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I think that it is pretty unusual. There is an unusual set of circumstances, in that the extent of the changes that might be made in the spring budget—given that it is an election year and given some of the noises that are being made in the media about what could happen vis-à-vis income tax changes—could have a profound impact on our budget.

That is not a number with which I am familiar. There is no number, as such, because the Scottish Funding Council is still to have discussions with the university sector about the places that will be available. The point that I am making is that 1,200 is the figure that has been referred to: I am explaining to you why there is a bubble and what its legacy is. The Funding Council is discussing with the universities the number of places, in order to settle on a number that is affordable and sustainable.

First of all, growth is a priority. Earlier, I set out some of the economic indicators in the Scottish economy that show an improving position. The strategic investments that we are making, particularly in net zero and green energy, are the right investments, and we have been encouraged by the investor panel to make them. However, there is no getting away from the fact that, with less money on the resource side and particularly on the capital side, we cannot make the investments that we would want to make. We cannot do that, because there is less money.

We have had to make some very difficult decisions on where we make the investments. For example, we need our enterprise agencies to focus on the key priorities, so there will be things that they are not able to do. Our capital investment is geared to try to use public capital in a strategic way that levers in private sector investment. All those things will be critical to continuing to see the improvements in economic performance that I laid out earlier.

I come back to the point that, with less money, we have had to make difficult decisions, and that has impacted on areas where we would rather not have had to make those decisions. However, there is no escaping the fact that decisions had to be made somewhere in the budget, and those are the decisions and priorities that we have made.

First, you are right to identify some of the very big challenges for the construction sector more widely and the housing construction sector more specifically. Interest rates are still high, there is inflation in the cost base, and all of that has led to some of the difficult decisions that have been made by the companies that you mentioned earlier.

That is the backdrop, so we have to think about what we can do with the £556 million investment that we are making and how that can deliver the biggest impact. I spoke earlier about the housing minister’s discussions with the private sector about levering more investment into mid-market rent opportunities. There is an appetite in the investment sector to invest in housing and we must harness that in a way that can provide a business model for doing so. The housing minister is working on that.

It is fair to say that the profiling of the target will have to change. There is never a straight road to a target: there are always bumps, peaks and troughs in delivery. It is fair to say that we are looking for back-end peaks but that we have a very difficult outlook on capital at the moment. That might change, but that is the outlook at the moment for our capital budget reduction. We cannot rely on public capital and must look at alternatives, which makes delivering the target very challenging indeed. Having said that, we are already more than 14 per cent into the delivery of that specific target, but there is still a long way to go.

Clearly, we have no intention of doing that. The big negative tax reconciliation that we thought that we were facing next year, which has been reduced—thankfully—was, of course, very much related to the forecasting during the pandemic. The figures that Matthew Elsby set out for the percentage risk demonstrate that it would not be anticipated that we would have a negative tax reconciliation of that magnitude very often. It was very much related to the set of circumstances at that time.

I am very clear that the uncertainty associated with the proposed approach to VAT assignment, along with your point about no additional fiscal or policy powers being granted to manage it, is an inherent and currently unmanageable risk to the Scottish budget.

A lot of the work that has gone on has tested some of that. In the fiscal framework review, we got to an acknowledgment of the complexity and risk. The concerns then really need to be addressed by both Governments. Officials have met following the conclusion of the review to establish where both Governments stand on the matter and to discuss next steps.

There will be another meeting early in the new year at which I think that evidence from this committee will be part of the discussion on whether the conclusions on VAT assignment are now clear in relation to the recommendations by all the experts and the evidence heard at this committee.

The outcome of those discussions will be considered at a future meeting of the joint Exchequer committee. My intention would be to keep the committee updated on that outcome. The process would need to come to a position that is acceptable to both Governments in relation to what happens next, rather than only one Government giving its view. I am very aware of that and I would like to get to an agreed position on what we do with the issue.

However—in total agreement with the convener—I would not countenance taking on that inherent risk without any of the policy levers. To be charitable, it was perhaps simply not fully understood at the time that the inherent risk and the impact on the budget was going to be borne totally by the Scottish Government. In light of all the evidence that we have now, I would like to think that we would come to a pragmatic and sensible conclusion.

That is a fair comment and a fair assessment, and we would have to consider that. The principles were a set of compromises that emerged from a political negotiation. We have probably learned from that process. In relation to what we just discussed about VAT assignment, it is necessary to be clear and careful about what is part of that negotiation. Some of those areas were inserted into the Smith commission at the last minute.

