We have received apologies from Douglas Lums in who is attending our funeral today. The first item on the agenda is an evidence session with the Scottish Government's expert panel on the Scottish budget 2023-24. We are joined remotely by Professor Sir Anton Muscatelli, Principal and Vice-Chancellor of the University of Glasgow, Professor Francis Roon, Chair of the National Competitiveness and Productivity Council on Research Affiliate at the Economic and Social Research Institute, and Dr Mike Brewer, Chief Economist and Chief Deputy Executive at the Resolution Foundation. I welcome you all to the meeting and intend to look up to 75 minutes for this session and we will move straight to questions. Now when I ask questions, not everyone has to answer. I'll put them through yourself Professor Muscatelli and you can decide which of your colleagues wishes to answer. It can be more than one but it doesn't have to be more than one. The interim commentary set out the panel's thinking on how the Scottish Government could respond to the challenges that it is facing through the tax system and the wider implications for public services and the economy. It suggests that the Scottish Government will and I quote, need to balance providing short-term support to vulnerable householders and businesses and investing to grow and improve productivity and resilience of the economy in the medium to longer term, as it does so. If I can perhaps start, convener, on that. I think it's done it the best it can given the rather difficult situation that we're in in terms of public finances in the UK and therefore also in the devolved administrations. Obviously we are not here as an expert panel to comment on the actual budget, because those are political decisions where spending and tax are involved. However, what it's tried to do is to try to protect certain heads of spending. We've seen a protection of health and social care spending. We've seen a protection of welfare payments. As a result, by increasing taxes, it has been able to reduce the impact in real terms on the Scottish budget, but not completely. It hasn't been able to offset production and real spending, which has come through the erosion of the total finances that are available to the Government due to inflation. Obviously, it makes choices to prioritise certain heads of spending. I think that that's the best way I would put it to summarise it in a way that isn't a common thing, if you like, on the choices, political choices made by the Government. However, maybe I'll pass over to my colleagues to give verdicts on that. I don't know if Mike you want to come in and then Francis. Good morning, committee. The context for this budget was an incredibly difficult one, with the rising cost of living, putting huge pressure on household budgets and putting huge pressure on Government budgets. The Scottish Government is in a more difficult position than the UK Government, because the Scottish Government lacks the ability to sort of smooth out those fluctuations. The context that we are in is that the energy price shock has made the country poorer. What we are seeing all across the UK is a process of negotiation and bargaining and political manoeuvring as we work out exactly who is going to suffer, who is going to bear the price, who is going to suffer the most from the energy price shock that's made our country poorer. What I can see in the Scottish budget is decisions to increase the tax take towards the top of distribution and use that in order to put more money into welfare benefits and also to try and ease the pain that's coming to some Government departments because they face increased cost pressures at the moment. Given the constraints that you've mentioned, I realise that you don't want to stray on to political areas if you can, and that's obviously not going to be easy. In terms of the question asked about improving productivity and resilience of the economy, we need them to long term. You've said that it's done the best that it can do, and it's tried to do that, but is there anything that it can do differently to achieve these objectives? I think that one of the things that we said in our final report, which is really important, is that, to some extent this year, as the Scottish Government has been able to attenuate through its budget, new tax increases the impact of inflation. However, there are more difficult times ahead, and we have, as you said in our final report, we expect simply from the UK Government's announcement further constraints on fiscal policy ahead in the next couple of years. We don't know, of course, what will happen after a UK election that may not get tighter, but even on current projections, spending at UK level will tighten. This is an important time for the Scottish Parliament to think seriously about how it engages in public service reform to get the most efficient outcomes in terms of total public spending, because simply there will be pressures on salaries, on public service salaries, and therefore hard choices may need to be made. Some of the runway, if you like, has been taken up already in terms of additional taxation, and we may come to that in terms of a discussion about to what extent taxes can I verge in Scotland and the rest of the UK. In a situation where this year has been a protection operation, if you like, to protect certain public services, to protect welfare payments, but I think that serious thought needs to be given in terms of ensuring that growth can continue into the future, which allows that tax aid to increase. One other point to make is that, if you look at the Scottish Fiscal Commission's report, it is part of the additional rule for manoeuvre for the Scottish Government. It has come from some of the revisions that they have made to tax take over the next three years. Those may or may not be realised, but for them to be realised will require the Scottish economy to grow. Therefore, again, I would certainly urge the Scottish Parliament to think seriously about how spending not only this year but the next two years will be allocated to ensure that that growth continues. Francis, I don't know if you want to come in on this point. I thank you very much. It is very pleased to be here this morning. When I was asked to come on this committee, it was very much as an outsider, so I am not on top of the detail of the budget of the Scottish Government. However, I guess that, like a lot of economists outside of the UK and, indeed, I suspect in the UK, we watched what happened earlier this autumn with some surprise, because, obviously, everybody realises that increasing productivity is a very good thing in getting more growth, but, obviously, you want to do that in a way where the process is smooth and works in the right direction. The effect of this, I suppose, which I saw when I asked to join this group, was that massive uncertainty had been created across the whole of the UK as a consequence of what happened. Even those subsequent changes have made that better. It is still the case that there is massive uncertainty. I think that one of the roles of Government in the time of uncertainty is to try to give as much certainty as it possibly can. To me, what is crucial for that is that the short-term decisions with regard to a budget like this year is properly aligned with a medium, two to three years' out view. That was one of the points that we made in the reports that we have given. The importance of making sure that the level of uncertainty is kept to a minimum. At the moment, crucial to that is obviously helping households and businesses who have suffered this huge price shock and allowing them to deal with that in the right kind of way, and also getting into a situation that I am old enough to remember when inflation became embedded. I think that the big challenge for Governments everywhere at the moment in dealing with inflation is to make sure that welfare issues related to it are well handled, but that inflation does not become embedded in the economy. Crucial to that is making sure that the economy grows at the same time. For me, the crucial issue for a Parliament is to make sure that what is being done in the short term will align well with the Scottish economy growing in the medium term in a fair and sustainable way. Of course, we are all very much more conscious now than we were a couple of years ago of how important that sustainability is in all its dimensions, not just energy. It is important to achieve the right type of growth that is sustainable and in line with other wider policy objectives such as reducing inequality and the transition to net zero. Clearly, you will not be recommending the building of a giant coal mine that I am suggesting in Cumbria. Can you give us examples of some of the sustainable right type of growth that will reduce inequality and the transition to net zero? I am sorry, but I will try to put the questions to Professor Muscatelli and he can then decide who answers.  The issue in relation to sustainability is making sure that what people in Europe are talking about is in the EU, not in Europe. The EU discusses that as a dual transition, so making sure that you are optimising the use of digital technologies to be efficient in, for example, what Professor Muscatelli mentioned earlier on, the delivery of public services and making sure that the public sector is as efficient as it can be, but also the ones relating to climate so that you are effectively getting investment taking place that is helping the climate agenda and is actually assisting companies and enterprises in getting to a stage where they are well set up to be able to sell them to international markets in a way that will work 5, 10 or 15 years out, and not just at the moment in terms of what is required. Professor Muscatelli talked about the importance of public sector reform programme, and the report says that that remains key. There has never been a more important attempt because of the prioritisation and public services and productivity enhancing reforms in the public sector. The Scottish Government's resource spending review published in May suggested that the public service reform programme would undertake over the remainder of this Parliament with additional outcomes to be reported in the 23-24 Scottish budget, but there is no mention of it in the Scottish budget. Is that an issue of concern to the panel? I think it is something that the Scottish Government and the Scottish Parliament need to really have in its sight over the next year or so. I think that the pressures that I say will increase in the next couple of years are on spending at UK level, which will have its consequences through the Barnett formula allocations. It is an important consideration, yes. Mike, I don't know if you want to come in on the overall UK picture. No, it's fine. Oh, sorry, no, nothing to add, thank you. Okay, thank you for that then. One of the things that you've also said in your report, sorry, is that the UK Government has announced two new fiscal targets, and it gives the UK Government more scope to cut capital spending to achieve its deficit rule by treating current and investment spending equally. However, that is potentially hampering productivity and economic activity in the longer run in reducing tax revenues. Now, we've seen that there's a £185 million reduction in the Scottish Government's capital budget for the next financial year, so how concerned are you about that? Mike, I turn this one to you, because, again, I think that overall budgetary position in the UK. Yes, that's fine, thank you. We flagged this in our reports, in our earlier reports. The UK Government's budget, Jeremy Hunt, did pencil in a reduction in capital spending from what were the generous plans previously announced by Chancellor for Issue Sunach, and of course that has consequentials for the Scottish Government. We noticed that we encouraged the finance minister to do what he can to try and offset that, because yes, it didn't seem to us that cutting capital spending at this time was a sensible action. It's been very welcome that we have noticed through the summer and through the autumn an increased focus from all politicians on the UK's fairly dismal growth record over the past 15 years, and low investment is a significant cause of that. That's chiefly the private sector, where the UK is lagging compared with other countries, but Government investment can help enormously, acting as an catalyst in certain areas. Yes, we've been urging the UK Government not to cut its capital spending plans, and in our report, we encourage the Scottish Government to do what it can to try and offset those. However, as I said in my earlier answer of what is limited to how much it can, it's essentially already taking full advantage of its ability to borrow, to try and offset the cuts that would be coming to the capital budget. You've said that the UK Government's decision not to enhance capital funding, given the high levels of inflation, will lead to a steep decline in the purchasing power of Scottish Government investments. This may hamper the Scottish Government's ability to meet its net zero targets and damage the economic recovery. Yes, absolutely. I completely stand by that. We're pointing the finger of blame principally at the UK Government, and then in the way that there are financial consequential costs for the Scottish Government, we made recommendations and suggestions to the Scottish Government, but, as I said, they are quite heavily constrained to how much they can offset the cuts in capital spending that are coming their way because of positions in Westminster. Okay, thank you. Just one final question for me before we open up the session to colleagues around the table. That's about taxation. We see that fiscal drag is going to increase income taxes considerably over the next few years. You've said that the Scottish Government should continue to consider ways that the tax system could be made fairer in better line to improving productivity and wellbeing, either through reforms to existing taxes of the introduction of new taxes. First of all, by 2728, what kind of share of GDP will be taken up by taxes compared to now? Secondly, when you say fairer, fairer to whom? We have an anomaly in Scotland whereby people who are earning, say, £45,000 a year on marginal tax will pay in ex-financial year 42 per cent in income tax and 12 per cent in national insurance, given a marginal rate of 54 per cent. Of course, on the remainder, they'll have to pay excise duty in VAT and all the rest of it, depending on what their lifestyle is. However, people over £50,000, of course, the national insurance level falls to 2 per cent, so their marginal rates are significantly less. When you say fairer, how can the tax system be made fairer, given those anomalies? Perhaps if I can address the second part of your question, convener, then my colleagues may want to come in on the first part, particularly on the overall tax take as a share of GDP at UK level. Obviously, it is quite difficult because Scotland doesn't control all the tax leavers in terms of income tax. You pointed out that there are interactions between income tax and national insurance, which means that in terms of earned income, marginal tax rates can vary a lot over the range. That is one of the issues that the UK is facing at the moment. Then you have the phasing of the personal allowance, which means that you have tax anomalies even further up the tax distribution. What we were thinking about largely—this is a personal view—my colleagues may differ around what other taxes