higher there. Do you understand why that would put us at a disadvantage? Presumably, if it is devolved, we can set a minimum wage as we see fit for Scottish circumstances. The economic effects of that are quite interesting, of course. I think that I still take the view that, if you are talking about regional competition on wages, there is a risk of having a variable minimum wage when you get regional competition in a downward, not an upward direction. It might not always be you who was setting the minimum wage. Probably never be, but that is another point entirely. My last question relates to oil taxation or gas taxation. You make the point that, while taxation is a natural resource rent, it is easy and principled to centralise. That was a point that was made by Professor McLean in this country. The Chartered Institute of Taxation made that point to the Treasury Select Committee down south. You seem to be against it. I am just wondering how other countries of Scotland's size with significant oil and gas interests—possibly more significant. How do they cope with that burden? Mostly, but not only in other countries. Oil taxation is grabbed, as it were, as a national rather than a regional resource. There are some exceptions to that, and in some places it is a resource that is shared between the different levels of government. In Alberta, for example, in Canada, there are different ways of dealing with it in Nigeria. Economic theory pulls in two different directions. First, the taxation theory says that you should really tax stuff that does not move around at a sub-national level or a sub-state level. Oil does not move around, therefore you should tax it at a sub-state level. That is the argument that the Chartered Institute of Taxation and Professor McLean are taking. The second economic argument points in the opposite direction, and you will see it explained in the expert group that advised the Parliament commission on oil taxation. That is that windfall taxes have an inflationary economic effect, if you like, and that should be spread over a wide rather than a narrow area. I do not think that that is the decision. Either of those is the basis on which the decision should be made about the devolution of oil taxation in Scotland. The decision is a simple one. If your objective is to cut Scottish public spending, then you should devolve oil taxation. If your objective is not to cut Scottish public spending, then you should reserve oil taxation. Of course, the choice would be for the Parliament to argue for one or the other. Given that there are sub-state jurisdictions that have control over their natural resources, and that there are countries that are of some size to Scotland that seem to cope very well with having that, I mean I use the term burden somewhat in an obtuse energy, I do not happen to view oil and gas as a burden, but given that they can manage it, why couldn't Scotland? What is the Scottish exceptionalism here? The Scottish exceptionalism is quite simple. If your objective is to tie devolved spending to a revenue source which is in long-term decline and therefore puts spending in long-term decline, that is, if I may say so, an ideological rather than a practical view. Oil and gas revenues hit their peak some years ago now. Typically a big agundian for oil was £11 billion or £12 billion of revenue, of which probably 85% or 90% would have fallen within what would become Scottish territorial waters. At the moment, oil revenue is around £3 billion a year, with oil prices being low. It is of course volatile, it depends on how oil prices go up and down, but it is on any view in long-term decline. If we were to say today, let us devolve oil tax revenue, and let us say that it financed £3 billion of the Parliament's present budget, what we would be saying is that, in 20 years, either we would have to find another source of tax revenue equal to £3 billion, or we would have to cut this Parliament's budget by £3 billion. That is just the arithmetic of it. It is not actually an economic question, it is a practical one. The point that I am making is that truly this is a challenge that is not unique to Scotland, so what makes us the exception to put a pack in these other jurisdictions and manage it and we can't? If you have—this course is the chance for the UK—oil revenue is declining at a UK level at the moment, those revenues in 20 or 30 or maybe 40 years' time will be vanishing close to zero. The UK is more easily able to manage that because £3 billion of revenue is relatively small on the total UK tax revenue switch. Off the top of my head are £6 billion or £700 billion, whereas in relation to Scotland and in particular in relation to the funding of this Parliament, £3 billion is about 5 per cent total Scottish spending, and it is 10 per cent of the budget of this Parliament. That is just a question of scale and arithmetic. I repeat, and if your objective is to cut Scottish public spending, by all means tie the budget of this Parliament to oil revenues. Thank you, convener. Professor Gallagher, do you think that devolution was a good idea? Yes. When you talk in your paper about full fiscal autonomy and what that means, you have one paragraph of statement that chooses inconsistent with the promises made to the voters. What were the promises made to the voters, in your opinion? In my opinion—well, not in my opinion—it seems to me