Finance and Public Administration Committee

Meeting date: Tuesday, June 6, 2023

Official Report 673KB pdf

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Economic and Fiscal Forecasts and Medium-term Financial Strategy

Good morning, and welcome to the 17th meeting in 2023 of the Finance and Public Administration Committee. Under agenda item 1, we will take evidence from the Scottish Fiscal Commission on its economic and fiscal forecasts from May 2023 and the medium-term financial strategy. I welcome to the meeting Professor Graeme Roy, the commission’s chair; Professor Francis Breedon, a commissioner; and John Ireland, the commission’s chief executive.

Before we move to questions, I invite Professor Roy to make an opening statement.

Good morning. Thank you for the opportunity to, once again, come along and speak to the committee.

I will give a few reflections on our report and some of our key insights from the latest economic outlook. On a positive note, we now forecast that the economy will avoid the shallow technical recession that we predicted back in December, but the overall environment remains one of slow and fragile growth. Inflation has started to fall from its peak of about 11 per cent, and it should fall sharply this summer. However, inflation will continue to exceed growth in normal household disposable income, which means that it is likely that living standards will once again fall in 2023-24.

The updates to our fiscal forecasts that we made in May are largely incremental. Forecast revenue from Scottish income tax has been revised up because of higher employment and nominal earnings. By 2027-28, forecast revenue increases by £209 million. However, the offsetting adjustment to the block grant also rises, following similar revisions by the Office for Budget Responsibility to its income tax forecasts for the rest of the United Kingdom. The end result is a small upwards movement in the net funding that is available to the Scottish Government.

We continue to advise caution in relation to the outlook for the income tax net position. From experience, we know that revisions to the outlook are quite common. Underlying Scottish and UK income tax forecasts are very large in terms of their overall magnitude, so the net tax position is driven by very small differences between the two.

As was the case in December 2022, a divergence in earnings growth between our forecasts and those of the OBR continues to be the main driver of Scotland’s strong positive estimated income tax net position, particularly towards the end of the forecast horizon. Crucially, we advise that, if Scottish earnings growth turns out to be closer to UK earnings growth in the coming years, it is likely that that net tax position will be materially lower than is currently estimated.

As we have highlighted in recent forecasts, we still expect a large negative income tax reconciliation for the 2021-22 budget year. Comparing our latest forecasts with those of the OBR indicates that there will be a reconciliation of minus £712 million. There remains some uncertainty about the exact value, and final outturn data will be available in July 2023.

We have also revised our social security forecasts, mainly because of demand for disability benefits being higher than expected. We estimate that, by 2027-28, total spending on social security payments will be £1.3 billion more than the funding that will be received from the UK Government through the associated block grant adjustments. It is important to note that one of the main drivers in that regard is the Scottish child payment; it is forecast that £436 million will be spent on the payment in 2027-28.

In December, I cautioned that the pressures from rising costs would mean that the funding position for individual Government portfolios would be challenging. That assessment remains unchanged despite our marginally more optimistic forecasts.

A crucial point, which we can perhaps touch on later, relates to the impact of inflation on the Government’s borrowing powers. The borrowing limits that are set under the fiscal framework are fixed, in cash terms, and have not changed since 2016. We estimate that the financial power of borrowing has been eroded by almost 20 per cent over that time, as a result of the effects of inflation.

Finally, I draw the committee’s attention to the consultation paper on baselines that we published alongside our forecasts. That might appear to be a dry technical issue, but it is important in relation to the assumptions that we make about Scottish Government policy over the five years of our forecasts in the absence of a clear steer from the Government. We will speak to a number of organisations over the summer to discuss those points, and we welcome the committee’s views, too.

Thank you very much, Professor Roy. I think that we all have a number of questions. Committee members have around 13 minutes each.

You mentioned the fact that your forecasts and the OBR’s forecasts are somewhat different. You also said that there is more uncertainty than usual at this particular time. Why is there more uncertainty at this time, and why is there a difference on the divergence in earnings growth, in particular, between the Scottish Fiscal Commission and the OBR?

I will say a couple of things.

I think that every time that I have come to the committee, we have mentioned the challenges that exist in the global economy just now. Those challenges come on the back of a pandemic and a cost of living crisis. The exact time path for the economy remains uncertain. There are some risks on the upside. We have seen, for example, an early lifting of Covid restrictions in China, which has helped to expand the global economy. However, it is clear that the effects of inflation continue to lag around, and they are acting on the downside. We have to make judgment calls about that, but it is clear that the world is uncertain at the moment, and the true effects of that are feeding through to the overall budget. That is the point about uncertainty.

Earnings growth and employment growth are the key drivers of the outlook for income tax in Scotland and the UK. As members know, under the fiscal framework, what really matters for the net tax position is relative performance—the relative difference between the outlook for Scottish income tax and the growth in income tax in the rest of the UK. Consequently, that means that what really matters is the outlook for employment growth and earnings growth in Scotland and the UK.

Over the past few years, we have seen a divergence between Scotland and the rest of the UK on earnings and on participation. Our judgment is that that gap will close over the immediate-term horizon—perhaps we can go into some of the details of why we think that that is the case—but, even then, there is a judgment call that we and the OBR make about earnings more broadly. It happens that we are probably slightly more optimistic than the OBR about earnings growth. That goes back to the important issue of divergence.

Pages 56 and 57 of our report show our and the OBR’s forecasts for earnings. We are forecasting around 2.6 per cent growth in earnings over the outlook of our forecast. The OBR is forecasting nominal earnings growth of just 2 per cent, which is very low by historical standards. If the OBR revises that up to be more in line with our forecast or we revise the figure down because we are too optimistic, the dynamics and drivers of income tax will converge much more. That is why the net tax position could decline toward the end.

Traditionally, we have found it hard to match the south-east of England and London, and their earnings have tended to be higher. Therefore, it is surprising to me that we have things the other way round, in a sense, this time.

The story is rather similar to what we went through in the previous report. There are a couple of pro-Scottish factors at the moment, one of which is what is going on in the North Sea. For quite a long time now, we have seen the North Sea being a drag, because the sector was a high-earning one that has been gradually diminishing. What we expect—and, indeed, what the data is beginning to show—is the North Sea being not a positive but no longer a drag; basically, it is keeping up. Therefore, that effect is slightly reduced.

The other thing that is positive for Scotland is that rising interest rates tend to have a smaller effect here because the average Scottish person is less indebted than the average person in England. That is the second factor.

The third factor is that we saw a very strong finance sector last year, particularly in London. That was a bonus-related effect that is already beginning to unwind, so that the finance sector in London is not outperforming the finance sector in Scotland by as much as it did last year.