The principles would need to be looked at. We would be in a completely different era with a completely different set of arrangements, so we would have to look at it in the round.

That point has been made on a number of occasions. There is scope and a need for a discussion of those fundamental issues. We would have liked to have got into that space, but, as I said at the start, when you are in a negotiation, you can only negotiate within the parameters of the other party’s willingness. In this case, those parameters were narrow, so a judgment had to be made.

Those issues remain on the table. As you have pointed out, the prudential borrowing powers of local authorities are markedly different compared with those of the Scottish Government and other devolved Administrations across the world, and that is not acceptable. Those matters remain live and we want to get into the space of further negotiation on them. However, this negotiation was very limited in scope.

We had to be pragmatic. I would not want to underestimate the gain that was made with the adoption of the indexed per capita block grant adjustment methodology on a permanent basis. In my opening statement, I set out that that could be worth around £500 million per year by 2026-27, so that was important. I was also mindful of the potential negative tax reconciliation quantum for 2024-25. We are now in a different space with the quantum, but at the start of the process, we did not know what it would be and it would have had a material impact on our budget next year. Therefore, being able to increase our resource borrowing powers from £300 million to £600 million was important, and that will be able to cover all the negative tax reconciliation for next year. Those things were uppermost in my mind. I accept that, if we had started with a fresh negotiation, other matters—some of which you have mentioned—would have been on the table. However, in order to secure some immediate benefit, I made that judgment and that was our conclusion. The negotiation took place within a limited window of opportunity.

Thank you, convener, and good morning. I am pleased to have the opportunity to attend this meeting to discuss the recent fiscal framework review.

The agreement with the United Kingdom Government to publish an updated version of the Scottish fiscal framework on 2 August fulfilled a key commitment in the First Minister’s policy prospectus. Since the fiscal framework was agreed in early 2016, it has been thoroughly stress tested as Brexit, the pandemic and the cost of living crisis have unfolded. Therefore, it was right to review arrangements and consider improvements.

The new agreement with the UK Government includes a balanced set of changes that strengthen the financial management tools that are available to the Scottish Government and provide the Scottish Parliament and the Scottish Government with greater long-term funding certainty. That said, I want to be clear that the review was not as broad in scope as the Scottish Government would have liked it to be. That reflects the fact that the scope and process for the review and its outcome were subject to agreement with the UK Government. Nonetheless, under the circumstances, the revised agreement represents meaningful progress and a good outcome for Scotland.

The adoption of the indexed per capita block grant adjustment methodology on a permanent basis is a significant win for Scotland. The authors of the independent report estimated that the use of the indexed per capita methodology for calculating income tax block grant adjustments alone could be worth around £500 million a year by 2026-27 compared with the use of other methodologies that were considered in 2016.

The agreement also provides a substantial increase in the Scottish Government’s resource borrowing powers to manage tax and social security forecast errors—the amount has doubled from £300 million a year to up to £600 million a year of borrowing capacity. That greatly improves the Scottish Government’s ability to manage and smooth funding volatility driven by forecast error.

The removal of drawdown limits on the Scottish reserve is also an important development. It provides a significant increase in reserve flexibility and improves the Scottish Government’s ability to manage funding across financial years.

The agreement to uprate borrowing and reserve limits in line with inflation ensures that the effectiveness of those powers will be maintained in real terms, which makes Scotland’s financial management arrangements more sustainable.

Taken together, and within the context of the narrowly scoped review that was on offer, those are meaningful improvements to the framework and the financial management tools that are available to the Scottish Government.

That said, we should not lose sight of the scale of the fiscal challenge in the aftermath of the pandemic, the on-going cost of living crisis and the urgent need to tackle climate change. Although the changes to the framework are welcome, they are not of the magnitude required to offset that broader fiscal challenge. That requires action by the UK Government and I hope that the Chancellor of the Exchequer will heed calls from the Scottish Government to take action on public services, fuel poverty, net zero and the cost of living as part of tomorrow’s autumn statement.

I also understand the concerns that the committee expressed about the process surrounding the review and its timing. The Scottish Government’s preference had been for a process involving broad stakeholder involvement. However, when a window of opportunity emerged earlier this year to conclude an agreement with the UK Government on changes to the framework, I was mindful of the value of securing borrowing powers ahead of the 2024-25 budget and that we were dealing with a UK Government that is likely to go into election mode soon. In that context, I judged that it was appropriate and prudent to conclude a deal when it became possible to do so.

I hope that the committee recognises the improvements that have been secured through the revised agreement and I look forward to discussing the detailed arrangements.