may be thought about in the devolved context is probably around property taxes. If you are trying to make the tax system fairer, the one bit that is probably less progressive—I mean, the income tax system is more progressive than Scotland and the results were in the UK because it puts greater burden on those with higher incomes—but the one area where probably it is less progressive is around property taxes, because essentially you have a council tax system, which is still rooted in a system that has not changed very much and therefore has not yet been paced with property prices and property price differentials and wealth differentials across the country. If you are going to do anything, it will probably be in that area. It is also the area where, because any new taxes or tax changes have to be approved by the UK Government that Scotland may want to introduce, that is probably the area where we have most freedom to act. That is what was in my mind when we wrote that. Mike, I do not know if you want to say something about the whole tax burden issue and then Francis, whether you want to say something about progressivity as well. Yes, but with apologies, I have not got the figures to hand to answer your precise question, but I know that you are talking to the Scottish Fiscal Commission later this morning. I hope that they can be more helpful than I am. On the particular issue that you raised, stepping back and looking at the situation from London, what I see is the situation that you describe is what happens when you have the Scottish Government in control of some personal tax rates but not all personal tax rates. Indeed, I was going to make quite a similar point thinking about the child benefit withdrawal, which affects the main earner and families with children who have an income of between £50,000 and £60,000. You see their marginal rate go up by 13 per cent if they have one child and the further 8 per cent if they have two or more children. Of course, a UK-wide policy, which the Scottish Government has no control over, but which we also think about when we are thinking about marginal rates. Problems can arise when different bits of government control different bits of the personal tax system and they can then interact in ways that you describe. At the moment, I think that band of income is fairly small, but it is the case that the Scottish Government must be aware of those parts of the tax system that it does not control when it just makes decisions about those parts of the tax system that it does control. It needs to take account of those interactions and be mindful of those sorts of situations that you describe. Professor Roon, yes? Yes, just very briefly. I hadn't realised the full complexity of the way the Scottish income tax system has to operate, where your control of some leavers and not control of others and changes in other leavers effectively impact on what you are already doing. It's a very difficult and challenging situation. The issue of the scale of tax revenue in countries is one that a lot of countries, including Ireland, are looking at at the moment. We have just had a commission on taxation and welfare and a key part of that was recognising the greater complexity that we have had in the economy since we had our last commission on tax but also on something that is very important for Parliament, which is the sustainability of the income tax system, of the whole tax system indeed, and really making sure that you have sources of taxation, including taxation on wealth, which are very much less volatile when you get changes in the economy in the way that we've had at the moment. I would be very much thinking that it would be appropriate for the Scottish Parliament to think about how sustainable the tax system is to volatility. Are there the right elements in that? Obviously, removing as many of the anomalies that you have in relation to the interaction between what Westminster does and what you do in Hollywood, I think that that's a very important thing to get in play. Okay, thank you very much for that. I'm now going to open up the session. The first colleague to ask questions will be Michelle, to be followed by Ross. Good morning, panel. Nice to see you all. We're dancing around a lot of similar areas, and such as the advantage of the convener, often he asks questions that I might have liked to ask. I will follow on. We've already heard a lot about the limitations in terms of lack of borrowing powers, capital reduction and so on. I suppose that what I find myself thinking, both in the two areas that we've talked so far, in terms of a public sector reform programme and also in terms of how you drive up productivity, in behavioural terms, surely, for the Scottish Government, this fixed budget, limited borrowing powers, limited fiscal levers must influence behavioural ambition, if you like, for making a change. Such is the complexity of unintended consequences. That's the case for any Government, but surely it must be a factor of so much more for the Scottish Government. Perhaps Professor Muscatelli might like to give us some thoughts on that first. Yes, I think that there's no doubt that the lack of borrowing powers particularly around capital must limit the scope of action of any Government. I think that this is one of those areas where, again, the current devolved settlement is what it is, but if you look around other federal tax systems, you do see the ability to borrow more for capital spending in a number of other jurisdictions. You do wonder whether that might help, as you say, the reform of public service, because some of the public service reform might be around things like automation or areas where greater capital intensity or capital deepening will improve productivity. You're right. That's one area where those constraints will certainly limit the scope of action. Following on from that, in terms of a reform programme, it can bring efficiencies, but there's a cost to those efficiencies. Where you've got a fixed budget is not so much a cost, rather it's a reduction in spend in other areas that leads into this cycle. I'd like your reflections on how a fixed budget makes for real limitations in any public sector reform programme. There's no doubt that, given a fixed budget and rising salary costs, you will have to make difficult choices about what services you can and can't provide. This is an issue that Scotland will face and the UK will face as a whole. Therefore, which are the most immediate priorities? When we talk about doing more with less, usually that means doing something genuinely that improves productivity. However, as you said, there will be other things that you will not be able to do and therefore you have to prioritise. So there are some really difficult choices to be made there without a doubt. I would come back to a point that Mike made earlier. We're all poor as a result of this particular stagflationary shock that the UK and Scotland has faced. Therefore, that means that we won't be able to do as much, not unless you decide to spend and tax more, it's about where the burden falls. You're absolutely right. If the implication of your question is that it's not just about gaining productivity but also the diminution of services in some cases past prol or hard choices to be made, that's absolutely right. I suppose then, just to finish off on this point, a question to all of the panel. If, within the limitations of what the Scottish Government's power is, where do you see the biggest bang for buck in terms of increasing productivity? It may well be, Professor Rowan, that you've conceded that you're not as across all those limitations, so perhaps Dr Brewer or Professor Muscatelli would want to take that. Mike, do you want to kick off on that? Yes, but probably with a non-answer. I don't think that I have enough knowledge of what the Scottish Government is up to to answer that question. We said earlier that one of the most important things that any Government can do right now is to be clear on its strategy, is to make businesses feel able to invest themselves. It's about business confidence in the Government. It's about stability. It's about having a clear strategy. I see some of that in the budget that the Deputy First Minister announced. I also note that some decisions have been put off quite rightly probably because of the severe challenge caused by the cost of living crisis at the moment. Professor Muscatelli? To do with spending and therefore not all to do with the budget. I think that one of the things that the Scottish Parliament needs to reflect on in the next couple of years is, again, it's back to the point that Mike has just made. How do we ensure that business investment remains gross because it is very low in the UK as a whole at the moment? Some of that might not be to do with spending. It might be to do with important areas such as regulation, around areas of how you manage to drive innovation or co-investment between public spending and private sector innovation and investment. We made reference in our first report around the national strategy for economic transformation. I think that that has to be pursued with vigor because that is aimed at trying to genuinely lift business investment and productivity. It seems to me that, if I were in Parliament, that would be what I would be asking for, evidence of how that will be driven and what co-investment is taking place between the private and public sector in those areas of action. Okay, thank you, convener. Okay, thank you, Michelle. Ross, to be followed by Daniel. Thanks, convener. Excuse me. Just returning to the point around capital powers and the recommendation that you have made for the Scottish Government to maintain capital spend, you acknowledged, Professor Muscatel, you acknowledged the Government's limitations when it comes to capital borrowings. I just want to understand a little bit better how you think the Government can maintain capital spend when the capital budget is largely set for it through the settlement from the UK Government, because the options are essentially, you may think that the very limited capital borrowing powers are not being used well enough or that we could increase taxation further to increase capital budget or it could be a question of reallocation within capital because there's a belief that some capital spend is not efficient enough and that we could get more bang for a buck as such through reallocation. Could you just expand a little bit on how you think the Scottish Government can achieve that recommendation that you've set out given the limitations that you've acknowledged? I mean, if I'm happy to kick off, but again, I don't know if Francis and Mike you may want to come in. I think there are limited levers here. I think one possibility will be around trying to seek areas to go investment, as per my previous answer. I think that one of the other areas will be around seeing if there is any room for move from revenue to capital, but that will put even more pressure on public services. But these are all things that I think that need to be considered if the trade off is around creating more fiscal space in the future because you then grow the economy more and that means you have more resources at your disposal in due course. But I don't pretend that this is going to generate hundreds of millions of pounds. I mean, we are talking here about actions at the margin, as you suggest. As the budget clearly sets out, a lot of the pre-commitment around capital spend is around areas like the drive to net zero, which is clearly hugely important anyway in terms of sustainable growth. Francis, do you want to come in on this? I mean, it may be very obvious, but at a time of global uncertainty, what you want to do as far as possible is for government to play the role of giving as much certainty as possible. Clearly, Westminster did the opposite in the early and the autumn, but if you look at the Scottish government going forward, I think trying to be consistent and having, to be quite honest with you, what we call boring budgets, budgets that aren't full of exciting surprises but are doing the very standard, steady piece that's going forward. For me, the important thing would be to make sure that the capital spend is not reduced as a way of dealing with current problems and ignored, but the capital spend is done in tandem with the current spend, the revenue spend, as you call it. To me, that's a really important one. If you're talking about—I chair our Competitiveness and Productivity Council—one of the things that's very clear from the evidence that we have looking in at what companies are doing, they depend very much on the level of certainty given very often by the markets but also given by governments. They want to know that if there's a scheme in place this year, it's not going to disappear in next year's budget or be changed around that kind of volatility, really does not help investment, which is exactly what you need for productivity growth. The other issue is making sure with regard to productivity that government spend on things like the skills generation makes sense in the context of the way in which the Scottish economy is developing as it modernises and goes through two different phases. So I think that there's a lot of work to be done to ask questions on whether certain elements of capital and revenue expenditures that they both are in tandem with each other, and they make sense that they reinforce each other. Productivity is a long game, it's not a short game. Thanks very much. I could ask if anyone on the panel, and perhaps this is best directed at yourself, Professor Muscatel, is as our domestic expert as such, do you have any views on whether the government is using its existing capital borrowing powers effectively enough, acknowledging that they are extremely limited? Have you looked at all whether or not they could be better used? So we haven't looked to detail the particular projects, if that's the question now, and we've been looking more at the overview and whether they're fully met and they are fully expended, but I haven't looked at the detail of individual projects, so I can't comment on that. I'm going to swap over slightly. Switching to tax and your recommendation around continuing to make the tax system more progressive, I'd be interested if you have any views on the papers that have recently been published by the STUC and the IPPR, which largely focus on the introduction of new tax powers that both those papers included proposals around changes to income tax, NDR, et cetera, but they focus primarily on creating new power, particularly around property taxation, as you mentioned, Professor Muscateli. I'm conscious of the time, so I can roll in a second question here, very specifically on the higher tax band. Do you think that the range in the higher tax band is now too large? Should we be taxing people who earn between £45,000 and £60,000 at the same rate for that portion of their income that we do for people who earn between £100,000 and £125,000, for example? On the first point, I think that the easiest way to introduce any additional taxation which targets higher incomes or higher wealth is probably around property. It's the only feasible thing to do, because any new taxes have to be ultimately approved by UK Government. I cannot see any attempts to say tax financial wealth differently in Scotland. It wouldn't be approved, and secondly, it would be too easily eluded given the mobility of that land. Ultimately, land is the only thing that isn't easy to do. Land and property is the only thing