You are right. All those factors together will not make Scotland’s earnings growth match that in London and the south-east, but they will make it match that in England as a whole or go slightly above that. That is what we are basing the forecasts on.

Okay. Thank you.

The big figure that was mentioned is the negative income tax reconciliation of around £712 million. Obviously, that has been in the media. How certain are we about that? I seem to remember that, in the past, the forecasts and the actual outturns were quite different from each other, even late on. We will just have to wait until July, I think, when we get the final figures, but is there a possibility that the figure could be very different from £712 million?

We will know the exact number in July when it comes through. However, I think that the situation is different this time. Clearly, the forecasts are estimates; we will get the exact number and have the outturn data and compare them.

If you recall, the reason for the £700 million difference goes back to the timing of different forecasts in Covid times. When the OBR assessment, which formed the block grant adjustment, was made, it was done at quite a different point in the pandemic. It was done when the omicron variant was spreading around and the outlook for the economy across the UK was much more pessimistic. By the time that the Fiscal Commission did its forecast, which was later in the budget process early the next year, the outlook was much more positive. The difference is due to the differences in timing and in the assessments of the outlook. If you recall, the point was made back then that there was a timing issue that was likely to mean that the BGA number would be revised up significantly, which would be a key driver of the reconciliation.

In the past, the forecasts have changed because outturn data has differed. That is just the nature of forecasting. This is more a fundamental question about when the judgments were made about the BGA and the tax position. That is why the number is so large this time.

In that context, on the question of whether it will be £700 million, £650 million or £600 million, we will know in July. The key point is that we can be pretty confident that it will be a large negative reconciliation, because of the nature of the issue that is driving it.

I will just add a point that we have heard a few times. Even though it can get revised, it could be revised to an even bigger number and, at this point, we do not know which way the revision will go. It could be an even bigger reconciliation or it could be slightly smaller—the probability is equal, as far as we are concerned. It is not a situation that we should ignore just because the final number might be slightly different. As Graeme Roy has said, it gives us a very strong steer that there is a big negative number coming. Although the final number might be a bit different from the number that we have now, it could be bigger, in practice, as I have said.

Mr Ireland, if you want to come in at any point, just jump in—that will be fine.

In December, the Fiscal Commission forecast that tax receipts would be £384 million less than you are now forecasting. Can you explain why that has changed so much since December?

Do you mean the uplift in forecast?

Yes.

There are several reasons for that. What happens is that new data comes through all the time. We have new data on earnings across the UK and we can see that the earnings data and income receipts that we are tracking are higher—there is an uplift relative to where it was. There are also things such as public sector pay awards feeding through, which are higher than we forecast in December. We have seen much greater resilience in earnings across the economy as a whole, which has led to an uplift in our forecast for tax revenues. We made a judgment about the slightly more optimistic outlook for the economy in the near term, which, again, has helped to boost the revenues.

Interestingly, we have not changed our assessment of the economic outlook by the end of the forecast period; it is just that we think that, rather than the economy entering a technical shallow recession, the outlook will be relatively flat. In essence, that will have the same outcome by the end of the five-year forecast period.

One thing that I should say is that, although £300 million sounds like a lot, it is a relatively small change in the overall forecast when we are dealing with the magnitude of revenues that we are talking about, which is thousands of millions of pounds.

Yes. The problem is that our borrowing limit is only £300 million. We will raise that with the Deputy First Minister next week.

You mentioned data. How are you finding it now for getting the data that you need at the time when you need it? I know that that was a problem in the past.

09:45  

I appreciate your asking about that. We continue to work closely with the key agencies that provide the data to us. Last summer, when we provided our statement of data needs, we mentioned, I think, that we had made good progress with the Government, particularly on economy and tax data.

You will not be surprised to hear me say that we could always do with more data and would always like more information. Some of the challenges involve the limitations of the devolved context and the relatively small size of the Scottish economy.

Although it is still early days, we have made big progress on social security. That was our big concern, back in the summer. We have worked closely with Social Security Scotland to get the information—for it to collect the data in a way that is helpful—and to have a constructive relationship in which we can, in essence, get intelligence on what it is picking up as it rolls out those benefits and new payments. There is still more work to do, but we are relatively comfortable about where we are when it comes to accessing the data.

I have a final question. You said that, in future years, you do not anticipate any negative reconciliations or forecast errors after 2024-25. Why is that?

It comes back to Francis Breedon’s point about the balance. There will be reconciliations. I guarantee you that. However, at the moment, there is no necessary case that there will definitely be a positive or negative reconciliation in that way.

That brings us back to the figure of £700 million. That existed for a reason that was quite different from being just a forecast error. That was about the timing of when the forecasts were made, and the fact that caution at the time said that the difference, particularly in the BGA that was embedded in the budget, was a significant underestimate of the reality. That is why we are pretty confident that the negative reconciliation that is coming will be large.

So, in some ways, that was a one-off because of Covid and turbulence.

Yes, and the reason for that was quite different. There is an interesting question about whether that can happen again, which comes back to the overall questions about how the fiscal framework operates and to negative or positive reconciliations being driven by when budget statements are made. That poses challenges. I do not think that anyone would say that having to base financial decisions on the timings of announcements is a good situation to be in.

However, we will always have reconciliations. That is the nature of the framework. Those reconciliations could be large because, to come back to that point, thousands of millions of pounds of income tax revenues are moving around, so reconciliations and changes in the forecast of hundreds of millions of pounds are entirely possible. That comes back to your point about having flexibilities in the fiscal framework to manage that.

It is worth adding that, although the £700 million is a bit of a one-off because of the situations that surrounded it, a reconciliation is the difference between two very large numbers, both of which are getting bigger very quickly because of inflation. We anticipate that, in future, reconciliations will tend to be bigger than they have been. Therefore, although that £700 million was due to special circumstances, we are saying that £700 million, plus or minus, is not something to be surprised about in the future.

I go back to earnings growth, for which the OBR figure is 2.0 per cent for the UK and your figure is 2.6 per cent for Scotland. You hinted that there might be some factors behind that divergence. Can you expand on that?

There are a couple of things. I mentioned pages 56 and 57 of our report, which talk about earnings. There is an interesting chart at the bottom of page 57, which shows Scottish earnings relative to UK earnings and the long-term average. Over the past five years or so, the gap between Scottish earnings and UK earnings has widened. We think that part of the reason for that is the high-value jobs situation in the north-east, which has been acting to pull down Scottish earnings relative to UK earnings.

Our assessment is that, at least in the short term, that is not going to continue. The data that we track shows that Aberdeen—the north-east—is, at least, not diverging from the rest of Scotland in the way that it has done. That means that that divergence is not going to continue. We think that there will be a relative catch-up to some extent in the short term.