that what was on offer in the referendum campaign and your right and circuit to locate this debate, this question of further power to the Parliament in the wider constitutional space. The promises made to the voters during the campaign can be summarised. If you like crudely in pensions and bonnet, let me tell you what I mean about that. They are both questions of social solidarity. The promises made to the voters were first that, if they remained in the UK, they would have the benefit or the security of a common social security system, pulled risk notably in relation to old-age pensions. That is where it stands simple of a principle of social solidarity in respect of what I earlier called redistributed benefits. The second promise that they were made, if you like, was that it would be a bonnet formula. That in the same way stands simple for saying that it would be social solidarity in the provision of public services, including those public services that are devolved to this Parliament, notably health and education. In other words, as I was explaining to the chairman earlier, my view is that the budget of this Parliament should not be solely dependent on Scottish revenues but should be partly dependent on Scottish revenues and partly dependent on a share of United Kingdom revenues. That is why I think that, as a matter of principle, the question of full fiscal autonomy, I thought, as I put it in the paper, in the guise of all public spending in Scotland being determined by Scottish revenues only, or, indeed, all of the budget of this Parliament being funded solely by own resources or Scottish revenues is inconsistent with what was offered to the voters. Can you suggest any taxes where the devolved Scottish Parliament might ask to have power over, that would allow them to genuinely make a difference? In other words, what would be the position of the Scottish Parliament in terms of raising taxes that would not affect a bonnet formula that would not be levelled out as the taxes that are currently devolved? In other words, other than the paper here, which is largely about tax, what powers could the Scottish Government be given in your opinion? Do you have any suggestions of powers that the Scottish Government could suggest? I am not quite sure for all the questions. Do you mean powers other than tax powers? Or powers to raise other taxes other than those that are currently... That is quite a hard question. Let us start with the understanding that the spending powers of the Scottish Parliament are by international standards unusually wide. If you look at devolved systems or federal systems, typically worldwide, you will see that the proportion of spending that is devolved in Scotland is higher than the proportion of spending that is devolved to state-level Governments in most federal systems. People tend to blink when they say that, but the OECD data tells you that very clearly. The reason for that is that the Parliament was built on a long history of decentralisation and administrative devolution, which is one of the reasons why I have, to go back to your first question, always supported devolution. The scope for additional chunks of spending that might be decentralised is, in my view, quite limited. We are back into the question of welfare, and that seems to me to be primarily a matter that is, back to my earlier point, about UK social solidarity. Are there relatively small additional powers? Yes, there might be, but I am quite in favour of finding some way of decentralising at least some of the powers of the Crown Estate Commissioners, for example, to refer to any area that you are interested in. As far as taxes are concerned, worldwide, Governments are looking for things to tax, and they have probably found most of the things that they can tax if there were more. However, I think that the Scottish Parliament should have the power to tax additional things if it wants to, and it is subject to them not being completely distorting of the rest of the UK economy. That is as much as I can see, really, in answer to that. One potential tax might be a land tax. Yes, actually. Of course, that is already within the Parliament's powers. As a matter of principle, your earlier session—no, you are on to one of my obsessions here, so you have got a while—you had an earlier session on stamp duty land tax, as I think that is what your previous witnesses were on about. Virtually all but one of the taxes that affect real property in Scotland are now devolved to this Parliament. There are only three. There is stamp duty land tax, which is a transaction tax on property, and non-domestic rates, which are taxed on the enjoyment of non-domestic property, and there is council tax, which is a tax on the enjoyment of domestic property. You have got them all. The only tax that affects real property, which is not decentralised, is capital gains tax on transactions of all the real property, and that is tied up with capital gains tax more generally. I think that the Scottish Government's proposals on stamp duty land tax are a step forward. That is good, but I am disappointed that it did not take the opportunity to look at the taxation of land on property in the round, because all those powers are here today, and it seems to me to be a wee bit of a failure of imagination. What I would do—perfectly plain—is move in gradual steps towards a land value tax. The first thing