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On council tax, I am sure that you are aware of the joint working group that we are involved in with the Convention of Scottish Local Authorities, which is looking at local government taxation generally and broadly. Some progress has already been made on the issue of second homes and empty homes. The group will also have the space to look at council tax reform, albeit that it is a longer-term ambition to get that right and to get it agreed.

The working group provides a forum for those discussions to take place. It is also set against the backdrop of the new deal for local government. Part of that is about the fiscal framework, which is being worked on. A partnership agreement has to come first to set out the principles, and that will be announced soon. The fiscal framework will look at how local government budgets will be taken forward. I think that it is no secret to say that what we are talking about in that regard is more flexibility and working with local government on revenue-raising powers. One of the latest such powers is the visitor levy, which local government was keen to have. Councils can choose to use or not use that power. That shows that our direction of travel is to empower local government with more flexibility and more levers.

With regard to the external tax stakeholder group, it is important that we hear from a range of stakeholders. We will send out invitations imminently. The views of that group will be quite broad and will range from a desire for us to go further by using tax levers in a progressive way to a desire for us to be more constrained with tax levers. It is important that we hear a range of views. Ultimately, the Government will have to come to a view and, when we set out our stall on our tax proposition for 2024-25, it will take all those views into account. We will look at the pressures on the budget, but also at the need for fairness in taxation and the need to land in a space that balances all the competing demands.

As soon as we send out the invitations, I will be happy to furnish the committee with the detail of who will be on the group and the meeting schedule over the summer. It is my intention to have a series of meetings over the summer and in the lead-up to the budget.

First, I agree with your premise. We have to deliver against one rule that is set by the UK Government, and that is to balance the annual budget—that is a requirement. We have to deliver that fiscal rule with the limited fiscal levers at our disposal, with no ability to borrow for the day-to-day spending as other Governments would and with almost two thirds of our funding tied to UK Government spending plans. That is the backdrop to the challenges that we have.

I will answer your question in two parts. First, in terms of the review, the aim is to secure some immediate improvements. If you were looking at it on a scale of 1 to 10, with a major or complete rewriting of the fiscal framework being 10 and no change to it being 1, we are somewhere in the middle. We want some significant adjustments to the framework to help us manage some of that difficulty, but we are not going to get to a complete rewriting of the framework at 10—that is just not the territory that we are in. We need to take what improvement to our position we can get and that is what we will do.

Secondly, there is the wider question of the future. We absolutely need to get into a space where we look at the fiscal powers more generally and, obviously, we have a very clear ambition for what that looks like. However, there are also opportunities under devolution to have far greater fiscal power. Local authorities have more fiscal powers in terms of borrowing than the Scottish Government has and that cannot be right. The Welsh Government is similarly minded that we need to get back to some of the fundamentals here.

There might be opportunities in the future to negotiate something far more ambitious that can change some of the fundamental restrictions and inherent links to every UK Government funding and spending decision from which we take the consequentials and which quite often are not positive. That will not be achieved through what is quite a technical review of the framework in the here and now, but my ambition is that we need to go much further than that in terms of how the current system operates.

We know that it was £900 million above what the budget had programmed for. On the entire pay bill, I have in mind something around £24 billion, but I can come back with the exact figure. It is a large chunk of the budget. The figure is over £24 billion. It is clear that most of the money goes on pay. The point that I made to Keith Brown was that, because of the pay deals to try to avoid strike action, for example, and because of inflation costs and people’s household budgets really suffering, we wanted to try to reach settlements that were as fair as possible. It is clear that pay is the main expenditure in the accounts and that any addition to the pay bill will be considerable. Those things need to be balanced.

I will bring in officials in a second.

It is correct that we have a larger public sector in Scotland and that it is better paid. Inevitably, that will have an impact on the importance of the public sector for the tax base. However, that is also a challenge because of the pay deals. As we have a larger public sector, pay deals will have more of an impact. We have tried to avoid strikes—quite rightly, obviously—and we have landed pay deals that are above what was budgeted for. That is one of the challenges to which the SFC points. Nevertheless, that is an important element of our economy and in relation to delivering public services.