that you can tax if you want to make the system more progressive in targeting wealth as well as income. In terms of what has been published by SGUC and others, we refer to one of the IFS papers around the Deetson review, which I think shows that if you look at targeting particularly the types of income and land included in property, you can gain some of the effects that you would from a wealth tax effectively, but not directly targeting wealth, which you couldn't given the current devolved powers. On the range of taxation, it's difficult for me to comment on exact tax bans. No, it would be fair for me to do so, because it would be strained to political terrain. Clearly, there are all sorts of possibilities that you can do. The one thing that you have to bear in mind is that, of course, the higher you go in the income range, the more mobile that labour is. Who will the incidents fall on as well? I think that this is a really important question. If you start taxing higher incomes—sometimes the burden will fall on the individual, but sometimes the burden will fall on businesses or indeed even public service organisations paying higher salaries because in order to attract people who are encouraged into staying in Scotland, they need to pay higher gross salaries. So, there are trade-offs there as well. One has to bear in mind, but I don't think that I would want to go into the detail of how I would design a tax schedule, since that's really a matter for ministers. Thank you. That's all from me, convener, unless anybody else on the panel wants to pitch in on that. Okay. Daniel to be followed by John. Can I start with a follow-up on both the answer that you were just giving there, Professor Muscatelli, and previously about property taxes. You've said twice that that would require Westminster approval. Assuming that what you're talking about is reform of council tax and non-domestic rates—and I think that a property tax or a land tax is a very good candidate for replacing one or both those—I'm just wondering why you're saying that that would require Westminster approval, because that is fully devolved if you were using it as a replacement for those sources of local taxation. If you could just clarify why you're saying that. I was simply saying that in relation to any new taxes, so not to reform of existing taxation, which is— Oh, you went in quite there, but that's fine. I mean, I'd just ask a further question. So, we recently had a very interesting—well, certainly for us—interesting conference on taxation that was held at the Royal Society of Edinburgh. In my view, if you're going to reform those taxes and you'd want to do them both hand in hand, they're both property-based taxes, but they've diverged quite significantly. I would say that council tax was only ever a temporary fix. Is your view that you'd want to reform both of them hand in hand? Indeed, would they both need to essentially be based on the same underlying principles, i.e. if you went for a land value tax, you'd want to do the same? Or do you think you could have a property-based tax for residential taxation purposes and a land value tax for commercial—do you think you need to do it in the round and do you think you need a consistent approach to both commercial and residential taxation? I think it would make sense to do it in a consistent way across the piece, yes, absolutely. At the same time, I would look at the progressivity of it and also where the incidence ultimately lies, because that's one of the issues. If I remember correctly, the RSE discussion around that, you have to look at it in the round, absolutely. I would agree with that. You also stated that, in essence, this budget was about dealing with the short-term shocks that we've had and, indeed, potentially the medium and long-term consequences. I just wondered whether or not the panel considers that there's sufficient focus on those. I think that there's clearly been a real focus on trying to create the envelope for pay awards. We're also dealing with labour market shocks. We're dealing with utility price shock, but, if we look at what's in the budget, we've seen reference to the warm building scheme. That was one of the budget lines that was cut in the September emergency budget review. Likewise, when we look at pay and the consequences in the health service, we know that delayed discharge is one of the key issues. Again, what we saw was a 3.8 per cent increase in the minimum pay. I think that it's fair to say that the focus has been on creating the envelope for pay increases. Is there sufficient focus on dealing with, essentially, getting people off gas or less reliant on gas, dealing with labour market shocks, dealing with the short-term issues that we're facing in our most fundamental public services, such as the health service? Do you think that there's that focus in this budget? Perhaps. I mean, I could say a word or two and then pass on to Mike, because, again, some of these policies have been enacted at the UK level, so he may want to relate it to that. Look, again, I don't want to strain us selling to political terrain as to what choices I would have made or I would have recommended in terms of the detail of that. However, there is no doubt that anything that he would do around trying to cushion the impact of energy prices is hugely expensive. If that hadn't been the focus, the focus had been less, as you say, on protecting the public service budgets from the salary increases and the inflationary salary increases. However, on other initiatives, I think that he would have put a strain on public service budgets. I mean, you could see the arithmetic of it would tell you that that's quite expensive. There would also be an issue of the interaction of anything that's done at the involved administration relative to what's done at the UK level, which is quite significant anyway, around the energy price guarantee. Mike, I don't know if you want to comment on that. I think that Mike is still struggling to get it. There we go. I think that I'm here. Thank you very much. I will describe this budget as being predominantly focused on dealing with the short-term challenges posed by the rising cost of energy and food. They have understandably not given it as much attention and as the depth difference might have wanted to, to all of the long-term challenges. This is partly because the fiscal situation doesn't allow the Scottish Government to do as much investment as it wants or for planning as it wants, but also because there are very real challenges this year. I see a Scottish budget that has chosen to prioritise additional welfare payments for the least well-off through the Scottish child payments and putting in extra resources to the public services, which are most under pressure at the moment. I think that that's it. There is a reasonable response to the really great challenge that we find ourselves all facing at the moment. You say that, Dr Brewer, but the Scottish child payment is flat from last year, so it's not going to increase. In fact, that would be a real-terms decrease, would it not? No, the increase of £25 last year will be making a substantial difference and does represent a major difference between the Scottish Government's approach and the rest of the UK, and will definitely help to protect low-income families in Scotland. One of the things that will make a significant difference to the budget both this year and future years is the spending that will go towards the creation of a national care service, but the issue seems to be that none of us can really identify whether or not that is included in this budget. There's a broad statement in the narrative saying that support will be provided. First of all, do you think that the Government should provide that clarity? Secondly, does that not indicate more broadly an issue around transparency? Will the panel agree with the Scottish Fiscal Commission that the budget should be stated on co-fog principles? The Audit Scotland's point is that policy commitments should be made much clearer within the budget, so I wonder what the panel's reaction to those observations is. I'm happy to have a quick go at that and I don't know whether Mike or Francis want to come in. There is absolutely no doubt that, in the case of major commitment like the social care element, there needs to be transparency in this. I wouldn't want to wish to second-guess Audit Scotland or any of the Scottish Fiscal Commission on what they said. I think that whether it's on that or anything else for that matter, if there's any new policy announcements, it's really important for the Scottish Parliament to understand exactly what the implications are on existing budgetary pressures. I think that it's a bit of a stretch to suggest that the Scottish child payment going from £10 in April this year to £25 next year somehow is a real-terms cut. No, it's just that in terms of the £25 that is carried over, it's just clarity about the changes that this budget can be now. Right. I won't get into that argument more at this point, but I'll pass on to John to follow by Liz. In your commentary or report, you talk about public sector reform and the public sector becoming more productive and you particularly mentioned digital technology, so I just wondered if you could say any more about what you think we should be focusing on or what should be changing in the public sector. Maybe if I turn that to Francis, if you want to, I mean maybe also from the Irish perspective and what the lessons might be from elsewhere and Mike, you may want to add that too. I mean, I guess it's a little bit like motherhood and apple pie. Public sector reform is always something that everybody sees as good. It's very challenging to do, it takes a long time to do and it needs government to be consistent. We've had issues in Ireland over the years where not having a sum of money available to invest in digital services, if you like, has slowed things down. What we were, as many countries faced, if you like, was an awareness that under Covid it was possible to do an awful lot more in different ways than had been done previously, so there was an enormous realisation of the potential that's there. I think the issue with healthcare in particular, the use of digital in healthcare, I think, is really important in terms of it being cost-effective, in terms of minimising burdens on both patients and on professions, I think is there. It's not the answer to everything, but I mean this change in the scale of digital is something that there must be capital money left, I think, to allow for that to happen. That's the major driver that would point to a difference between the public and the private services if you're talking about very large scale bodies. Just in relation to what Professor Muscatelli said earlier, one comment I would make is that in our first report we referenced the need for a realisation of what this shock has been. It's a terms of trade shock, it's made that we're all worse off, it's really important for parliamentary discussions in my view to recognise that. Where we were a year ago was not great, where we are now is an even bigger challenge, particularly to parliaments, to make really difficult decisions. Having that open discussion and recognising that is in the interests of everybody, including all of the members of the population of Scotland. Okay, that's very helpful, thank you very much. You mentioned when you're talking about where the UK is raising money from that new energy levies is part of that. I just wondered, I mean there's been some debate around energy levies as to whether you know that discourages investment or because they're one-off it doesn't really have an impact. I just wondered what your thoughts were on that as well. Just since you have an overall UK perspective. Sorry, yes, it was from a UK perspective that that obviously the levies are happening, yeah. Shall I start? Sorry, I didn't hear you address the question too. My view is that if now is not the right time for a windfall tax, which is effectively what these levies are, then when is the right time for a windfall tax? The profits are being made by oil and gas companies and by electricity generators, which are entirely due to events outside of their control, that seems to me to be the ideal time for a windfall tax. It's very clear from the way that the UK Government has announced them that its season must be in temporary and I think the way that they are operating should mean that investment is not lower than what it would have been had there been no energy price shock. Moving on, I think as I understand it your emphasis is you're more concerned about what's going to happen after two years perhaps than immediately. You say adding future fiscal commitments or pressures at this time given the spending outlook is unwise and would require a larger subsequent adjustment. I was just wondering if you thought things are happening. There are future fiscal commitments being made that shouldn't be made or if this is just a general warning that we shouldn't be making major new commitments at this time given what Professor Rowan just said that the whole country is becoming poorer. The latter interpretation is basically not suggesting that any unwarranted commitments are being made now and as we said the budget is constrained anyway but that harder times may be upon us in terms of total fiscal spending depending on what happens in the next few UK budgets. Just again to illustrate the point and I think it's really important to some extent what the UK budget did in order to try and stabilise the sustainability of public finances to debt to GDP ratio was pain postponed, spending controls coming in later on, lower spending as a proportion of GDP and capital spending reduction. We have to prepare for those that's essentially what our warning was in the report and also one other point. The Scottish Fiscal Commission and I know you're speaking to them after us have improved their forecasts around Scotland's tax take. That is largely, as I read their report, a lot to do with a more favourable interpretation around employment levels and income tax take. That may turn out to be correct but that's one of the riskiness of Scotland relying on its income tax base. If it's incorrect it will put further pressure on the budget. I've got no reason to disagree with the SSC forecast but it does present another element of risk on top of the potential reductions in spending that might come up at UK level. For both those reasons I think some caution is warranted in what might be possible in the future. I saw you used the word caution in the introduction as well. You're not really arguing against things like increasing the child payment or putting more into the health service. It's not that kind of fiscal commitment that you're really saying. Fair enough. I saw you quoted Andy Haldane as saying that the situation around health is having a break on economic growth. Can you just expand on that? Do you think that Covid, long Covid, waiting times in hospitals that is actually having an impact on the economy at the moment? Mike, do you want to say something about this? Again, this is a UK wide concern as well what is happening around participation rates in the labour force, etc. Yes, of course, thank you. That is an excellent question. Although the evidence is not clear, there is an emerging story that rising levels of ill health are now beginning to hold back the economy. They have always held back the economy but the health of the UK population is declining and that is leading. That means that we are less