that I would do is make an assessment of the extent to which the existing property taxes approximate to it. Non-domestic rates are not that far away from a land value tax, and they are paid every year. Council tax is pretty hopeless. No one is revalued for—I can't think how many years since 1991. Thank you. That is quite a while, isn't it? There may well be a case for a revaluation in another look at council tax, but the long-term objective is that this Parliament already has the powers to look at the taxation of land on real property and should take a deep breath and think very hard about it. Do not need any new powers to do that? Just as a secondary question to that, you do not see any issue in terms of the kind of endless debate about not wanting to upset any apple cart in terms of competition or movement of business. You cited the minimum wage, which I would disagree with you about, but there would be no issue with that. In addition to land tax, no, because land does not move around. In terms of other developments, you heard the four evidence givers earlier today who talked about half a percent making a difference. In the long run, taxations on land influence the value of land. Okay. Finally, to ask you about the business of tax collection. In your submission, you refer to national insurance contributions. Collecting national insurance contributions is just really collecting income taxes, is it not? No, for two reasons. One is that national insurance falls into two halves. One is a payroll tax and employer's tax, which is—I forgot the numbers, and I do not have them with me, but no doubt the committee has access to them—so the payroll tax is one part of it. Second, it is not like income tax in that it is not a progressive tax. Regressive tax is a payment, as it were, for membership of the social security system. I will stop you there. It is not that I do not understand the basis of calculation of the tax, but where does it end up? People used to imagine that your national insurance was going to pay your pension. There was some kind of fund that you might make a contribution to, but in fact the income tax and national insurance once collected, regardless of how they are calculated or whether their employer's contribution or the employee's contribution actually end up in the same bucket. All income tax in the end flows into the treasury, and all national insurance in the end flows into the treasury, because the national insurance fund is not big enough to carry the resource on it. It is not a funded fund in the sense like a company pension fund. I could give you a long story about why Lloyd George failed to do that in 1923, but I will not bore you with that. There are three interesting things about national insurance in respect of the potential devolution of it. First, I think that there is a real principled question about it being as it were a payment for membership, if you like, of the UK welfare state. It is a gateway into the pension, and people talk about their stamps still. Do you have enough stamps to get the full pension? I think that that is important. I think that the contributory principle is one that we ditch at our peril. Second, I think that the peril is that by the peril element of it, you can run an argument that says that perhaps we should decentralise that or allow it to be varied in some way. There is a third element, which is the percentage element, which is in a sense a substitute for income tax. It is now 2 per cent on income above a certain level. It is £40,000, as it were, forever. However, the other thing that is worth remembering, which people often forget about national insurance, is that quite a lot of people with substantial income do not pay it. Most of the people who are in receipt of pensions. Do you think that there are areas of improvement on tax collection generally? Do you think that there is an opportunity— I do not claim to my next expert on that. It is pretty interesting that the revenue can put a number on the amount of tax that they do not collect. I imagine that, if they had more resource or more power, they could collect more of it, but there would be a trade-off, I am sure. However, I would not claim to have expertise on that. In your enthusiasm for devolution, would you see that there was an opportunity for Scotland to design a different kind of tax collection? I have given you my view on that earlier. I think that there is a strong argument for a single UK administrative system for income tax for the benefit of both employers and employees. I am not in favour of the devolution of corporation tax. I can see the argument as an economic development. I can give you the long reason why not or the short reason why not, and the short reason why not is Amazon and Google. The trouble with corporation tax is that it is tax on profits, and profits are not like land. Land does not move about, but profits can be moved around at the touch of a button. Those companies such as Amazon and Google, which route all their profits through low-tax countries, are, in effect, avoiding perfectly legally, but nevertheless irritatingly, tax that would fall in. I do not think that it would be in the interests of people in the UK or in the long run of people in Scotland to create such tax competition opportunities inside the UK. You talked about air passenger duty in response to the convener's question. You said