Seòmar agus comataidhean

That is right—as long as we do not become a more law-abiding society, of course. Thanks very much.

Mairi, the Deputy First Minister more or less said that the reason why we did not go down the road that we said that we would in November 2021 is that the UK Government said that the model was a kind of take it or leave it. Is that your understanding of the situation? Was the only room for manoeuvre that the Scottish Government had to accept this?

Good morning, and welcome to the 29th meeting in 2023 of the Finance and Public Administration Committee. The first item on our agenda is an evidence session on the Scottish fiscal framework independent report and review. We are joined by David Phillips, who is associate director of the Institute for Fiscal Studies and one of the authors of the independent report, and Professor Mairi Spowage, who is director of the Fraser of Allander Institute. I welcome you both to the meeting.

We have about an hour for this session. Before we move to questions, I will set the scene a wee bit. In November 2021, the then Cabinet Secretary for Finance and the Economy, Kate Forbes MSP, confirmed that the independent report would focus only on block grant adjustments. However, she said that the Chief Secretary to the Treasury had

“agreed this will inform a review that will be wider in scope”

to ensure

“that the current arrangements are thoroughly assessed and options for reform considered, and that input is obtained from a wide range of stakeholders as part of the overall process.”

On 2 August 2023, the Deputy First Minister confirmed:

“I have now reached agreement with the Chief Secretary to the Treasury ... on a package of changes to the Scottish Government’s Fiscal Framework.”

She explained that she had judged it appropriate to concede to a review with a narrower scope than the more fundamental review that was originally envisioned

“in the interest of securing long sought practical borrowing and reserve flexibilities, and to protect those arrangements that we already have in place which work in our favour”.

I wanted to note that in order to set the scene for the questions that will follow.

One of the things that the Deputy First Minister secured is the indexed per capita mechanism for calculating block grant adjustments being adopted permanently. What are the benefits of that to Scotland? Further on in the paper, it says that that will be reviewed every 50 years. Is that what they mean by “permanent”? Do you have another view of what “permanent” might mean in this situation?

It was not a negotiation between equals. Obviously, the Treasury always had the whip hand. We will certainly put the question to the Deputy First Minister, but no doubt she had to accept, more or less, the progress that has been made. Some of that progress is on capital borrowing, which will no longer be fixed at £3 billion in total and £450 million a year for capital expenditure. The limits will now increase in line with inflation. As Mairi Spowage has pointed out, that should really have been the case from the beginning, because the value of those borrowing powers has been eroding significantly over time.

I am interested in how the capital borrowing power inflationary impact has been assessed, because it is based on the gross domestic product deflator. Between 2023-24 and 2027-28, it is predicted to be 5.5 per cent. That is not the figure for this year; it is the total over the next four years. Is that in any way realistic? It would mean that the resource borrowing limit would go from £600 million in the current financial year to £633 million and the capital borrowing limit would go from £450 million to £475 million. How realistic is that, Mairi?

In your submission, you say:

“There is still a question though about whether the limits for forecast error are adequate given the risks the Scottish Government are facing ... Given that forecast error is all that this borrowing mechanism can be used for, it would seem sensible to consider that they should be extended further.”

The next item on our agenda is a round-table discussion on value added tax assignment in Scotland. For this session, I welcome to the meeting Charlotte Barbour, who is deputy president of the Chartered Institute of Taxation; David Phillips, who is associate director of the Institute for Fiscal Studies; John Ireland, who is chief executive of the Scottish Fiscal Commission; Professor Mairi Spowage, who is director of the Fraser of Allander Institute; and Mark Taylor, who is an audit director at Audit Scotland. We have around 75 minutes for this session. I would like it to be a discussion between us all. If witnesses or members would like to be brought into the discussion at any point, they should indicate that to the clerks and I will call them.

Initially, I will ask a question to Charlotte Barbour, and then anyone else who wishes to comment should let me know. The discussion will proceed in that way. It will be somewhat different from the last session.

In your submission on behalf of the Chartered Institute of Taxation, you said that

“the lack of a suitable model for identifying and assigning VAT revenues raised in Scotland, the lack of policy autonomy that would be afforded to the Scottish Government from a policy of ‘assignment’, and the introduction of additional risks to the Scottish budget”

mean that, in your view, this would be a highly risky adventure, so to speak. Will you expand on that?

I turn to John Ireland. In its submission, the Scottish Fiscal Commission says:

“we are still in a situation where the estimates of VAT raised in Scotland are too volatile to be suitable for the purposes of VAT assignment.”

We queried that. I specifically asked about Scotland relative to the other 11 nations and regions of the UK, because our geographic and demographic profile is very different. For example, our rurality is quite different from that of the Midlands, for example.

I will let John Mason in, but we have talked about VAT assignment, and everyone seems to think that it is a dead duck, for the reasons that have already been discussed such as the fact that the Scottish Government would not have any control over it. Do people feel the same about the devolution of VAT at this time or do people have different views on that?

Are there any further comments from anyone?

Thanks very much. There will be no fact-finding visits to Italy, Belgium or Germany. I want to make that clear.