productive as a nation than we would be otherwise. The OBR pointed that out before the UK as a whole and the Scottish Fiscal Commission have commented on this all Scotland. I don't think that we know whether that is how much of that is due to Covid. I note that some of our own work has shown that part of the reason for the increased worklessness is due to mental health problems as well as physical health problems. Covid is exclusively the cause, but it is definitely the case that the UK is getting sicker. We can see that in labour force surveys where people report that they are inactive because of their health. We can see it in the number of people claiming disability benefits and the UK level of the OBR have written in a sharp increase in disability benefits claims over the next two years. In more recent months, we are also seeing people make links between NHS waiting times and some of that inactivity. The NHS waiting times in England are much worse than they were in the previous decade. The evidence is building. We need to be concerned about how the health of our nation is having a feedback to the economy. Of course, there is a vicious circle here. The less productive the economy is, the fewer people who are in work, the less tax revenues we get in order to pay for the health services in the first place. I think that all Governments need to be very wary of this. That is very helpful as well. The final point that I have and maybe it is yourself again, Dr Brewer, to start with. You mentioned that, although it is normal for debt to increase during a recession, the UK has failed to address the accumulation of debt following the financial crisis and the pandemic. Should we be worried about the level of UK debt? It is very hard to answer. Of course, there is no magic threshold above which the country is indeed in deep trouble and below which everything is fine. What is ultimately up to banks and Opposites organisations has to have whether they want to lend to the UK Government and at what price. At the moment, apart from being after the brief kerfuffle in September and October, they seem willing to lend to the UK Government at a reasonable rate of interest, but we cannot take that for granted. Were the UK finances to look like they were on a track of debt rising unsustainably, that would be a problem. We would see interest rates rise on Government debt and we would be in danger of a dangerous spiral. It is very unfortunate that the UK has been hit by two crises in close succession, the Covid crisis and now the cost of living crisis. It did not have time to improve the finances in between the two. It is also the case that we still have much higher levels of debt than we did 20 years ago when debt was around 40-50 per cent of GDP. In the long run, which means that beyond the five years of the UK Government or the Scottish Government plan, it would be ideal if the UK could bring down its debt level in order to create the fiscal headroom but is in a better position to cope with the next crisis that comes. That is undoubtedly the case. That is undoubtedly the case. There will be another crisis somewhere along the line. Thank you very much, John. Can I return to the question about improving productivity and wellbeing, which was very much one of the central themes of what you have been looking at in research? Michelle Thomson, my colleague, asked you earlier about where you can get the biggest bangs for the buck when it comes to improving productivity. You provided a couple of examples of that. Can I develop that a little further? We are in a very difficult situation right across the UK, but Scotland included where there is a very sizable number of people who are coming out of the labour market, particularly in the 50s to 60s age group. That has obviously got very significant implications for difficulties along the line in terms of productivity and the tax take. I think that it was Professor Muscatelli who mentioned earlier about the skills and labour market flexibilities. What do we have to do in your opinion to drive forward greater flexibility within the labour market and also try to ensure that we are retaining more people in that labour market than perhaps is the case at the moment? I am clearly on skills formation and whether we are producing the right skills and ensuring that we continue to invest in skills. I think that that will be one of the important considerations for Scottish Government going forward. At UK level, you have probably heard me speak about this before, but we need to look at how we use immigration to try to address some of the overall issue around skills. One of the damaging elements of Brexit has been the fact that we are not able to attract as many skilled Europeans as easily to the UK. Some of that has been obscured by Covid, but I have no doubt in the next three or four years that that would be an important consideration. How do we plug those gaps? Mike Burr has already addressed the issue around health and decisions to retire early. It would be interesting to see how that dynamic works out. I think that more research work has to go into that data on what exactly has caused the great resignation of the earlier timings of a lot of people dropping out of the workforce for mental health and physical health reasons. It is a complex problem, but I probably would say that we need to make sure that we plug those key skills gaps and therefore what investments we put into the skills base is going to be important. However, at UK level, we need to look at what we do in terms of ensuring that we bring in the skills that we need and that we cannot generate ourselves in a short order to make sure that we are not held back over the next few years. I accept that point to Professor Muscatelli. Can I ask you, which I know is a very close to your heart about the university sector, given its role in developing innovation and the digital technologies and helping to upskill people as well, what else do you think that the university sector has to do to improve the future skills of the graduates who are coming out from the sector? I think that that is again a really interesting question. I think that there will be a greater challenge on all of the tertiary education system further and higher education to make sure that we are able to upskill through the upskilling courses that Scottish Funding Council funds, but also through our basic sort of undergraduate and postgraduate provision. We target particularly those areas where the economy has bottlenecks. Increasingly, I think that we need very clear signals from, you know, we as a sector need to capture those very clear signals from the labour market and ensure that we provide in those sectors, in those courses. Again, I think that measures like the graduate visa route are really important. I mean the kind of measures that the UK Government has brought in that are really important because, again, they allow talented students to come and study the UK and then perhaps stay on, particularly in key areas like health, in key areas like digital technologies. Again, those kind of measures, I think, we need to sustain at UK level because that is where immigration policy is set. I do not know whether, Francis, you want to come in or Mike? The situation of giving graduates a prospect of being of employment after being there is really very fundamental. I think that it changes their whole attitude to the way they behave when there are students. They interact with other students in a particular way and I think that it is a very positive piece. I would just like to briefly go back to the earlier point. I was just looking at a chart this morning on, I think, produced by the OECD on changes in activity levels in the UK versus a whole load of OECD countries. The UK is up there with one of the highest increases in activity levels. I think that it has been very useful for Scotland to have a look at its position in relation to that to try to understand it. Ireland is actually at the opposite end of the scale for once where we are doing particularly well and it seems to be a lot to do with women going back into the workforce, which may in turn be due to policies that have been put in place to increase childcare arrangements for people and after-school care. It is just interesting to look at this chart. You are into a plus three and we are into a minus four in terms of reduced in activity rates. I think that Scotland may not be the same as the rest of the UK. I think that it would be useful for you to have your own look at that and not just take it that it is all happening in the same way. I think that it is a lot more heterogeneous as to why you get these changes taking place and they do merit attention. Thank you very much. That is very helpful. I am sure that we will have a look at that evidence. If you listen to what a lot of the economic commentators are saying just now, making the point that Scotland really needs to have more higher-paid jobs to help with the not just the flexibility of the labour market but obviously in terms of improving productivity and returning a better tax take, I think that what this committee is interested in is trying to find the ways in which Scotland can make the best use of all its talents and ensure that, as I say, we have more people going into higher-paid work because that is something that I think would benefit the economy hugely. Anything that the panel's reflections are on that would be very helpful. A lot of that has to be driven by the demand side as well as the supply side. I think that this is why I made reference to the national strategy and economic transformation. A number of actions have to be evidence and have real investment behind them over the next couple of years, which is again why we need the fiscal space. I think that if we focus on ensuring that the industries of the future, whether it is biotech, whether it is quantum technologies, whether it is advanced engineering, come to Scotland and Spain and those investments come here. That demand will drive its supply. Pictures like the tertiary sector will respond and more people will come and live in Scotland. As you say, it is absolutely key what happens to our tax base over the next three to five years. However, a lot of that will be driven by the demand side for skills and the supply side. I moved out. I assume that you would like the funding to follow in that priority area, where it would be helpful to have more money spent on innovation and on the university sector, for example, and ensuring that, as I say, we have a drive towards the industries of the future that are so productive? Indeed, and not only in the university sector, to be honest, also in trying to leverage business investment in this area. The kind of measures that we have seen around the tech scaler, for instance, we need to look at whether some of the things have to apply across other sectors of innovation and some of them will involve co-investment from universities, but some of them will be about essentially catalyzing business investment. My final point is that when you look at the national performance framework, which is generally agreed as being a good thing to have across the board, how easy do you think it is to measure where the best outcomes are within the national performance framework and, therefore, how much is that allied to Scottish Government policy? That's a really interesting question. I think that we've tried—economists have tried—for many years to try to focus on economics of wellbeing and how we trade, or how we have this balance scorecard approach, if you like. I think that it's a good guide in terms of understanding that it's not just about economic performance, but it's about more widely about performance in other sectors. Of course, it's very, very difficult to use it as a short-term guide on where to allocate spending. For the very reason that we discussed earlier, you have to trade off how much an extra pound spending in health versus an extra pound spending in economic development is going to make a huge difference to every indicator on that national performance framework. It's not designed that way. It's probably more designed as a retrospective saying, well, look how well have we done in the balance of all our policies, and here's a balance scorecard that allows us to then assess it. However, as a perspective, where do I put a pound of investment? It has to be based on much more granular considerations. Again, I'd be interested to hear whether Michael Francis has got a view on that as well. We all want metrics to see how we're doing, and we want to use them to make sure that we're doing more of what's giving us a higher return, the obvious, and getting out of things that aren't going, aren't doing it. I think it shouldn't be overly—I think one takes a second—everything to do with productivity is medium to long-term. This was the most extraordinary thing about the September fracae, what I call a fracae, and Westminster was really that it was about achieving productivity growth by Christmas. I mean, short of Santa Claus, this was quite an amazing concept. It's a very, very long, long game, and I think what Professor Muscatelli has said there is absolutely right. It's a question of making sure that you're identifying the weakest links in the chain. If the weakest link in the chain is under investment by Scottish enterprises here, then you need to look at that. If the one is the fact that you don't have the skill sets that people have got talent shortage in areas where they want to grow jobs, then you need to be looking at that. I think that approach of looking at where the constraints are, the barriers are to productivity growth, is actually something that every country can look at. I think it's quite revealing, and sometimes the constraints are not where they were in the past and sometimes people have policies that are dealing with where they were in the past rather than where they are in the present. That's really very fascinating commentary there. I mean, the budget has set out three priorities. One is tackling child poverty, the other one is sustainable public services, and the final one is moving towards net zero. Now, I always assumed that people in the North Sea were paid very well. People who worked in the net zero industry are not as well, but when I looked at the average income, it's almost exactly the same, just over £38,000 a year. Given that and given the priority that the Government has, how can we accelerate the move to net zero faster than we see the decline in employment and therefore the tax revenues, etc. in the North East? It's a really interesting question, and I'm not a huge specialist on energy economics, so I'll try myself, and colleagues may want to come in. I think that a lot of it is around ensuring that it's back to the point about trying to make sure that we fund innovation properly, that we fund co-investment properly between the research sector and the encourages companies to look at it. Ultimately, highly-paid jobs are driven by having a large segment of the value chain here. Drive to net zero can happen in two ways. One is where we simply import technologies and deploy them in Scotland, and that will create jobs, but it will not create the well-paid jobs across the whole value chain. The other is to make sure that, in addition to simply some of the manufacturing, we bring in some of the highly-skilled innovation jobs. That's why, again, coming back to the national strategy and economic transformation, it's looking at across the whole value chain. It's looking not only at particular