that you are broadly in favour of that to be devolved, but you did have a caveat. I cannot read my writing, but there is something to do with predatory, as long as there is no predatory. Can you expand on what you mean by the character? Newcastle airport is in competition, in some respects, with the airports in Scotland. The worry that people there have—I have a lot of sympathy with them—is that the Scottish Parliament could take a little bit off air passenger duty, or maybe even a lot of air passenger duty. The few flights that they have managed to get that go outside the UK have managed to secure one to New York when they immediately go to Edinburgh or Glasgow to save the £50 quid or whatever it was. I have some sympathy with that. That is the essence of the issue, the only issue that worries me about air passenger duty. I take that point on board. You are saying that you have been favour of the devolution of it. You added in that caveat. In practice, if you are saying that you would not want to see the Scottish Parliament reducing air passenger duty by a percentage point, how would you devolve it in the caveat that you are talking about? I understand the question. There are three things that you might do. One is that, as you will know, air passenger duty is already variable across the UK. The rates vary essentially in how far away you are from Heathrow and it is zero in certain parts of Scotland already—in the Highlands and Islands. One could devolve it on the basis that there was some change in the UK rate that might benefit the UK, so that is one possibility. Another would be to do the opposite of what is happening in Ireland and to devolve it for short-haul, rather than long-haul flights. Those are certainly possibilities. In relation to VAT, your paper says that it cannot be devolved, but a share of the yield could be assigned. Obviously, in your earlier answer, you pointed out the risks of so-doing, but on balance, do you have a view on whether VAT should be assigned in part or in full? As part of an overall package, I would probably assign up to an assignment of a number of percentage points of VAT. I would just be careful for the interests of this institution and, indeed, of people of Scotland not to take on too much risk there, so I would be cautious. I certainly would not go above 10, and I might suggest going below that. The last issue that I want to ask about is more theoretical, but Malcolm Chisholm asked about the broad equivalence, as you call in the paper. You give quite a useful answer there, as it had to be 50, 50 or 60, 40, as the kind of ends of the spectrums were. Just from a theoretical point of view, we have had a number of witnesses who look very carefully at that, because when you look at the figure whether it is 50 or 40 or 60, some of it will be made up of a tax that is truly devolved, and some of it could be made up of a tax that is partially devolved, and some of it may well be as a nation where you have got a share of the risk but you cannot control the rates at all. I suppose that they were saying that there is an extra, and I mention that you really have to think of instead of just looking at the pure percentage, because on the OECD stuff, for example, Germany, they say that you might think that they have a lot of control, but in terms of the rates, there is not so much control. Do you have a view on how that 50-50 should be made up? If it was theoretically only made up of taxes that were assigned and none of them were devolved, that is different from one way—I am just wondering—it is obvious that it is different from one way that 50 per cent is devolved. Do you have a view on the kind of balance of how we ought to weigh that? That is quite an interesting question. I would start, Mr Brown, by agreeing that pure assignment gives all risk and no power. If you get VAT assigned, your revenue goes up and down, and long-term investment to grow the Scottish economy is not what you can do about it. A deal that is pure assignment would be the purest presentation, and I would not recommend it. I can understand that people take the view—it is a slightly superficial view—that that number really matters, so we should put in some assignment to get to that number. I can see genuinely the presentational argument for that. In the end, my view on the 50-50-60-40 question is really about the amount of risk that you are importing. I would be unhappy with importing 75 per cent of risk into the budget, particularly as the only way that I can see of importing that would be a lot of assignment that might risk in no additional power. Conversely, I entirely accept that 25 per cent of our own resources really does not give the Parliament the power to do what I think the objective of all of this is, which is, while remaining inside the UK with the risk-sharing benefits—indeed, the economic benefits of that—never the less to give the Parliament the opportunity to reflect a different approach to public services and taxation if that is what the people of Scotland want. I think that only experiment will find out if that is indeed what the people of Scotland want, because it is very easy to be in favour of increased public spending when you know that you are not going to pay any increased taxes or that you are not going to have to make the choice of increasing those taxes. I think that it would be very good for this Parliament and