In the longer term, there are important questions about the outlook. As Francis Breedon said, there has been high growth in financial services in London. Again, that changes the average and drags the UK away from Scotland.

Those are some reasons why we think that the divergence might not continue at the same level of detriment to Scotland over the next two to three years. A broader question is: what do we economists think might happen to earnings when we look across the economy? Our judgment is that earnings will grow in Scotland by about 2.6 per cent. The OBR’s completely independent, different assessment is that growth will be lower than that in the UK. Who is right? Obviously, we will have to wait and see. If the UK becomes more like us, or we become more like it, the net income tax position will not be as strong because, essentially, we are assuming that there will be higher earnings growth here than in the rest of the UK and that that will boost our revenues.

I guess, therefore, that it is not so much a case of divergence, because you are predicting that the two figures are coming closer again. A difference of 0.6 per cent does not sound like too much of a big number. If the OBR revised its figure up to 2.6 per cent growth and the two figures came together, what would that do to our income tax take, or to the BGAs?

Earnings are crucial to the income tax element. We have a rule-of-thumb number that we use. I will not say what that is, because if I do I will have to write to correct it. However, I highlight that a 1 per cent swing in earnings is in the magnitude of hundreds of millions of pounds. We will get the exact number for you. That is really crucial to that relative differential in earnings.

If you look at what has been happening to the net tax position, you will see that the shift has been from negative to positive. That is driven partly by policy but, crucially, partly by what is happening to the earnings outlook.

When we look at the OBR figures, we see that the average growth in earnings has been 2.7 per cent over the past 11 years. It has revised its forecast for earnings growth to 2 per cent. How cautious should the Scottish Government be with regard to that figure?

We explicitly say in the report that, particularly towards the end of the forecast period, caution should be given to that. We would hope that Scottish earnings growth would outperform earnings growth in the rest of the UK and that that will come through to tax revenues. However, as I said, one of the crucial differences is that our judgment of the outlook for earnings is more optimistic than the OBR’s. If that does not turn out to be true, and we converge, the net tax position will ease back. It is in relation to that that we would advise caution when planning.

When is the next milestone? When will the OBR publish its next estimates?

That will be in the autumn, to support the UK budget. We will do the same for the Scottish budget. Those figures are definitely something to watch. I think that, when we come back to it, you will see that movement in the net tax position. That is when we will know more.

I can give you that sensitivity. We ran some estimates, as Graeme mentioned. Page 61 of the report states:

“We estimate that 0.1 per cent extra growth in Scottish average nominal earnings relative to the rest of the UK would lead to a £25 million increase in the net position.”

A 1 per cent increase would be £250 million, and 0.6 per cent of an increase would be hundreds of millions of pounds. It is a significant number, and it builds over time.

However, for the past five years, we have been lagging behind the earnings relative to the rest of the UK—

Yes—and you see that in the net income tax position chart. That shows that the Scottish Government is seeking to raise revenues by freezing the tax bands and increasing tax rates relative to those in the rest of the UK. However, the amount of tax take coming in has not been keeping up with what you might have expected to raise. The reason for that is that earnings have not been growing as quickly here as they have been in the rest of the UK. There are also issues to do with participation. That means that the net tax position is perhaps not as good as you would have hoped that it would be, because the tax base is not growing as quickly as you would like it to.

I will move on to my next question. You have been making estimates of the Government’s spending. What assumptions have you made about the public sector workforce? Have you seen that number falling or remaining constant?

On the spending outlook, with our forecasts, we tend to look at the overall funding envelope. That includes looking at the block grant and the outlook for tax revenues. We do not really get into the details—we do not get into the specifics of the policy choices, which would include the outlook for things such as employment and at the choices within that. With regard to our December forecast for public sector employment and pay, perhaps John Ireland can remember that.

I cannot remember back to December, but for each forecast we need to think about public sector employment and public sector earnings, so we operate a mechanical rule. It basically shows that in the May forecast, we are expecting the public sector workforce to fall by about 1 per cent, but that involves the UK Government’s employment in Scotland, the Scottish Government’s employment and the wider Scottish public sector, including local authorities, which are a very big driver.

The contrast relates to what the Government has put into its MTFS. It has a couple of scenarios which would result in positive growth for public sector employment.

I stress again that our forecast works in a very mechanical way, going off public expenditure and the likely pay pressures that the Government talks about. That just gives us a number for public sector employment.

So, looking forward, you do not have any estimates of the size of the public sector workforce.

We basically say that it is falling very gently by about 1 per cent over the next year, and that trend continues.

So it is 1 per cent per year—that is what I was trying to get at.

Yes.

To go back to John Ireland’s point, it is very mechanical and runs off the funding envelope. We are not forecasting in anger—it is just something that falls out from the process.

My last question is around social security spend. We have seen that go up from about £3.6 billion in 2021-22, and it will be doubling by 2027-28. Behind that, there are two things. Inflation is obviously pushing the welfare bill up, but there are also new welfare commitments that are not matched, which do not come through in the block grant adjustment. How much is the spend on each of those? If we never had these new commitments, what would the social security bill be going forward?

You are right—there are probably three big drivers going into that. The first is inflation—with most of the key benefits uprated in line with the consumer price index at key points, much of the big increase that we are seeing in social security is coming through inflation. We made that point in December. That is one of the big drivers.

The second driver is the increasing evidence across the UK of demand for key social security payments, in particular adult disability payments post Covid—we might come on to that—and some of the evidence that has been picked up around the effects of long Covid and waiting times.

In a Scottish context, both those drivers, at the margins, lead to higher spending but also higher funding. That is not a risk in that sense to the Scottish budget, because it comes through the block grant adjustment. The difference comes through either where the Scottish Government is introducing new social security payments, or where it is changing the benefits system that is being allocated, which leads to higher spending relative to the BGA.

Figure 5.6, on page 86 of our report, talks about those differences. We think that the difference between the amount of funding flowing through for social security payments and what the Government is committing to spend will be £1.3 billion by the end of the forecast period. That money has to be found either from taxation or from other sources in the budget.

I will return to the issue of the workforce, if that is okay. The resource spending review said that the Government was going to seek

“to return the”

overall

“size of the public sector workforce ... to pre-COVID ... levels”.

You are saying that you have not baked any of those figures relating to policy intent into your forecast. Is that correct?

Yes. This time, we have not put anything specific regarding changes in employment into the forecast. It is purely mechanical in that context.

There would be a major impact on the public finances if we were to take the trajectory that was previously stated. When the permanent secretary was in front of us a few weeks ago, he stated that he was operating on the assumption that that was the direction of travel but that the new Government under the new First Minister had made no specific statement. If there were a specific statement, would you be modelling that?