sectors but at actual technologies and how Scotland can, particularly in the platform technologies, play a role. We've got some of the best universities in the world. Let's make sure that we exploit that research basis as per Liz Smith's question earlier. Let's make sure that it's not just about simply manufacturing devices around whether it's devices like batteries or other things that will help to drive to net zero, but we're actually driving some of the other parts of the value chain. I don't know, Mike, if you want to come in on this. Francis? No, I don't. That's not my area at all. Well, thanks very much, Professor Muscatellian. Thank you also to your colleagues for their evidence. This morning, I'll now call a five-minute break before we have the next panel. Thank you very much, everyone. I'm taking on the Scottish budget 2023-24. I warmly welcome to the meeting in person Professor Graham Roy, chair of the Scottish Fiscal Commission, Professor Francis Breeden, commissioner of the Scottish Fiscal Commission, and John Ireland, chief executive of the Scottish Fiscal Commission. I welcome you all to the meeting. Professor Roy, I understand that you would like to make a short opening statement. Great, thank you very much, convener, and thank you very much for the opportunity to come along and talk to you through our forecasts that we published last Thursday. The report comes at a time when the near term outlook for the Scottish and UK economies has weakened significantly over the last year. We estimate that purchasing power of household incomes has anticipated to fall by the largest amount since Scottish records began in 1998. Inflation is on track to peak at around 11 per cent by the end of the year, and it will outstrip earnings growth across our economy. Inflation is expected to drop sharply over the next year, and household incomes should start to recover in 2024-25. Crucially, the price level will remain higher than it would otherwise have been the case without the cost of living shock. That means that living standards will take time to return to the pre-crisis levels. The economy will just slowly to the two global shocks of Covid and the conflict in Ukraine. Despite the challenging backdrop, the net contribution of income tax to the Scottish Government's 2023-2024 budget has improved by £582 million since last year's projections. That is due to a number of reasons, partly to last week's Scottish Government's policy changes, but also to other reasons, including the revised data that pointed to a relatively better tax position for Scotland in the most recent HMRC figures and projected rising earnings. The positive income tax net position of the next five years marks a change in the funding position of the Government relative to what we previously forecasted. However, we deliberately took some time in our report to set out the caveats inherent in this assessment and the potential for change. Should either we or the OBR alter our assessment, then projections of the net position will change too. We are now six years into the operation of the fiscal framework, and we have a much better appreciation that those things can change, and they can change a lot. The Scottish Government will need to take that into account when setting their medium term financial strategy next May. As always, our report contains an account of our costings, of the tax and social security policy changes made in the budget. We estimate that the changes to income tax will raise an additional £129 million in 2023-24. The changes to additional dwelling supplement, LBTT, will add £34 million, and it therefore will be £356 million less raised from non-domestic rates. Finally, turning to social security, as we highlighted last December, the gap between our forecast social security spending and the funding received from the UK Government that is projected to widen, reflects the extra costs of delivering some payments such as adult disability payment, which we forecast to run ahead of the BGA, and distinct payments such as the Scottish child payment, which have to be funded from within Scottish Government budget resources. We estimate that the gap will be £776 million next financial year, growing to £1.4 billion by 27-28. Finally, as you know, convener, I wrote to you updating on our social security data needs, and we are more than happy to answer any questions that you have. Thank you very much. As we did not really touch on social security at all, in fact, in the last session I am going to start with that first. As you pointed out by 27-28, the social security budget will be £1.4 billion higher than it would be if those payments were obviously maintained at the UK level. Obviously, the Scottish Government has got three priorities. One is the move to next zero, another one is tackling child poverty, and the second one is sustainable public services. What impact do you feel that the £1.4 billion will have on public services? Just before you respond, what the end-suit of fiscal studies has said, as you are probably aware, is that the main reason why more services are facing cuts in elsewhere in the UK is that the Scottish Fiscal Commission expects Scotland's growing range of devolved benefits to eat and to be a share of its budget. Extra spending on benefits will help to tackle child poverty and support more disabled people, but will mean less for public services. There are a few things going on in here, so you are right. Our forecast of the £1.4 billion funding gap is essentially made up of two components. One is about £780 million on the net position between the social security benefits that are being transferred and the equivalent BGAs. There are a number of reasons why we think that that gap will emerge. In particular, the key driver is the different approach that the Scottish Government is taking to delivering social security benefits compared to what has been inherited from Westminster. That particularly has a big impact on adult disability payment, where it is quite a different approach that is being taken in there about the whole systems, about how you deliver those sorts of payments. I should caveat that there is uncertainty around that for several different reasons. One is uncertainties around the take-up of those benefits. However, also how successful the Government will be in delivering that different type of approach to social security. However, if all those things come to pass, that would lead to a gap of just about £780 million. However, crucially, there is an additional element for the social security benefits, where there is no equivalent BGAs adjustments. Those are new additional decisions by the Scottish Government to implement additional social security payments to, as you said, deliver those other broader outcomes around tackling child poverty and reducing inequality. We think that they add about £600 million for the end of our forecast period. That is where the totality of that £1.4 billion comes from. What then matters is how do you fund that and if that number comes to pass. Essentially, the Government has got two broad choices within that. One is to use the tax powers to try to raise additional net income to come through on that. We have the tables in here that talk about the net tax position and how that has evolved. The alternative element that you can do is to then re-prioritise within your devolved budgets into there. That is where there is a trade-off in here. That is the classic opportunity cost, whereas if you have priorities in some area, you are going to have to re-prioritise or shift the relative prioritisation from somewhere else. If you are going to fund more in social security, that has to come either from increased tax revenues coming through or it has to come from existing devolved public spending priorities. Broadly, the point that the IFS is making in that narrative is that if you are going to spend more in social security, then, with a relatively fixed budget, you can add to it with net taxes, but then you have to find other ways of funding that, which would then come from the general bloc of Scottish Government's funding. I should have said that myself and my colleagues will select all the questions Professor Roy and Professor Ock inside which colleagues wish to come in if at all with regard to any specific question. One of the things about the public sector is that 60 to 70 per cent of the money that goes into the public sector is actually in salary. Obviously, if there is £1.4 billion less because it is going to, for example, additional social security payments, then that means that you will obviously get less money to pay wages, and that is obviously going to reduce headcount. Has the Scottish Fiscal Commission looked at the overall calculations of the taxes that are actually paid? Obviously, the difference between social security payments and wages is that some of the wages will come back to the Scottish Government in terms of income tax, whereas that is obviously much less likely in terms of benefit payments. Has that been calculated at all in terms of you? Yes. When we do our forecasts for income tax, we will have forecasts for earnings of which public sector earnings will be part of that. Changes to that will feed through to our forecasts for income tax. If you expect earnings as we do over the next couple of years to increase significantly, then that is the key driver of what is happening there to nominal earnings, and therefore that is the key driver of what is happening to income tax. On the tax side, it is done. On the social security side, you are right that those are quite different flows of income to individuals. In the case of adult disability payments, they are going to particular special needs. If it is going to child payments, they are going into additional payments for children in there. They are quite different in that context about how they then feed through to nominal earnings in that context. It is accounted for, but the two payments are quite different in how they feed through. Of course, one of the issues is that benefits are going to be uprated in April. The consumer price index rate of 10.1 per cent, as it was in September, whereas the GDP to flatter is only 3.2 per cent, so that is of course a ridiculously low 3.2 per cent, given circumstances. Does that increase the gap even further? Because the benefits are being uprated, the ones with the BGA, have a block grant adjustment, because they are being uprated at the UK level by the CPI index, then the block grant adjustment will also be uprated by the same amount. Yes, the Scottish payments are going up by the higher rate of inflation, but so is the block grant adjustment. There are some marginal differences in there about payments where the payments that do not have a block grant adjustment are uprating of them will go up. I apologize, so I should have been clearer about that. Yes, I appreciate that. When anything does not have a block grant adjustment, you are uprating it by inflation, and that has a net impact on the funding. There is a bit of a discussion in the report where we talk about the different effects of inflation that do not have an equivalent BGA and additional elements into that. If I can just see if Francis or someone wants to come in, your broader point about the difference between CPI and the GDP deflator is really important, particularly when you are talking about wages. We know that, in particular portfolios, wages account for a significant amount of the totality of the spend in there. If you are increasing those in a way that I will not keep up, but trying to compensate for the very high increase in CPI inflation way above the GDP deflator, then a significant proportion of your budget is going up by more than the totality of the budget, which then means that the remaining part of your budget, which is day-to-day service and all that, has to go down in response to that. That is one of the really difficult issues with inflation, with high inflation in this context. It has that legacy depilitating effect on the ability of the spending power of Government, just as it does on us as individuals and households, as a same impact on Government. In the sense that the earnings side is slightly second round, because eventually those high earnings will create domestic inflation and will create GDP inflation. The tricky bit of the GDP inflator is that it does not include import costs, so that is particularly so. The lighting and the energy in a public building is excluded, and that will not appear. That is a problem with that measurement for using it for that purpose. I think that, in the midst of time, there was a decision making made that public expenditure should be deflated by GDP deflator, but there are times like this when everybody scratches their heads and says, why are we using this measure of inflation? It is only in these circumstances that when import inflation is driving everything, it really shows up what a poor measure it is. Hospitals and schools still have to keep the lights on, etc. Ambulances still need to be fuelled. The GDP inflator underestimates the real costs that is impacting on the Scottish and the UK budgets as we go forward. One of the things about the increase in the higher rates of taxation, etc, is the impact on behaviour. I was convener of the equivalent to the committee 10 years ago, when Professor David Bell was talking about that, then in research. What research has been done on behaviour and where the threshold is whereby you get to a tipping point whereby the increased revenue basically is offset by behavioural change. For example, people who can register in England rather than Scotland for tax, income tax purposes, incorporation or even people class themselves as self-employed, all of which I imagine have an impact at this time in any case. Where are we with that? The commission published back in March 2018 quite a detailed paper that set out the elasticity, what we call the tax elasticity, which are used to capture these behavioural effects. It tried to draw where possible an international evidence about how people respond to changes in taxation. I should say that there is quite a high level uncertainty around the tax elasticity. In some ways, elasticity is added to in a devolved context, because usually when you are talking about tax elasticity, you are doing it at one fiscal system, whereas here you have that potential additional bit where people could change their tax affairs depending on Scotland and the rest of the UK. There is an uncertainty around that, but in that paper it talks quite a lot about the different types of behavioural responses that people could make to changes in taxation. There is what we call the marginal response, which is people changing essentially how much they are working at a particular point in time to a change in tax. Or it could be changing their tax affairs to become incorporated, or it could be relocating where they are domiciled. That is probably the one that is most important when you are looking at the top end of the income distribution, because it is people at that end who tend to have the greatest flexibility to adjust their tax affairs. It is not evasion, it is not doing something illegal, it is just about they have greater flexibility to take some other income as being incorporated or to adjust their hours as a result of that. The evidence tends to be that those tax elastases can be quite high, at least relative to other parts of the income distribution when you get at that top end. That is why our estimates on things like the additional changes to the additional