it would be very good for the people of Scotland to have that choice and then make it one way or another. I am not sure what way they would make it. We will have to try it and see. Is that helpful? That is another trouble thing. Thanks, convener. Thank you, Professor Gallacher, for persisting through all of this. In some of your introductory remarks, you talked quite a lot about the different kinds of union, political union and economic union, and you talked about respecting the outcome of the vote. I think that, for me, I am not entirely clear why everybody voted either, yes or no, for that matter, but concentrating on the no side, some do not even—one or two people do not even want the Scottish Parliament to be here, so they voted no. Some people want things to carry on as they are, so they voted no. Some people want a little bit more power, and some people want a lot more power, so it is quite difficult within that mix, is it not, to discern what the public wanted? Was my idea to have a referendum, so you get a result, and the result was that it remained inside the United Kingdom. The best way that I have of answering that is to look at what the campaigners offered in the end. Who knows why? Voters are a bit like students. They like to answer the question that they wish they had been asked. Lots of people voted yes for reasons other than the question on the exam paper, and we know that from other referendums. We know that from referendums in the European Constitution in France or in Ireland, for example. People were answering a different question. That is one of the risks of having a referendum. Nevertheless, the question was asked, and it has now been answered. Looking at what promises were made, it seems to me, what commitments were made on the basis that, if you voted no, you would get this. If you voted no, it was perfectly plain, by definition, that you were voting for a political union. You were voting for having, in my view, equal Scottish representation in Parliament at Westminster. When you say that equal could you expand on that? Equal could mean that we get 50 per cent and England gets 50 per cent, or equal could just mean... I am a chartist in this respect. I think that everybody's vote should have the equal effect. At the moment, we have almost got that, not quite. Scotland is now, just by accident of history, slightly overrepresented in Westminster. I believe that, when people say that we want to remain part of the UK, the presenting question was one of political union. Political union seems to me to be linked to two other forms of union, both of which were heavily debated during the campaign. The first is what I would call economic union, and the big symbolic issue in the campaign was whether we have a single currency or not after independence. It seems to me that the argument was made and accepted that the maintenance of a single currency outside of a political union was at best perilous. It seems to me that the voters have voted for an economic union. Would you accept that there is a range in there? Clearly, you have a currency or you don't. In some of those words, union, you are either more united or less united, but you are probably never completely one union or you are never completely not one union. There are a number of ways of, as it were, analysing this concept of union. If you look at the academic literature on this, I am going to sound a bit professor-like for a moment, there is what is now a quite well-defined concept of a union state. That is a state that has been formed from the union of pre-existing countries, but retains in its form some of the institutional inheritance of those pre-existing countries. If you look at the union between Scotland and England in 1707, it is precisely of that kind. Although there was political union in the creation of a single Parliament, there was the maintenance of something that mattered more to most people than the Parliament, which is a separate church, as you will know, and also a separate legal system. The legal system, of course, was at that time the only domestic instrument of the state. What we have got in the United Kingdom and have always had, it seems to me, is the form of union state in which Scotland has had a separate, distinct and continuing institutional identity. That was not invented in 1998, when the Parliament was created. What the Parliament did was give that institutional identity, that historical continuity, a democratic aspect that was wholly appropriate in the 20th century, should be perhaps appropriate even in the late 19th, but clearly was not relevant in the 16th and 17th under the 18th. That is what we mean by union. That is one way of looking at it. The other way is to say, in what respects does union operate? One is this political one, the second one is economic, and the nature of the economic union is essentially a single domestic market. Free trade. That is what the 1707 people were after. The Scots were in trouble in 1707 for two reasons. One, they were bankrupted because of the Darien scheme, and two, because they had been frozen out of English markets by tariffs. What 1707 created was what the Europeans would call a single market, and what has been created since then is a domestic market. Capital and goods, labour, investment, trade, all-flow across the Scottish-English border without any let or hindrance, and there is a real contrast