10:00  

We model specific policies on Government employment and pay when we have the evidence to do that. To come back to my answer to Douglas Lumsden, we have to remember what part of the fiscal process we deal with. We would potentially change our employment forecast if we thought that the Government was changing employment levels, or change the income tax forecast. That is the way that it would come through to us, and we would then think about how that might impact funding.

When it comes to the spending bit, essentially, we are looking at the overall envelope that the Government will have. What it then chooses to do with that, such as allocate it either to public sector wages or employment or spend it on day-to-day services, is not an area that we would typically go into. We are just looking at the overall totality of the budget.

In short, if the Government comes in with an explicit policy to do something, we would factor in that policy and it would enter our modelling process.

That is useful. With the medium-term financial strategy, the Government is seeking to establish an external tax stakeholder group. What is the job of that body? What does it have to do?

That is an interesting question. It strays out of our remit because we do not comment on policy per se—it is up to the Government to come forward with that.

My overall reflection on tax and the debate here is that the most important thing to look at is the long-term work that we have done on the outlook for the budget. We were here a couple of months ago talking about that. For me, that is the really important work to look at, which includes looking at the long-term structural challenges that are coming down the line for our public services given the rising costs in health, the demand, demographics and so on.

There is a really important debate, not just in Scotland but more broadly across the UK and internationally, about what the public finance system looks like for public services that will be in much higher demand and will cost a lot more in the future. That is where you start to get into some really interesting debates about tax.

One of things that I am really interested to see from that group is long-term evidence about the future of tax in the context of the changing nature of our public services.

Are you doing much work on, for instance, modelling on behavioural effects longer term, given where we are with the tax situation and the divergence within the UK?

Our remit is quite explicit that what we can do is model the specific policy choices of the Government. We would not be able to model hypotheticals; that would have to be done somewhere outside of the Scottish Fiscal Commission. We work all the time on matters such as tax modelling and behavioural forecasts to inform the process. I would hope that our work might inform the thinking that goes on in a body such as that group, but it is not for us to come out with ideas and suggestions. That is just the nature of the framework that we operate under.

Of course, but are you doing any of that pre-emptive work?

That has been a big part of our research agenda since we began. The tax situation is not unique, but it is unusual in the sense that the border between England and Scotland is extremely permeable. That has implications for the behavioural impacts of tax. We have done quite a lot of work on that—we had an international conference because, even though it is unusual for the UK, it is very common across the world. In lots of countries, there are income tax differences across regions. We have a body of work to look more and more at the Scottish case.

As a research economist, one would say that, for Scotland, as is often the case with economics, it is still too early to say. The policy divergence between Scotland and England is still quite new; therefore, the international evidence will continue to be a really important guide to the Scottish experience.

We will do more and more work on the particular experience in Scotland but, at the moment, international evidence is very helpful because there are countries that have had different tax rates between regions for a long period.

What does that evidence tell you?

Roughly, that there is an impact but that it is not enormous. We are still in a situation in which, if we were to raise taxes, particularly at the higher rates, we would get the revenue. It is not the case that the behavioural impacts would offset it.

An extreme example of that has occurred in the United States, where certain states have a millionaires’ tax. There was a strong view that it resulted in some millionaires migrating from one state to another, but in the end it was shown that most of them stayed put and that, overall, having such a tax generated revenue for the United States. That example is from right up at the millionaires’ end, but we can see that such measures have a positive impact. We do not raise very much revenue from increasing higher rates, but we still raise it.

Just to conclude, how urgent is the work of the tax group, given the situation that we currently face and also what is outlined in your forecasts?

We have had a conversation about the long-term financial outlook. My personal view is that it is really urgent that we have a conversation about the long-term future trajectory of Scotland’s public finances. The challenge is not unique to Scotland; it is common across high-income economies. However, the pressures exist here and now, as we can see from the demand on public services, which will only accelerate over the years to come. Having a conversation about tax, public services, reform and how we plan to grow our economy will be crucial. Fundamental structural decisions will have to be made about how we can continue to protect our valued public services over the long term.

Although the situation is urgent, I would caution against seeking quick solutions and thinking, “If we do this one simple thing, it will be easier.” It will be a long process, but we can make decisions now and start putting in place the work that we need to do in order to change.

Good morning. My questioning will focus on two areas. The first is about the frustration that I think we all feel about the different timings of the various forecasts that underpin strategies—whether it be those for the medium-term financial strategy or any other set of forecasts—and how the OBR and the SFC forecasts relate to the different timings in the budget cycle. That has an impact on the projections that can be made, given the data at that time. Is there scope to bring the timings of the forecasts slightly closer together so as to make things easier? I am sure that the OBR and the SFC would welcome that as well.

In principle, and from a purely technical point of view, it does make sense to have the forecasts as close together as possible. If we end up in situations such as the one we had back in the Covid period, where we had a fast-moving economic environment, any delay means that the position looks quite different. In principle, therefore, my answer is yes.

I appreciate that our forecasting is one part of a big budget process that takes place both in Scotland and in the UK, and that both Parliaments need time for proper scrutiny. For us, it is important that the forecasts are together. It would avoid situations such as the reconciliations that we currently have, a large part of which is simply due to the timing of the publications. That cannot be a good outcome.

There might be ways in which we can get around that. For example, back then, the Government was offered a revised BGA. Could we do something different if there were a delay or a material difference in circumstances, or could we change the nature of the framework to be more flexible so that we would have a more accurate assessment from both? It would definitely be worth discussing such matters as part of the review.

On the discussions about the forthcoming new fiscal framework, which will replace the 2016 version, are you aware of any dialogue about the forecasting element?

We are not part of the discussions, so I would not know that. We have been quite clear in saying on the record that that is one of the matters that we feel could and should be looked at, but I would not know where the review stood on that.

Thank you. That was helpful.

Obviously, there is a question to be asked about medium and longer-term planning for the economy; indeed, you cited that in your response to Michael Marra. The gap between Scottish Government projected expenditure and the tax take is a very serious issue, and I think that it focuses the committee’s attention on two questions. First, what is the scope for serious public sector reform that would help to address the problem? Secondly, how can we increase the tax take?

On the first of those issues, do you have suggestions for the most likely areas of public sector reform that could help with things, given the fact that there is almost certainly no scope to reduce spending on health, social security and social care? Indeed, as your own estimates have shown, spending on those areas is going to increase very substantially. What scope is there for public sector reform that could really help with that side of the equation?