rate, we do not expect to have raised that much revenue in that context in comparison to the changes in the freezing of the immediate and basic rates, because people do not have the same ability. First of all, there is more of them. And secondly, they do not have that same ability to change their tax affairs, because most people are salaried, most people are subject to the PAYE system. We monitor those elastases all the time. There was a recent study by HMRC that had a first look at the Scottish context that was published, I think, in the summer, which looked at some of those elastases in here, and we will continue to monitor to see whether we need to change them. However, the caveat that we say is that the Government has to be careful about this and thinking about how much additional revenue might come in because of people's potential behavioural responses? That is something that the committee will have to look more at. I mean, we all want more revenue, but we do not want to kill the goose that lays the golden eggs, either, because there is always a balance to be struck. One of the other things, of course, in terms of tax, you have obviously given us some very healthy projected income tax net positions through fiscal drag, i.e., the reduction in disposable income for people as much as anything else. What is there going to be the difference in GDP in Scotland taking tax now as compared to £27.28? How would you see that shifting, the increased tax burdens, you would call it? John would not call that, but that is generally what it is called. It is not a calculation that we have done that looks at the total tax take and as a share of GDP in that context. Obviously, in the Scottish context, it is slightly complicated because you have obviously got reserve taxes as well, which have a potential impact on that. You can obviously get some calculation of some of the GERS numbers with all the caveats that go along with the GERS numbers, which would give you relative estimates within that. However, we have not ever produced a definitive devolved tax burden caveatied with that phrase as a share of GDP. I am not entirely sure how useful that would be. Basically, the Scottish Government is more or less, apart from higher rates, mirroring the UK in terms of thresholds. What is it going to be at UK level then by 27.28? I do not know that number. We know that it is going up. Across the UK, the relative share of tax as a share of GDP is increasing in the UK for a whole variety of different reasons. It is likely to increase in the future more generally as you move to higher costs of delivering the same level of public services in time. The relative position in Scotland, as I said, is that the devolved context is slightly complicated because you have all the other elements of taxation that are not included into that. It would be careful about coming up with a devolved tax proportion of GDP because there would not be an equivalent comparator in that context in the UK, but it is something that we can have a think about and look at for potential future reports. Okay, thank you. You have said in your report that high inflation means that over this year next, Scottish households are expected to see the biggest fall in their real disposable income since record began in 1998. Even once inflation returns to lower levels and real household income starts to grow again in 24.25, living standards will take time to recover to the pre-crisis 21.22. A forecast suggests that by 25.26, real disposable income per person will be no higher than its level a decade earlier. I am just wondering how that impacts across the different income distributions across the quintiles. Have you done any work to see who would be most, who is going to be most adversely affected by that and where the balance lies? Larger because we focus on the overall macro picture, which is the key task that we have to do to get the overall projection for the economy and how that feeds through to taxes, etc. However, we talk about in the report that the evidence that shows that people in different parts of income distribution face different rates of inflation and that largely comes from what the basket of goods that people consume. We know that people in lower levels of income tend to spend a higher proportion of their income on things such as energy and food costs, and as Francis was saying, those are the things that we typically import. Therefore, they are having it. People at the lower end of the income distribution are facing a higher rate of inflation than people at the upper end of the income distribution, and therefore, they face a greater drop in their living standards. Also, people on lower incomes have left what I have called discretionary spend, so the less ability to cope with the additionality that might be coming through additional pressures on energy costs or on food costs, the less savings, the less fixability, the less discretionary spend that you can adjust to cope with that, and that all means that that hit is going to be more disproportionate than the lower end of the income distribution. That is interesting and, indeed, is what one would anticipate. You have said that the underlying structure of the Scottish economy is undergoing profound shifts. You talk about the impact of the pandemic and more people working at home, while some people are suffering from prolonged health effects. I am just wondering whether you have looked at that. I know that we have taken evidence from various other panels in recent weeks, which across the UK around 600,000 people have left the workforce, and about 60,000 are being in the corollary in Scotland. Is that something that you have looked at as being a long-term consideration? Is that something that you think might be a one- or two-year blip in terms of your projections, in terms of future economic growth, et cetera? A couple of things. Do you want to come in, Francis? That is a very key question. We begin to look at it, but, in a sense, we are like everybody else. We are observing this unfolding in front of us as a relatively new phenomenon. We are all of us trying to understand quite what this participation effect really means. The data has got a slightly limited extent to which we can identify where it is all coming from, but it is obviously a mixture between the ill health, but changing attitudes towards work and participation is in the background as well. I am afraid that it is one of those that will have to wait to see somewhat whether that is a permanent feature or a growing feature of labour market participation. The frequent use of the word uncertain in your report, I have to say. I think that that is really important. One is the uncertainty in the economic climate. As we mentioned, who would have thought that you would have Brexit, you would have a global pandemic, and you would have a war in Europe and a cost of living crisis? The endless trust. All those things are in a relatively short period of time. We are in a period of particular uncertainty, but there is also an important point about understanding the uncertainty that is in the fiscal framework and how we manage that, and how movements in our forecasts and OBRs' forecasts feed through to significant changes in the budget. That is an additional layer of uncertainty, but I think that we are getting a better handle on that in Scotland about the scale of that. How do we manage that? That obviously has implications for the fiscal framework review, but it also has quite significant implications for how the Government plans its future budgets in a world in which we know that those forecasts could potentially change. The fiscal framework review continues to seem to be getting kicked into a touch, does it not? There have been delays on that. One of the things that I think might be more positive is that Scottish households tend to have smaller mortgage debt, while that is positive. Households in other parts of the UK mean that they will be less affected by rising interest rates and supporting economic activity in Scotland. Obviously, I would hope that that would mean that there would be less fluctuation in house prices about being also less decline and then less bounce back, more stability in house prices, but has that actually helped in any way in terms of the economic activity in Scotland? How much of a difference do you think that that will actually make? In our forecasts about how we think the recession will go in Scotland compared to the UK. Broadly speaking—again, this is a judgment call—we think that the recession will be slightly shallower in Scotland compared to the UK. We highlight a number of reasons that that feeds through to our income tax forecasts. You are right that some of that is about the level of mortgage debt relative to the UK as a whole, which then means that if interest rates go up, Scottish households are all else remaining equal and less exposed to that increase in potential mortgage payments. One of the key drivers that we have seen recently about the disconnect between Scotland and the rest of the UK has been financial services and significant growth in city earnings. Again, that is one of the things in the fiscal framework. It is not just how Scotland does, it is how the rest of the UK does. In a world where interest rates are going up and potentially profits are being squeezed, investment banking might not make the same amount of profits in the rest of the UK and that might help Scotland as well. The third element that we talk about in the air is about the north-east and the north-sea. In recent reports, the commission has spoken about how, potentially, Scotland's earnings would lag behind because of the challenges in the north-east and the north-sea in terms of squeezing earnings growth. However, we have seen with the energy price spike that the engagement that we have had with stakeholders suggests that potential earnings in the north-east are doing slightly better and greater demand in there, which, again, we think might help Scottish incomes in that context. Broadly, we have seen Scotland being pretty similar to the UK over the next couple of years in that challenging environment. Your specific point about house prices. Historically, it is almost mechanical because the average house price in Scotland is slightly lower, the amount of money that an individual gains or loses when house prices move around is less. The house price is less in Scotland, but it is mechanical because the average house price is lower, so that is an important factor. In London, for example, when it mortgages and it would be here, so interest rates are much more damaging than they go up. In terms of capital funding, you have talked about the £23.24 budget reflecting a real-terms cut of £185 million at the GDP deflator rate, but you have also said that the UK Government announced a freeze in capital budgets and cash terms from £26.27 onwards. What impact will that have on growth and productivity as we move forward? We know that capital budgets are really important in the long run for economic growth and productivity in how they feed through. We are talking about that trend in the capital budget, and the UK Government's announcements are largely flat in cash terms. That is one of the areas in which the deflator really matters. If anyone has tried to do home improvements recently, you see the huge increase in costs and that is really important in that context. I think that the outlook projection in real-terms for capital is probably likely to be even more challenging than what we have set out because the actual price level is in there. You are at 3.2 per cent and the price is going up by 17 per cent in terms of material. It is not even in the ballpark, is it really? No, exactly. We do that because that is the process for doing it, but it is important to highlight that that is going to be a significant challenge in that. The Government obviously has capital borrowing powers in order to try to offset some of that. Again, we talk a bit about some of that in page 35 of the report when we talk through the potential options around capital in there. Of course, the more you borrow on capital, the more quickly you come up against the limit on the fiscal framework and the more borrowing costs that you embed into the future. There is a trade-off between trying to offset some of the pressures on the capital budget with higher borrowing that might have indications coming down the line. There is just one more question from me before I open up to colleagues around the table. That is with regard to a letter that you sent me. Last Thursday, regarding non-domestic rates, we talked about them being levied on a re-valued role. You talked about significant uncertainties that remain throughout the forecasting process. That is obviously of concern to the Scottish Fiscal Commission, so I'm just wondering if you can expand on that a wee bit for the record. What's happening is that there's obviously a revaluation going on at the moment, and in order to forecast non-domestic rates, we look at the valuation role and we project that forward, but clearly going through a revaluation, there's additional uncertainty in there about what the new valuation role could look like. The full new valuation role wasn't available to us from the time we made our forecast, so what we had to do was develop an imputed valuation role, where we essentially took the data that we did have from the new valuation role and used that to project the remaining elements of the role that we didn't have to come up with an imputed valuation role. That's what we used our forecasts on, but because of that imputed process, we're not actually using the actual valuation role, so that then beds in an additional layer of uncertainty into the forecast. We would have liked to have the full valuation role. We've spoken with the Government through this process and really constructive engagement with them about coming up with this method, but one of the lessons is that next time we have a revaluation, particularly if we're going to increase the frequency of those valuations, we need to have the actual full valuation role earlier in the process to let us do our forecasts to remove that additional uncertainty. Thank you for that very helpful clarification. The first member around the table to ask questions will be Deputy Convener Daniel to fraud by Michelle. I just want to follow up on one of the questions that convener asked earlier in terms of the interactions between public sector pay policy and social security. I think that the point around pay was clear. I just wanted to follow up to what degree you model the long-term economic impacts of social security spend. It's not a pure cost that can stimulate demand. Indeed, quite often, unemployment benefits are referred to as stabilises. Given that we need to look at the increased proportion of spend, to what degree is that wider or external economic? Apologies if I'm getting my economics terminology wrong, modelled by your work. No, it's a really good point. I'll ask Francis to come in in a second. In the short term, the macro impact of putting more into social security versus less in public services basically washes out, because the net effect is still the same. It's just that you're changing the different type of spending that you're doing, but the totality of that is still the same. That pretty much drives our forecast in the short run. The two essentially wash out in there. There's an interesting debate. If you look into what we call the multiplier effect, it is essentially taking tax from a higher earner and potentially