between that and the European market. That is what makes a single currency sustainable, along with the fiscal framework that involves the sharing of resources. That sharing of resources is economically necessary. A fiscal union is necessary to make a currency union work. It is also what gives effect to the third aspect of the union, which is a social union. Social solidarity, the sharing of resources first and perhaps most important in things such as pensions and benefits, but also second in securing common social rights, such as health and education, through a funding system that enables this Parliament to do that, even if Scottish tax revenue falls through the floor. On your final one of social unions, clearly, again, there is a range, isn't there? As you have said already, there are things like free home care or personal care and that kind of thing, which is slightly different. There are already differences, but it is not exactly the same. If people voted for the social union, do you think that they voted that, for all time, their pensions should be the same as down south, or was it really a fear that their pensions might be poorer than down south? In fact, if their pensions were better here, most people would be quite happy about that. That is a counterfactual, I do not know the answer to it, but what people certainly did was pretty plain of all of the issues that were around during the campaign. Securing a continued UK pension system was pretty near the top of the agenda, and one can see that in the voting patterns. Obviously, if you say to somebody that you would like your pension to be bigger, the answer would probably be yes. If you say you would like it to be lower, the answer would probably be no. As a matter of pragmatism, I think that I mentioned this earlier, if you look at the age structure of the Scottish population, it is prudent to pull that risk at a UK level. At the moment, Scotland, if you call it social protection, i.e. pensions and benefits together, is much the same proportion of our tax income or GDP as the rest of the UK's. At the moment, there is really no pulling going on, but you are getting that in future there is a risk, so that is why we want to pull it. That goes back to Mr Hepburn's question. That is only true if you include the off-shore numbers in the GDP. Of course, those off-shore numbers have two characteristics. One is that they, as a proportion of GDP, produce a lot less tax than the rest of the GDP. Second, of course, they are going to decline over the long run. That, if I may say so, is the wrong comparison to do. When you say that they are going to decline, that is assuming that the oil price does not go up very dramatically. No, it is assuming that, at some point, a finite resource demonstrates that it comes to zero. Oil will run out one day, unless you think that perhaps it will not. I think that there is more to find under the latter. That sends out to the truth, but do you think that it is infinite? I do not think that anyone is suggesting that. However, we have the answer to that because it is renewable, so we will not go out righteous now. One of the things that you, sticking to the social union, say is that national insurance contributions provide a gateway to the welfare system, and I know that we have touched on this already. Is that not really a bit of an outdated concept? You used words like stamp, which I accept to apply to my age group and above, but I do not think that I apply to the 20-year-olds. Perhaps not, but nevertheless, I think that the contributory principle is a very important one. It is important for two reasons. One, because it demonstrates to people that they are buying into a system of common and shared risk, and two, because it is, if you like, a fee for membership of the welfare state. That is quite important. If you look at the history of the welfare state, if you have a look at Beverage on this, Beverage is very interesting of this. It sounds a little outdated nowadays, but he was very much against—he very much wanted to minimise—the idea that there was a set of people who were constantly receiving support from general taxation. His aim was that most social security should be funded by the common pooling of resources, a bit like an insurance system, which is why I called it national insurance, or what George George called it national insurance. There is a principle thing there of putting in and taking out. I think that we have lost rather too much of that. I would rather have more of the contributory principle rather than less. Although you could argue that that is what the whole tax system is applied. It has always been suggested for a long time that tax national insurance should be put together in the UK-level PEY in national insurance. Presumably one of the things Scotland could do if we got devolution of both would be to put them together, create a simpler system and have a lot less cost for admin. I think that there is a difference between understanding that there is a single administrative system and understanding the nature of the taxes. The admin system is, in one sense, now here and there. It would be, in principle, entirely possible for the UK today to invite HMRC to administer the national insurance system in an integrated way with the tax system. That is not the same as saying that you would simply pull the two taxes and have a single tax rate. I