Unfortunately, we would probably be straying out of our remit if we got into the specifics of what Government could do or suggested particular policies in that respect. However, your general point is really important, and it brings us back to our long-term fiscal sustainability work, in which we have projected that health will get to the point at which it starts to take up more than half of the entire budget, because of demographics, rising costs and so on. Clearly that is one part of the budget that has to be looked at. How can you continue to deliver high-quality healthcare, given that the costs of delivery and the demand are increasing?

I guess that, from a purely economic point of view, the key question is: how can you reduce lifetime expenditure per head in areas such as health? That is not about cutting expenditure on health, but about looking at issues such as prevention, tackling inequalities and growing the economy in order to reduce the demand on the health service and ensure that you are not having to do so much corrective activity. Of course, the issue is not unique to Scotland; lots of other countries are looking at it, too.

Another issue that you can look at is how you become more efficient at delivery. Yesterday, I heard a fascinating talk on artificial intelligence by Gita Gopinath, the number 2 in the International Monetary Fund. AI can be used to detect cancers and other illnesses in people, to deliver certain types of treatments and so on. How can we use new technologies to deliver public services in a way that reduces delivery costs?

In many ways, it brings us back to the Christie commission and the stuff that this committee has repeatedly discussed about the need for those kinds of reforms, which are about not changing the quality of services but reducing the cost of their delivery. Those are the areas that I think that we need to focus on.

You are quite right to say that you cannot comment on projected policies that the Scottish Government should employ, but I am interested in finding out whether, in all the analysis that you are doing and the data that you are using, you are aware of other countries or other attempts to try to reform public services in the way that you have described with regard to increasing efficiency, making use of technology or whatever. You have already given us three or four examples, but are there any other areas that, without projecting into Scottish Government policy, you think that we should be looking at?

In our long-term report, we highlight a number of different things that are driving the outlook for the public finances. The first relates to the spending side of things. In other words, what can we do to maintain quality while adjusting the spending profile?

The second issue relates to the economy. What can we do to raise the tax take in Scotland—crucially, in this framework, relative to the UK? What can we do to outperform the UK and bring in those revenues?

Finally, there is the issue of migration. Can we attract more people into Scotland, either through taking a bigger share of the international migration that is coming into the UK as a whole or bringing more people from the rest of the UK into Scotland, to work in high-value jobs that pay the tax revenues that we need? After all, the nature of the framework means that what matters is income tax revenue, particularly from the higher earners. Those are the different areas that I think are worth looking at.

10:15  

The second aspect of my question is about tax revenues, which you have mentioned. There are ways to increase tax revenue by changing tax rates and thresholds and so on, but there is a question around the change to tax structures. A debate is going on down south just now about whether inheritance tax should be replaced, and we have had lots of debates up here about whether council tax should change, and so on.

I go back to the analysis, of which you are aware, around other countries that have changed their tax structures. Is that debate an urgent one to have here in order to address some of the concerns that we have about a weakening tax return?

I will say a couple of things and then you can perhaps get Francis’s thoughts as well. The first point is that a really important debate is taking place globally about the future of tax, the nature of the tax system and what we tax. If you are moving towards a world where the value of capital in the economy increasingly comes from companies that make profits through automation and artificial intelligence, and less worker output, how do you tax that? You are essentially squeezing the amount of labour in the economy, so how do you tax capital efficiently in order to pay for public services? That is the on-going really important global tax debate, which clearly goes into wealth taxes, corporate taxes and all those sorts of things, too.

In Scotland, you have a relatively narrow tax base—essentially, it is income tax and property taxes—and you do not have that broader spectrum. Any conversation that is happening about those broader taxes will have an impact on what you might want to do in the future around the devolution of taxes and the like.

In the Scottish context, the nature of income tax means that the growth in high earnings, and what you do around it, is so important—that is where you broaden out. The volume of higher rate tax payers that you have really matters. That is not a political comment but an arithmetic one—that is the way that income tax works. The broader point is that growing that volume is crucial to creating underlying revenues that will grow income tax; the base is fundamental.

The Government does some really helpful ready reckoners around income tax: for example, increasing the higher rate by 1p yields £88 million. We are talking about the numbers, but we are also talking about earnings—a 0.1 per cent change in earnings is £25 million. Very small changes in the performance of the economy can have a really significant impact on the overall earnings base, which is why broadening out that tax base is really important.

Just to finish off on that point, at your breakfast in the Parliament event some weeks ago, we focused on the potential high-growth areas of financial services, renewables, digital industries and technology. Are there other areas of the workforce where we have a chance of better, higher-paid jobs that will widen that tax base?

You are right; the nature of the economy is that some sectors will naturally be more productive than others—some sectors are naturally high earning in relation to others. From an economic policy point of view, you can do one of two things: first, you can try to grow those high-performing sectors in your economy relative to elsewhere. Things such as financial services, energy, renewables—which you mentioned—and so on are really important because they are naturally high productive sectors that will then generate the broad tax base that you want.

Secondly, that is not to say that you should not also think about what you can do to boost productivity in the other sectors in the economy—such as hospitality, care, public services and so on—because if you can make them more productive, they will improve their earnings as well. It is about riding the two horses: the first is attracting and growing the high productive sectors; the second is asking how you can make other sectors in the economy more productive.

Good morning. What has been said leads on quite neatly to my questions on capital expenditure. We know that block grant funding from the UK Government is the largest component of the Scottish Government’s capital funding. The commission’s projections suggest that that funding will, in nominal terms, be cut by 14 per cent between 2023-24 and 2028-29. How will that cut affect the productive capacity of the Scottish economy?

You are right that, on page 18 of our report, we talk about the outlook for capital spending, but the 14 per cent cut is in real terms. You are right that the block grant drives that.

In relation to our forecasts on what is happening in the economy, we capture changes in capital spending in the economic outlook largely through an arithmetic exercise. We just look at the change in spend; we do not capture in our five-year forecast the change in productive capacity as a result of that change in spend. It is just about the money coming in and out.

In our report, we have not made an assessment of the long-term benefits of capital expenditure. As I said, we just did an accounting exercise in relation to the money coming in and out. However, cuts to capital expenditure clearly have an impact on long-term productivity.

I will explore that a bit more. Could you all, as top-notch economists, say how productive capacity can be affected by low levels of capital expenditure? For example, you have talked about AI, research and development, productivity, economic growth and sustainable wellbeing or otherwise. It would be useful to get that on the record.

Broadly speaking, capital expenditure can have an impact on the economy because it means that more output can be produced for the same amount of effort. For example, transport infrastructure gets people from A to B more quickly, which means that they can do more for the same amount of effort. Transport infrastructure therefore has a direct impact on productivity.

Education infrastructure has a more long-term impact, but there can be real benefits over the medium term. If we improve the quality of the physical infrastructure for schooling, the benefits will be marginal but will build up over time.