disputing that via the social security system, going to lead to a higher multiplier effect than would have been if you had kept that income in the higher earner. Most of that washes out when it comes to the short term forecast. The more interesting piece is the long term changes here. That's very much my reading of what the Scottish Government is saying in its strategy here. Tackling child poverty isn't just a policy objective in its own right, but it's about building a more resilient economy and a more prosperous economy in the medium to long term. We don't capture that in this because we're doing short term five-year forecasts. It's the sort of thing that we will look at when we come to our fiscal sustainability report, so that in March we're looking for the first time at population, but we have said that we need to think about other issues and things like tackling poverty, tackling inequality is something that we think we should have a look at. It's probably going to require a lot of careful thought and a lot of new evidence gathering about how potentially the spending could actually have a long term impact on the economy. The demand side is the easy bit because that's sort of like almost like arithmetic, the amount of money spent where it goes, and as Graham says, the longer term issues about whether the spends actually improve the long run growth potential of an economy is the more difficult question that we know from some side of the economy, so it wants things like better outcomes, improve long term growth and improve the economy. The question of how big that effect is and particularly social security being a slightly indirect way of improving outcomes compared to direct health spending is quite a complicated question to answer. That sort of steps into a little bit in terms of the overall points around transparency. It strikes me by highlighting the £1.5 billion figure in terms of the medium term shortfall. The key question then is what should the balance of overall spend be? In the medium term, we have seen a reduction in the share that local government gets, an increase in the share of health, and that is essentially what part of that blend does social security. Should the Government be explicitly looking at that balance and stating that clearly? To what degree should that feed into the budget process? There is a slight thing about how far we stray out our remit, which is about the forecasting of the totality and then how the Government then allocates priorities with portfolios. It is really up to the Government and then the scrutiny of those allocations. In some ways, the reason that we look at what we are spending on social security is because it is new and it is because it is the bit that we have the blockgat adjustment so that we can calculate that funding gap and then we have everything else that was old school devolved spending and we compare the two. I think that the Government, when we are setting a budget, most Governments would just look at the totality of all of it and say what is the balance between how much is spending on social security and how much is spending on public services. It is one of the unique elements of this framework, which means that you can see this net funding position which then lets you see what actually you are reducing, potentially reducing spending in public services. I think that the conversation has to me much broader about the totality of the spend both in social security and public services and is that meeting the outcomes that the Government want to try to achieve in the long run through net zero child poverty and growing the economy? I take that point and in terms of your remit. One thing that you have stated very clearly in your forecast is that the Government should be stating its budget on cofog principles. To what extent have we stepped towards that? Indeed, to what extent would it actually help with the issues that we are talking about to have that clarity? I want to ask one additional point. Audit Scotland has also stated that the Government means to set out clearly in its budget the contribution towards specific policy commitments within the budget. Would you add that to your point about cofog? I think that cofog is helpful because it is consistent over time and it does what it says in the tin in terms of the spending element. That is why I think that cofog is really helpful to have and it is really important for our long-term fiscal sustainability work where you are looking at what you are trying to spend in health, not just in the next two to three years, but in the very long term. Anything that adds to transparency and adds to understanding is really helpful and that is where cofog is really important. On the specific policy commitments, again, that probably strayed outside our remit in terms of how the Government then present their budget and how they articulate their key policy priorities in there. Where we stray into it and where we talk about it is where there are potential policy commitments that we think are feeding through to sustainability and that is like on social security. We also got a comment in there about Scotland allocations because they have articulated about how they will use that and to allay some funding pressures. Again, we can highlight those sorts of things but we tend not to too much go into the specifics of this policy as directed for this particular priority. I would like to round off my questions about income tax calculations. I just want to know how variable they are likely to be. I have been going into this. I noted that the IPPR was suggesting that an additional one percentage point on the top rate would raise £50 million. Given that your forecasts are suggesting that the totality between the one pence on both the upper and the top rate will raise £129 million, you are much more pessimistic. Does that reflect the genuine degree of variability? Should we be coping a very close sigh about what we actually get in compared to what has been forecast? Or is there a bigger difference of opinion between how you are calculating it and what the IPPR are? A couple of things. One is the uncertainty, but the potential move around is important. I do not know the specifics of the IPPR calculation, but if you look at what we say, so if you look at the additional rate, so a penny additional rate, the static costing we think would raise about £30 billion next year, but that is without behavioural change. When you add in the behavioural change, we think that the totality of that is only £3 million, so the key is what you are doing about the behavioural change and how big you think that elasticity will be, so how much you think people will respond and adjust their tax affairs in order to then feed through to the final element that you get. That potentially might explain some of the elements in which people might be talking about the static effect versus the one that I could for the behavioural effects. We have discussed a number of times before Scotland's relative position in terms of per capita income tax receipts, which is obviously the fundamental drive for the fiscal framework. In your report, you are suggesting that that position is improving. Can I just clarify to what extent that is because we are seeing employment and earnings growth improve relative to the UK average and to what extent it is the difference in terms of the policy decisions that are being made just in terms of both fiscal drag and indeed the additional pennies on the upper and top rate? Just be useful to just clarify the balance of what is contributing to that. The key chart to look at is figure 4.5 in the report where we talk about the net income tax projections. If you look at essentially what is the cumulative effect of the government divergence of the policy choices of the Scottish Government compared to the UK policy choices over the past few years, we estimate that that comes in at about £1 billion. We had a really helpful chart in our August report, figure 4.2, where we decompose how the net tax position can evolve and it can essentially evolve from four things. One is Scottish Government policy choices, UK Government policy choices and then the performance of earnings and the performance of the economy. That £1 billion is essentially the policy divergence that we think is essentially coming through in 2023-24. That is essentially Scottish taxpayers paying more tax in Scotland relative to the rest of the UK. What then becomes the crucial other bit is what is happening to the economy and what is happening to your earnings and your employment. That is where you get the net tax position that we are thinking next year is around £325 million. That is essentially the gap between the tax that you are trying to raise and the ultimate final net tax position that is coming through the relative performance of the economy since we have had tax devolution. It is the combination of those elements that is absolutely crucial. I think that it is more positive that part of that is the income tax increases by the Government, which we think will raise about £129 million. Part of that, if we recall, we got new data from HMRC in the summer, which showed that Scotland's relative position was actually improved because the outturn for the UK was weaker than what the OBR had thought it was, and that lifted up the net tax position. The larger remainder of that comes through a difference between our forecast for the economy and the OBR's forecast for the economy. Some of that comes through what we think might happen in earnings and the catch-up. We talked about the North Sea and things and the divergence not being as significant, but it also comes largely from the fact that we have a slightly more optimistic forecast for the Scottish economy compared to the OBR. If either of us changes that, then the net tax position will change. If the OBR becomes more optimistic, then the net tax position will narrow. If we become more pessimistic, then the net tax position will narrow as well. That is the uncertainty that is embedded into the framework. In the sense that there are even more elements going on in the background because as we have already talked about, there is this mortgage debt issue going on. The other thing is that we have slightly adjusted our participation assumptions for the over-60s in the sense that what we have done is that we have raised participation as the state pension age rises. We tend to observe that people participate more as the pension age rises. We have added that into our forecast. I am going to say that there is a very large number of things that have contributed to this change, so I would not put it down to those one or two elements. Good morning, everybody. Thanks for coming along. I just wanted to return to modelling behaviours and elasticity. We have talked about it with income tax, but I just wanted to get your sense of how that has been factored in in terms of ADS, which you said in your opening remarks, increasing from 4 to 6 per cent and estimating to give £34 million extra. Obviously, that is arguably even more complex because of the reasons that you said out before. Of course, it is a new tax. I just wanted to get your sense of the extent, I suppose, a level of confidence that you would have in that £34 million given a range of factors, which I feel free to outline. I have merely given my view. It is a really good question. We obviously have a policy costing which we draw on past experience of what happened with the additional dwelling supplement. We have got some evidence about how much was raised and we can then use that to help to inform our policy costing going forward. One wrnco with the additional dwelling supplement is that if you increase the rate, you might have fewer people buying an additional dwelling, but that opens up the rest of the housing market to buy properties in there. It is slightly different in income tax where someone might change their behaviour and that is it. They are the only person involved. If someone changes their behaviour and not to buy a second home, that potentially opens up the opportunity for someone else to buy it, so there is potentially less of that loss in that context. Obviously, one of the things that we have seen in recent years with LBTT has been quite a lot of volatility in the top end of house prices being sold. That is one of the reasons why our forecast has been out in the past couple of years because it has been moving around quite a lot. Actually, a lot of the income has been coming through at that top end. One of the really interesting things to keep an eye on is what happens when prices do fall. Is it the top end of the market that becomes softer and what implications that might have? What might impact the additional dwelling supplement if that is capturing those houses or if that is somewhere else in the house price distribution? It is something that is really important to keep an eye on. Your other point about saying that check new taxes and new benefits and everything, that is obviously a more of a forecasting challenge than when you are just changing existing policy. If you look at our forecast evaluation report, particularly when new benefits were introduced, we usually make our biggest error in the first year because there are so many uncertainties about when a new comes in worse rather than a change in existing policy. I accept what you are saying because it may mean more housing available at the bottom of the ladder, but then that is really if people can get the funding for it and that links into the wider economic environment. There is a lot of stuff that I was going to ask about that has been covered. I just wanted to turn to the letter that you sent to the convener, Professor Roy. It was concerning sex and gender data for child disability payments. Firstly, it would be useful to refresh our memory. In my recollection—you can tell me if I'm wrong—the data that is now being collected as part of the equality monitoring form is gender and that equality monitoring form could be filled in by somebody else. Is that right? Or because it's being filled in on behalf of a child? John, if you get any on the technical aspects, the equality will be gender. I'm happy to give an update more broadly about where we are on the social security data and the assessment on that.  We don't have that information for child disability payment yet, which is a challenge for our forecasting point. When I read your title, it said that sex and gender data, and you are pointing out that Social Security Scotland has indicated to be able to provide the application form that it collected on the sex for the period from October 2022 to February 2023. I'm just trying to understand in data terms because I'm aware that we don't want to go into other big debates, and that's not my intention here. I'm trying to understand in data terms about accuracy. The reason I'm asking that is that we know that boys are statistically more likely to have learning disabilities, particularly like neurodivergency. Getting the data collection correct that links to biological sex must surely be vital.  