think that the contributory principle, which is regressive in terms of income, is nevertheless important. That opportunity exists today. If you accept my argument that when income tax is devolved, there should be a single system of administering it across the UK, those opportunities would still remain. We have touched on benefits a bit and the idea that you suggested that the Scottish Parliament could supplement benefits. Two of the key problems that we face at the moment are sanctions where we feel that people's benefits are stopped for not a good reason and work capability assessments where we feel that some people are assessed as fit for work when we feel they are not. They would not be issues that we could deal with with just a supplementary system, would they be? That would be changing the fundamental way that the DWP works at the moment. I do not really answer to that, Mr Mason. I have not studied that. You might be right, but I would like to think about that before I answer it. I suppose that my fundamental point is—that is right—that we just want to top up the present system or do we really want to change the present system? A lot of us would like to change it. There are many people who would like to change the present system on a UK level as well. That is not likely to happen? Well, I do not know. You tell me the result of the next election. Just a couple more things, if I may. We have talked about housing grants as against housing benefit. You talked about how you support the capital building of the houses or do you pay people a cash to pay a higher rent and things. At the moment, we are a bit unbalanced on that because we are trying to support the building of the houses. That presumably brings down the housing benefit bill, but that is a Westminster thing. Do you think that joining the two of them up would make sense? I am not quite sure that I share all the premises, but the argument for devolving housing benefit as opposed to the supplementary system is that it enables you to transfer resources between capital and revenue. That is the argument of principle, which is why I have suggested the devolution of housing benefit. You get most but not all of the upside of this approach by a supplementary system, but not all of it because you cannot play those tunes at the edge between capital and revenue support. It is worth remembering that it is very easy in conversations like this to assume that if we just devolve it, there will be more of everything and everything will be better. When the Conservative Government moved from supporting housing investment in public sector housing to supporting individuals through housing benefit, it saved money by doing so. That is one of the reasons why it did it in the 1980s. The housing programme was substantially cut and the housing benefit line went up, but the benefit line did not go up as much as the programme line went down. Consequently, do not be fooled into thinking that if we simply devolved it, that would make lots more resources available. It would not. It would just enable you to move the resources relatively at the margin. Was that a short-term saving or was it also a long-term saving? Presumably, they saved the capital short-term, but they were paying more benefits for quite a long time? The benefits ran on over time, but it was baked into the baseline, as it were, and the Scottish Parliament's budget reflects that ancient, historic baseline. My final point would be going back to minimum wages, where I am not sure that I quite understood the argument that, if London had a higher minimum wage, is the thought that a lot of our people would just go to London to work? My injection is slightly more general than that. I am going back perhaps to my argument of economic union. I think that there are certain guarantees that you get from being in the United Kingdom, and it seems to me that minimum wages is rather a good one of those. I am worried about the idea of different regional minimum wages in the UK, because of the risk of a race to the bottom. Say that it was the other way round, because say that there was a desire between labour and the SNP to put the minimum wage immediately at the living wage, wherever that is, where are we, 78, 75, thereabouts. That would be the other way round, wouldn't it? Yes, it would, but one of the tricks in designing constitutional systems is to make sure that there is proof against any politician who might be in charge, not just the nice ones. The Conservatives? All right, okay, thank you. I guess that they are going to leave us a power in Scotland in the foreseeable future. I was actually going to touch on that, but I think that you both had enough on that at the moment. That concludes questions for the committee, but I just wonder if I can just touch on one or two things to finish off. When I asked to your view on devolving a number of taxes, capital gains, et cetera, was one that I do not think you did reply to, you talked about an inheritance tax, APD, I think that maybe just when you were rhyming them off, that was one that you did not really touch on. So just if you can clarify your views on the evolution of capital gains tax. As a matter of principle, I think that that is possible, chairman. I just wonder if it is worth all the bother. It is a very small yielding tax. I do not have the number at the front of my mind at the moment. It is maybe 