Some Government capital expenditure might have less of an impact on productivity. Naturally, if the expenditure was on a Government building or a prison, we would not capture the impact on productivity.

Crucially, it is about how we can change productive capacity largely by improving the way in which the economy operates. Historically, the UK as a whole has lagged behind key competitors in that regard. That is one of the potential explanations for the long-term productivity puzzle in the UK relative to other countries.

You have prompted my next question. Off the top of your head, do you have any figures to show how capital investment in the UK over, say, the past 10 years compares with that in other states?

I do not think that we have looked at that. I do not know whether Francis Breedon can say anything about comparisons.

No. Obviously, there is a big difference between private sector investment and public sector investment, and the situation varies because some countries have much bigger public sectors. That is me saying that I cannot answer that question.

We can write to the committee on the issue. Why UK productivity has lagged behind is one of a number of questions about which people have speculated. We can think about capital investment in connectivity and digital infrastructure. If we compare digital infrastructure in the UK with such infrastructure in the best Scandinavian countries, we can see the difference. There are also other factors, such as management practice and so on, that might explain the differences in productivity. Capital investment is crucial in the long run.

To follow on from that, you have indicated that the Scottish Government may receive further funding from sources other than the block grant. What are those sources? What do you see as the key risks for their not materialising? In other words, I am trying to flesh out the extent to which those sources can be relied on relative to the block grant, which we know has been significantly cut.

On page 34 of our report, we talk about the different elements of the outlook for capital funding. As you mentioned, the Government gets the key chunk from the block grant. That is the most important element. Obviously, it can borrow as well. We talk a bit in the report about the constraints on borrowing and potentially hitting the limit. There is a really important point about the effect of inflation in eroding the amount of money that the Government can borrow, which has been fixed in cash terms since 2016. We have high inflation, and the amount that the Government can essentially add into capital is constrained.

The other funding that we talked about includes things such as city deals. Potentially, future city deals might come down the line, which might lead to additional capital funding that would be outside the block grant. That is a potential source of funding but that, of course, depends on policy choices by the UK Government. There is also the Scotland reserve—the money that the Scottish Government puts into it and moves from one year to the next. That is where it can potentially try to offset some of the negative block grant outlook.

Your contention that the block grant dominates is correct. That is where the money really comes from.

So any cut in the block grant has a potentially significant impact.

Yes.

I have a last wee question just to finish off. It strikes me that, because of the limitations instilled by a fixed budget, the narrative is continually about revenue spend, for very good reason—of course that needs to be scrutinised and monitored—without there necessarily being the same kind of awareness in the body politic of the implications of capital expenditure in investment terms. Is that something that, as economists, you see happening almost as an inevitable consequence? I can see that you are nodding.

Internationally, it is a very common issue that, when budgets are tight, a cut in capital spending looks like a very easy cut, because that does not create as much immediate pain as cuts in other areas. However, as your questions imply, although that does not create immediate pain, it has long-run consequences that have to be picked up later on. That is, sadly, a common feature of what Governments tend to do. In circumstances in which money is tight, capital seems to be a good place to start.

Is that approach even more prevalent in Scotland due to the tendency to focus on revenue because of the fixed budget?

Possibly. The fact that you are raising the issue of capital is really important. We need to think about what we will do about the capital budget and the allocations there.

I remember when there was a big debate about capital investment around 10 years ago. That was part of the Government acceleration programme after the financial crisis. There was a big debate and discussions about the value of capital investment, trying to accelerate that, and shovel-ready projects, for example. Therefore, I think that there has been understanding about the value of capital.

I know that the Government does the infrastructure investment plan and sets out how it expects the capital budget to feed through to those outcomes. However, you are right. The issue goes back to the conversation with Ms Smith about the long term and what we are doing to prepare for long-term challenges. Productivity is one element, and that is where the capital budget is really crucial. However, the question is: what are you investing in public services through your capital budget to help you to take advantage of the investments that you are making now for offsetting some of the long-term challenges down the line? The more you want from us on capital and the understanding of that, the better. We are more than happy to help.

Good. Thank you.

On the question about that being an issue in Scotland, in a sense your previous question shows that it is not that much, because the block grant is so dominant in the capital spending envelope. In a sense, Scotland is spending up to its envelope in capital, and it is the block grant that is driving that.

Okay, thank you.

10:30  

My questions might be a bit naive and all over the place because I am a new member of the committee.

I am interested in the point about inflation and how energy prices falling back is

“leading to slightly lower expectations for inflation and interest rates in the near term.”

From what I observe, core inflation has increased to 6.8 per cent and most commentators think that we are going to get at least one interest rate increase and probably two more interest rate increases, which will affect the housing market and mortgage rates. When do you expect to see a reduction in inflation? Last year, we were told that that would be in the middle of this year, but that has not happened.

I will go first; Francis Breedon can then come in.

You are right. The big story in town is what is happening to inflation and the effects of that. Inflation will come down quickly over the next few months simply because of the way in which it is calculated. It is looked at from one point in the year to the point in the last year. We had a spike, and it will naturally come down.

The key point that you are making, which is crucial, is about how quickly inflation will come down and how embedded any expectations about inflation will be over the next year or so. The concern that people are raising is about whether, although it will come down quickly, it level off at a higher rate. If that happens, the Bank of England will have to be more aggressive at increasing interest rates in order to bring inflation down. That is where things get challenging for the economy. The Bank of England faces a difficult trade-off between slowing down the economy to try to combat inflation and not tipping the economy into a downturn. We simply need to wait and see, and hope that we get things right over the next few months.

We have seen a really odd combination in that energy prices, which are the original culprit behind the inflation, have come down way faster than we originally predicted. You would have thought that we would have seen inflation falling more, but what we have seen is that the burst of rising energy prices that we saw last year is still working its way through every single other price, including food prices, even though energy prices have fallen.

That is one of the many reasons why we think the fall in the rate of inflation is happening. The energy price cap will be revised in July, and there will be a fall in energy bills in July and potentially in October. We know that those negatives are coming. However, your question implies that the core rate of inflation has been surprisingly resilient, given that we thought that it would have come down faster than it has.

To be honest, I cannot say that I have seen any evidence in my own bills so far of a reduction in energy costs. That is the important point. What people have to spend will have an impact on inflation.

I will take two or three points together. Michelle Thomson made a point about a 14 per cent reduction in capital funding over the next few years. Somewhere in your report, you said that living standards are projected to take one of the biggest hits that we have ever seen, and the revenue side will see a pretty small increase in the next few years. You have been asked a number of questions about comparative inflation and taxes. This could be described as a period of austerity. I am not asking you to do this, but has any comparison been done following austerity policies? Such policies are odd, given that the national debt has ballooned to £2.5 trillion. Are austerity policies working for the ends that were set out, or are other countries following a different path that is more productive? Have any comparative studies been done on that?