I do not know whether Andrew Scott has anything to add.

The gap that you talk about cannot all be closed by taxation. I have not said that. What I am saying is that in our spending plans, focusing and targeting on the four key missions that I mentioned earlier, all the pillars are important. Tax is one, but it is not all. Having the powers to raise more money is clearly also important. If you look at the SFC forecast of nominal earnings in Scotland, it is talking about that going through a period of higher growth relative to the growth in earnings forecast by the Office for Budget Responsibility for the rest of the UK over the next five years, which will support our tax base. Therefore, although taxation cannot be the only answer, it is an important part of the equation and it is looking more positive. Aside from what we choose to do in terms of the tax policy, the revenues are looking more positive, which is something that we hope is welcomed.

On this morning’s figures, unemployment is still below that of the UK; employment has fallen slightly but is still in a good place. You are right about economic inactivity, which is why the action that we are taking to support people into work is important. Bearing it in mind that there are acute labour shortages in many sectors, we need to join the dots to support people into work and to make sure that, whether it is through training, skills support or childcare, we help people into work and into better-paid work and additional hours if that is what they are seeking.

I appreciate that.

Clearly, the employment rate going down is not what we would have wanted to see, but there are a couple of points that I would like to make.

The employment rate is still in a good position, and labour market information tells us that there are big sectors in the economy that are struggling to recruit. Employment levels are still high and the economy is improving. The unemployment rate here is lower than the rate in the UK as a whole. The figure that I gave earlier, which I think was in response to Liz Smith, as a barometer for income tax showed that, according to HMRC data—the labour market statistics on payrolled employment in Scotland, which are important because those people pay tax—there has been an increase since April. There are 56,000 more people paying tax than pre-pandemic in February 2020 and 28,000 more than last May. As I said earlier, that is a good barometer for income tax, because it means that more people are paying more tax.

I am not at all complacent, which we should not be about the ONS figures. We need to see what the trend is and what the next set of statistics shows. In our economy, GDP is growing faster than it is in the UK, the unemployment rate is lower and earnings are growing faster than they are in the UK as a whole. The SFC forecasts show that that will continue. All of that is cause for optimism, but we should not be complacent about the employment figure.

The figure that we should be more focused on is the economic inactivity figure. We need to get that down and get more people into work. That is why work is being done to ensure that people who need extra support to get into work are given it. If you were to ask me which figure concerns me the most, it would probably be the one on economic inactivity.

We do not want exponential growth, because bodies have to live within their financial means, but we must recognise the issues in social security and healthcare.

If you would like me to do so, I am happy to write to the committee to set that out.

No—not at all. I would not accept that. To be blunt, I need to set out in the 2024-25 budget how we are going to deliver all this within a balanced budget. There are no ifs or buts. The detail will be there and we will set out how we are going to close the gap, because we have to. Unlike other Governments, which can borrow their way through difficult scenarios, we must balance our budget. That is a fiscal rule that we cannot escape and we have only limited levers to use in balancing the budget. Since 2007, we have had unqualified accounts from the Auditor General for Scotland, which show that we have managed to do that, despite the increasing challenges.

You mentioned NCS and childcare, which are areas where we need to create some headroom. I spoke earlier about childcare. If we want to increase the very good offer that already exists, which we see as being clearly linked to the priorities of growing the economy and growing the tax base, we must create headroom to do that. We might not be able to do that in one year, in 2024-25, which will be a very challenging year in which to do anything at great scale, but we can set out multiyear objectives and priorities for spending. I will be setting out the detail for the budget and for our next few years of spending plans and priorities. Childcare is a good example. We must ensure that we set out what and how we will deliver in the next few years.

Far from

“hoping that something will come along”,

we must consume our own smoke. We have very limited levers, so what you have said could not be further from the truth.

We are meeting ministers over the next few weeks.