100 million or something like that. Mr Brown is obviously looking at it. 292, thank you very much. It would be quite a disruptive thing. Capital gains tax is very few people pay. Most people who pay it are doing so through smart tax management schemes. They are doing so essentially because they are using up their capital gains allowance rather than income. If you like a way of minimising income tax by paying it in the capital gains, I would worry a little bit about the avoidance risk. I would not realise that it is a matter of principle, but I just wonder if it is worth the bother, frankly. Okay. Thank you for that. Just one final point about the Scottish rate of income tax. I am just wondering if you think that the annual indexation of the block grant adjustment for the Scottish rate of income tax should take into account population growth at a UK level relative to Scotland. Okay. This is under the Scotland Act 2012. I think that things might be different, first of all, if one were to go for a system involving the whole devolution of income tax or the assignment of all income tax proceeds. So what I have got to say relates only to the Scotland Act 2012 scheme. That is quite important, because different considerations apply in different circumstances. It seems to me that under that scheme there are various risks in the, what you might call, the revenue stream to the Scottish Parliament, some of which should be allocated to this Parliament and some of which should be allocated to the United Kingdom Parliament. It seems to me that this Parliament should bear the risk primarily of its own taxation decision, in other words, if it cuts the tax, it gets less money, if it increases it, it gets more money. Second, and secondly, the easy one, the United Kingdom Parliament should bear the risk of any changes to the structure of the tax base so that the UK, if it changes the personal allowance, makes a compensating change to the Barnett formula grant, one way or the other. Those two are relatively straightforward. The interesting one, the one that she suggests, is about relative growth in the tax base, which might be growth in respect of relative population growth or it might be growth in respect of income. It does not matter what the cause is. My view is that this Parliament should bear the risk of relative growth in the tax base. Of course, that is exactly what you and some of your colleagues are arguing for, greater fiscal autonomy. I think that that is right in principle in this case, certainly in the case of the Scotland 2012, because it gives the Scottish Parliament the benefit of the upside of greater growth in the Scottish economy and incentivises it to ensure that that is the case to use the powers that it has got to do so. In relation to the own resources element under the Scotland Act 2012, the Parliament should bear the risk, upside and downside, of relative growth in Scottish income tax compared to English income tax. Otherwise, the thing is not doing what we intended it to do. Indeed, but if the population of England was to grow higher rate than Scotland, what we have seen recently, as you probably know, is a lot of the GDP growth. If you look at per capita, there is not really going to be very much of the GDP growth, a lot of it is just because of increasing population. It is just that specific issue. Would that disadvantage Scotland do you think, if England's population continues to grow in terms of this block grant adjustment relative to Scotland? Depends on what you mean by disadvantage, chairman. Obviously, one of the things that has happened over a long period, first of all, is that the population of England has grown more than the population of Scotland. Primarily from immigration, because they have had a lot more immigration than we have had. As a result, and you are absolutely right to say that, when people say that Scotland's growth has lagged behind the rest of the UK and things are bad here, they are talking nonsense, Scotland's GDP growth has been higher per head than the UK over many, many decades. Indeed, since those numbers were calculated in 1963. The English population has gone up, but the GDP per head in Scotland has actually exceeded in growth the GDP per head in England. I do not think that that is a relative population growth, either a problem or a good thing or a bad thing. It is just what it is. I do not think that we should say, through the income tax system, that, because the population of England is growing, it should send us some more money. Therefore, it seems to me that relative population growth in the income tax base is part of the driver of relative population growth in the income tax yield. The Scottish Parliament and its budget should bear that risk relative to England. I would like to thank you very much for your very straightforward answers. I mean, we have kept you for 100 minutes, so thank you very much. Just any final point that you want to answer? Thank you, Chairman. It has been good to be here. We are in a very, very interesting period, as the circuit and I were saying earlier on. It is a time of opportunity to create a long-term, stable and well-functioning devolution settlement for this Parliament. We will do that, if and only if we address the questions on our merits. I hope that I have been doing that to now. I am sure that the committee will do that when it reports on this matter.