We have not looked at comparing with what everyone else is doing. We spoke about this back in December. The real challenge of inflation is in its hidden effect on living standards and the Government’s spending power. Even though we have really fast earnings growth in cash terms, that is being offset by high inflation. That is why we think that living standards will fall this year on the back of falling last year. That feeds through to Government. Even though the Government is increasing expenditure quite substantially, that is being offset by the effects of high inflation. It is important to tackle inflation and get it back down to a more comparable level so that we are not in a constant cycle of erosion of spending power, which, in the Scottish context, means erosion of the effectiveness of borrowing powers.

If it all works out correctly and we get inflation back down, we can start to get back on to a more normal path on which standard earnings growth can lead to improvements in living standards, as earnings are growing ahead of inflation. We still expect that that will happen and that disposable incomes will start to increase next year. It will take a while for them to get back to pre-energy crisis levels. The same goes for Government expenditure. It will start to rise again in real terms. However, within that overall envelope, the Government has really big pressures around rising pay costs and the costs of service delivery.

On earnings, we had a discussion earlier about projected comparative rates in Scotland and the rest of the UK. It would be useful to know whether there is any comparison between Scotland and the rest of the UK that excludes London. Also, I was surprised that there was no mention at all—perhaps I am getting it wrong—of the comparatively positive performance in Scotland on employment. Whether it is employment, unemployment or now, for the first time, I think, economic inactivity, the figures have been well ahead of those in the rest of the UK for a number of months. Surely that would have an impact. Is that part of your calculations?

You are right. On the comparison between Scotland and the UK, one of the slightly unfortunate things in the nature of the fiscal framework is that the focus is always on Scotland versus the rest of the UK. When you start to unpick that and take out London and the south-east of England, you get quite different stories about how Scotland is doing from an economic perspective, compared to other parts of the UK. We know from all the data that Scotland, outside London and the south-east, typically comes next in the rankings on most economic indicators. That said, the nature of the fiscal framework is that what matters and what we are signed up to is the relative performance of Scotland compared to the rest of the UK, including London and the south-east. That is why we focus on that so much and why it matters for earnings.

On the point about the labour market, employment levels and inactivity rates, one thing that we have seen in recent years—this is over the longer term so it is not just the most recent stuff—is that there has been a challenge with participation in Scotland and the UK, some of which is due to demographics.

In the report this time, we have quite a big discussion about changes in inactivity and the difference in data that we are getting on levels of activity between Scotland and the UK. One thing that we are not sure about yet—we need more data—is that, although both Scotland and the UK have declining participation because of age, Scotland has not kept up with the UK on participation among the key age bands, particularly in the middle of the demographics. We do not really know why that is the case. It might be a data issue or issues tied to the north-east and the loss of jobs there since 2014.

We want to keep an eye on those differences in participation at the midpoint of the demographics. There is quite a bit of discussion on that in the report, and we talk about the data—basically, the conclusion is that we are not sure yet.

Do you have any data on Scotland’s relative performance on FDI compared to that in the rest of the UK, excluding London?

Also—this betrays the fact that I have not been involved in these discussions previously—I want to get my head around the discussion on the reconciliation of £700 million. Earlier, you said that that is basically down to timing in forecasting. As best as I can tell—you can tell me if I am wrong—it is not down to any decision or financial act of the Scottish Government. Obviously, that will follow on from the forecasting but, initially, it is a forecasting situation.

The idea of any consistency in when you can do your forecast seems to be undermined by budgets changing every year or not taking place when expected. It is not like it used to be in the 1980s, 1990s or even 2000s, when you knew when the budget or autumn statement would happen. It has been all over the place in the past years. It would be interesting to know to what extent the Scottish Government is responsible for that adjustment of £700 million.

On FDI, do you mean foreign direct investment?

Yes.

We track measures such as data on foreign direct investment levels. Broadly speaking, there are two sources. The Government publishes data on business investment and we track that. It has done quite well in Scotland over the past year. That data gives us a broad sense of how the economy is doing. However, we also track more unofficial estimates, such as EY’s attractiveness survey, which give us an idea of how Scotland compares to the rest of the UK.

That all goes into the mix when we make our assumptions about the forecast. If, for example, we saw lots of data showing significant investment in Scotland, high earnings growth and lots of jobs being created, that would be factored into our forecast. Those are probably the two main sources that we use.

There are a couple of things to mention on the reconciliation for 2021-22. Our latest estimate is that the net tax position for that year will be negative, which means that the block grant adjustment will run ahead of income tax receipts. The reason for the big reconciliation is differences in forecasts. It is not about how the economy performed at the time; it is just about what assessment was made back in December or November 2020 by the OBR and then, by the Scottish Fiscal Commission, in January or early in the spring of 2021.

If you remember, at that point during Covid, the new variant was emerging in the run-up to the Christmas period and there were real concerns about the outlook for the economy, which was quite uncertain and negative. If we jump forward to when the Fiscal Commission made its forecasts in the early spring, you will remember that the vaccines had come out and there was at least a time path for getting through the situation, so the overall outlook was much more positive.

We have a table on page 11 of the economic and fiscal forecasts that looks at that. The budget-setting process said that the block grant adjustment would be about £11.8 billion. The latest forecast is that it will be £13.6 billion. When the Fiscal Commission made its forecast, it said that income tax would be £12.2 billion and the latest position on that is £13.4 billion.

Therefore, the income tax take has gone up by £1 billion but the block grant adjustment has gone up by £1.8 billion and the difference between the two relates to the reconciliation. On economic performance, although both have gone up, because the BGA was set in a much more pessimistic period, it has gone up by even more, which leads to the reconciliation.

To reiterate the point that we made before, although the timing of the two forecasts was a factor in that case, we should not think of that scale of reconciliation as a one-off that we will not see again. We should consider it as the sort of scale that we would expect to see. Although there were some rather special circumstances around that number, growing budgets mean that that is the ball park that we should think of.

I have a couple of questions about the calculations on social security spend in figure 5.3, which is on page 81 of your report. I would appreciate a little bit more information.

Part of the theory of the Scottish child payment is that, if we give families more income, we create the stability for them to find themselves in a better financial situation in which they do not require the payment. The calculations that you have in the figure show a dip over the next couple of years but that then slowing down over the last couple of years in the cycle. Will you explain a little bit about that tailing off in the decrease?

Are you talking about figure 5.3?

Yes.

It is largely due to changes that we made in our assumptions about take-up and the difference between eligibility and case load. We assumed a higher take-up early on relative to the end of the forecast period. The data that we have show that the take-up is ever so slightly less just now than it could have been but we think that it will accelerate and catch back up. That is why the gap is bigger just now but will ease off towards the end.

We also think that the actual number of eligible children is less than we expected in December. In turn, that reduces how much we think will be spent.

10:45  

How much of the reduction in the number of eligible children is a result of the reduction in the overall population versus the relative socioeconomic situation with regard to children? I think that, over the five-year period covered in the paper, we are looking at a drop of something like 25,000 children in the primary school roll.

One thing that I would say is that we are making judgments on the back of data that is still coming through, but one of the key dominant features with regard to eligibility is the change in the projections for the child population, which will be less than what we thought it was when we were first making these forecasts.

One would have expected a significant initial spike in the child disability payment as we transition away from what was a relatively hostile system under the Department for Work and Pensions towards the deliberately more generous system under Social Security Scotland but, according to the same table, the child disability payment is projected to continue to rise quite significantly. I understand why that would be the case for the adult disability payment, given that our adult population is becoming more ill as a result of a number of factors, but is the same driver behind the situation with the child disability payment or is it something else?

It is a mixture of both things. The inflows into the child disability payment have been higher than those for previous benefits, so part of this is to do with our projecting higher demand in future. Some of that is linked to the economic situation, but some of it is linked to higher demand and the number of children who have become eligible for these benefits.

About a third of the increase is down to UK-wide trends, while the other two thirds is related to the launch of the new payment.

On a different note—and moving away from that particular table—I heard at the start of the session Francis Breedon make a comment about the north-east no longer being as much of a drag on the Scotland-wide income growth figures over the next couple of years. When the committee took evidence—late last year, I think—on regional differences in income growth, we found that the really stark difference was between the east and the west of the country. That was reflected in the population figures, too, with all local authorities on the east coast projected to grow and Argyll and Bute and Inverclyde having the most significant decrease. How much of that regional data are you able to draw on for the purposes of this projection?

One of the useful things that we can get from the real-time information data is data on regional incomes and, in that respect, we have been very focused on Aberdeen, which historically has been the outlier. Scotland as a whole has tended to have rather similar earnings growth—and it, in turn, has tended to be rather similar to that in the rest of the UK—but Aberdeen has provided a variation. One thing that it has been important to understand—indeed, it has been a key part of our forecast—is the reason why Scottish earnings diverge, and what has been interesting in the latest data is that the Aberdeen area, which for a long period has had slower earnings growth than the rest of Scotland, has come up to the Scottish average.

That is in line with our story that the area will no longer be a drag on the figures—although, as Graeme Roy has rightly pointed out, it is really hard to judge at this point how long that will continue. We still think that the North Sea is a mature and declining sector and that the long-run trend is there in that respect, but what we are seeing is a bit of a mini renaissance in the area, because of what has been happening with energy prices elsewhere.

Is the west, then, going to become that drag? Are we going to see the gap between earnings in the east and west continue to grow? Concerns have been expressed about that—I have certainly heard them locally—off the back of the announcement of free ports being established in the north and the east of the country, but not in the west. I must stress that I am not in favour of free ports, but we are already seeing a fall not just in the population but in average income growth on the west coast compared with the rest of the country.

As you said, a long-term trend in Scotland over the past 20 or 30 years has been the shift east in earnings growth et cetera. That has been partly to do with the sectoral mix, particularly with the growth in financial services and energy in the east.

I guess that what matters now is what happens as we move forward, because all of that is baked into the baseline. The fact that earnings in the west are slightly lower than those in the east has already been reflected in the initial adjustment, and what matters is what kicks on from there. That is where the issue of relative performance will become really important.

As you were asking that question, Mr Greer, I found a really good chart that basically answers your question. It is probably not great for the Official Report if I just show it, but we can write to you with it. It shows the difference between UK and Scotland, and the gap that has emerged in that respect, but crucially it contains a bit about Aberdeen and the north-east that will help explain quite a significant chunk of the issue. As I have said, what matters is what happens as we move forward.

As I was bringing up the issue of free ports, another question occurred to me. Have you made any projections on the basis of their expected economic impact? I realise that we are still very early in the process.

No. We would need to see clear policy in that respect. For us, the question is: will it have a material macroeconomic impact over the course of the five-year funding horizon? We would need to make a judgment call as to whether that would be the case and what displacement and dead weight would be associated with it.

My final question is on the availability of data. I realise that this might be straying somewhat outside your remit, but I would be interested to hear your thoughts on this matter.

Obviously, you have access to significant amounts of public data that are not in the public domain, but when you look at some of the independent tax proposals that have been put together—for example, the paper commissioned by the Scottish Trades Union Congress—you see a significant difference between the additional revenue that the STUC says will come from some of its proposals versus what is in the ready reckoners. Do you think that there is enough information in the public domain to aid a healthy public debate on the issue? After all, it creates a bit of tension if the STUC says that putting 2p on the top rate will raise an additional £200 million and the ready reckoners say that that will be essentially net neutral.

Again, as you would expect me to say, the more information out there and the more accessible it is, the better. There are really good tax models out there—indeed, the Scottish Parliament has access to calculations in that respect—so I think that, as far as tax policy choices are concerned, people have the capability to set those things out.

Secondly, the issue that you have highlighted might well come down to behavioural changes. We have quite rigorous, open and transparent marginal taxes; certain behaviours will come into all that, and they will have material impacts on the end outcomes. The question, then, is: are the people out there with the other numbers doing that work? Are they talking about static or dynamic effects? That is, typically, where the big differences can be found.

It is worth adding that even if you were to get all the data that you ideally wanted you would also need a relatively long run of it in order to do the economic analysis. As far as Scotland is concerned, a lot of these questions are still relatively open, as we have only a relatively short run of data to look at. Moreover, with regard to behavioural impacts, we are obviously going to do as much as we can with the Scottish data, but that is why we have historically leant more on international evidence. That data is probably the same as the Scottish data, but there is a longer run of it and it can therefore be analysed in more detail than we can with the Scottish data.

I should add that we do not use that much private data. One of our general principles is that we prefer to use publicly available data, as it increases transparency. In any case, there is not a lot of private data floating around in this area—it is mainly public.

Thanks very much. That is all from me, convener.

I congratulate the committee and the witnesses for keeping us to time—we have done quite well. Is there anything else that the witnesses wanted to touch on?

No, convener. I just want to thank the committee once again for allowing us to come along and speak to you. We will be happy to pick up on the long-term and capital work in future conversations.

Thank you all for taking part and for your clear answers.

We will have a break and start again at 11 o’clock.

10:53 Meeting suspended.  

11:00 On resuming—