You then referenced Social Security Scotland because it seems to me that setting aside any other debate, the data being collected that would ultimately be used to project cost where we know that Social Security payments could well go up, given a whole range of factors. It would be useful just to set out what exactly you think is happening and what you see happening going forward in terms of your data needs, so it's a data question. A general point on how we can get John to come in on specifics of that. As we updated the committee in September when we spoke, we had access to data, the importance of access and data. We've had really good conversations with Social Security Scotland about getting the data and pushing it in. We don't have it yet, so if you look at our child disability forecasts and adult disability forecasts, we still don't have the core information that we need to do that. For example, we don't have the average payment going to a child on disability. We don't have the number of inflows relative to what has been there. A crucial part of that, as you say, is understanding sex, because that potentially has an impact on our forecast in terms of the take-up of that. We need that information to help inform our forecast. We may have asked John to give an update on where we are with the conversations in specific to that. If not, we'd be happy to write and provide more clarity. To some extent, the question is asked in both the application form and the qualities monitoring form are an issue for Social Security Scotland. Our concern is really getting some sort of data on these issues. In particular, the thing that concerns us is that if the data comes from an application form, every applicant or every person applying on behalf of a child needs to complete the form, when the quality is monitoring form, it's more voluntary. You basically get a break in the quality of the data. For us, the overriding issue here is the break in the quality of the data and what that looks like, as well as getting the data. At the moment, we've got a commitment from Social Security Scotland to give us the application form data, as that's processed by about February. We're not sure whether that will be published statistics or management information. Where we're lacking any clarity from Social Security Scotland is when they will give us the data that is obtained from the quality of the monitoring form. After we get that, there's this break, and we need to wait longer. Social Security Scotland has plans to put the two pieces of data together and see what the differences are, but they can't give us a timescale for that piece of work either. In a sense, we're flying blind here and that's our really big concern. I think on the data which is generated in terms of payments, things are looking more optimistic than they were a couple of months ago. We do have a commitment from Social Security Scotland to give us that data in February-March, so we can incorporate that in our forecast. On the payment stuff, things are moving forward. On the issue about the application and the quality monitoring form, things are still very vague. I think that we need some further clarity. I suppose that I'm just interested. How did we get to the position where a fundamental data item ceased to become important? Because it strikes me that it's utterly fundamental, both in terms of assessing spend at this point in time and future forecasts, because we may well, for example, come across a disease that has a proclivity to one sex or the other that we don't yet know about and we're going to have to be able to project. How did we arrive at that position? I think that this came around because Social Security Scotland was very focused on making the application process as tight as possible, as less burdensome as possible. Not exactly burdensome, to tell you which sex. They made this decision and we sort of found out about it later. If you remember back to when we originally wrote, we were concerned about the consultation process around this as well. We're very pleased that the chiefs of the Scottish chief statistician has made a commitment to improve consultation around how Social Security Scotland can collect their data. I think that in the future users, including us, of the data will have the opportunity to comment on these things before they actually take place. Unfortunately, on this one, the decision that was made, we found out about that at the events of the thing that we've done. I do remember you called it. Professor Breeden, you keep raising your eyebrow. You look as though you want to come in with the last comment. I think that I just have an expressive face, but I think that it's slightly to defend the scheme of Scotland. I mean, they focus on delivery. They have had a very challenging time in the transfer, and I think that you can simplify as I'm saying that our number one focus is delivery. Management information, obviously, is hugely important, but it came up a second to delivery, which was their focus. Okay, thank you very much, Professor. Okay, thank you. Ross to be followed by Liz. Thanks, convener. I'm returning to the additional dwelling supplement. If you were to assume no behaviour change from the rise to 4 to 6 per cent, what would the additional revenue have been from that? 55. It's a roughly £20 million projected loss from behaviour change in that case. Given that change takes place immediately to avoid a very obvious bit of avoidance that would otherwise take place, do you have a projection for what the additional income is now going to be in quarter four of this financial year? Yes, it will be on fine. So the table 4.21 talks about the policy costing from the change in residential LBATD, including ADS, and there's £12 million in 2022-23. Fantastic. Given that we've not quite figured out how to fill the gap in the remaining quarter of this year, I think that every little helps in that regard. On the question of behaviour change, do you have an estimation for what the tipping point would be where ADS would become net negative in revenue terms? Because it's an interesting tax in that it has two objectives. One is to raise revenue for public services, but the second is it can result in what many of us would see as desirable policy change around freeing up more housing for owners rather than second homes, holiday homes, etc. What is the tipping point, where it becomes such a strong disincentive that we actually have a net loss of revenue? I'm not entirely sure. I follow the question. We wouldn't calculate a tipping point in that regard, because if you think that the stock of housing is relatively fixed, essentially you might not be buying second homes, so you're not getting that, but you're potentially opening it up in terms of other potential people that are buying those homes. To get a tipping point where it was not raising any revenue, it's a difficult— Wrong. I was thinking more in terms of—you're assuming that this additional change to the rate will result in behaviour change of around £20 million, but at what point would it have resulted in a change that is equivalent to the amount that it would otherwise raise if there was no behaviour change? Ie, at what point have we raised it by so much that the amount of money coming in is no more than it was in the previous year at a lower rate? Presumably, if we raise it to 20 per cent, we're going to take in a lot less money than we did from ADS specifically last year. I take your point that we'd probably bring in more from LBTT, but the amount that we're bringing in from ADS would be a lot less. I think that we've done that calculation. I don't think that we're allowed to do that sort of stuff, because if we remember our access, we can't speculate that. Sorry to be boring. Boring is important in this regard. Asking a similar question, which might result in a similar answer, on income tax and taking us back to Daniel's point on the difference between what you're projecting from raising the top rate versus IPPR's projections. If you're assuming that putting the top rate up by penny is only going to, in the end, bring in a net £3 million, I presume if we'd increased it by 2p rather than 1, we would have ended up bringing in less. That would be linear, so it would go up by roughly doubling it. It's a behavioural effect, get stronger, but the revenue you raise is also increasing. Generally speaking, we don't have those non-linear effects. Obviously, there are cases where we do, but in this case, as I recall, this is a linear effect. Just one final question, and this is just about jogging my memory. How did the eventual outcome to the 2018 changes across the board to income tax compare to the behaviour change assumptions that were made at the time? It's very difficult to do that. What was the year the HMRC did the study for? We don't have individual tax pairs, so it's very difficult to back out, because what we get is the totality of how much income tax is exactly the same. From wider economic changes. What we get from HMRC will be the overall tax take and then decompose into different points in the income distribution. We can see that income tax revenues will have gone up, but we don't know whether that was because of behavioural change or whether that was because the economy did really well or there was a change in earnings or something like that. In time, as we get more data, HMRC is collecting data, which in time could let us do some longitudinal analysis where we can perhaps identify taxpayers that have similar characteristics to taxpayers across the rest of the UK. You can start to do some modelling to see whether or not all else remain equal. Taxes have changed in Scotland and have people changed their behaviour in that context, but we are still at very early stages in the process for framework. People might change their behaviour instantaneously, but it might take them a couple of years to change their behaviour. That's why there's always going to be a lot of uncertainty around the modelling of that. That's why, again, we just think that when Governments are setting out those policies and think about how much they'll raise, they can either be really optimistic and take the static costs or they can be cautious and think about whether those are the behavioural changes and that's what we factor in. As we've already done, and I think that we will continue for a long time, we're going to lean quite heavily on international comparisons. Basically, even with a long time series of Scotland, it's just one board and the data is going to be that one. If you look at countries like the millionaires tax in America, the regional taxes in Spain, you've got lots of borders that people are crossing, you get a much better richer data set to see what's going on with the behavioural effects of regional tax changes, so I think that we're going to be heavily relying on that evidence for quite a while. Thanks, George. That's all from me. Thank you. Just to follow up before I let Liz in. I struck with something that you said, actually, Professor Breedon, because you said that if you assume that the penny increase at the top rate would increase taxes by £30 million, but because of behavioural changes, that would only be £3 million, but if you put it up to £2, it would be £6 million, and it was double it. Surely you get to a point where behavioural change exceeds the actual income level, and if the volatility is such that one penny will take 90% off the revenue, then surely two pennies in a pound—I mean, I'm quite astonished at that high level of elasticity, but surely two pence would tip it over the edge and you could end up with negative revenue? I think it depends. Obviously, if the cost of getting out of the taxes is like £1,000, then clearly nobody's going to react initially, and then they'll react when it's a thousand. That isn't this type of relationship. For the international evidence, what we found is that the most common migration—obviously, there are other ways that people can adjust—is mainly paper migration, i.e., that somebody's already got a second home south of the border, and they just re-register. That is an obvious costless transfer. Having done it for one P, they've already done it, and they think, when it gets up to two P, well, I've already re-registered. You get another group of people who may be either making physical moves, so you just catch more or more people, but the revenue of the residual is still rising. I would have thought that some people just win a ball if they win a penny, and some might not win a ball if they win two pennies, but if they win three pennies, so the higher it goes, that's when you get the behavioral change. Yeah, but I think if you think about the case of paper migration, you know, it's basically a two-minute job to re-register your permanent residence as whatever it is, and I think there are people who can do that. Okay, well, thanks for that. Okay, it leads to before by John. Thank you, just pursuing this, which I think the convener is quite right to ask about in terms of behavioral changes. I think it's almost a laff or curved of the likely trends. Just to go back to the additional dwelling supplement and the 34 million, understand how you have used your arithmetic to calculate that. There was quite a lot of comment at the weekend about, mainly to do with shortages in the rental markets, that because of the increase from 4 per cent to 6 per cent, it may mean that some people don't go into the market at all. Would that then have a bit of an impact on the 34 million that's expected because it would take, because of that behaviour, it would take some people out of the market? Whether we've specifically done that, it's something, again, we can have a look at and come back to you on that. I think typically when we do these sorts of behaviour responses, they're very much at the aggregate level, so we're dealing with a macro level, so we've got evidence about how additional dwelling supplement has come in the past and then there for what is the totality of change within the overall housing market transactions. That's typically the way we would forecast it. Will there be any specific things within individual markets that we might pick up on, not entirely sure, John? It's worth just clarifying that this costing was calculated using the OBR elastocities, so the behaviour effects that the OBR use, whereas I think those were set up a couple of years ago before the sort of changes about rent control and things took place, so I don't think we formally include those. I understand the arithmetic to which you're referring. It's just obviously that the knock-on effect, possibly, is that some people are deterred from going into the market and therefore the estimated 34 million that is the tax revenue coming in perhaps doesn't have quite such certainty over a period of time because that might put people off coming in to the market. It may do. Again, it's something that we can have a look at and think about and write and give you a bit more detail about how we calculate the behavioural response with that and what all goes into that component. The only caveat that I would say with that is that you're dealing with a revenue of about, what's that next year, 557 million, so an extra 5 million, 10 million here or there in our forecast isn't really going to change the overall totality of the budget in there, so it's something that we've got to look at, but when we're trying to forecast half a billion, a small few million either side, I can understand the policy implications of it and the broader implications for the housing market, but for our overall forecasting, it's relatively small in that context. No, I will understand that it's always very difficult to make any expectations on what people are going to do. Can I turn to inflation, which is obviously one of the most important things to try to address? Professor Breedon, you quite rightly said that a very high amount of that inflation is due to the cost factors, particularly for people on lower income. Can I just relate that to Professor Roy's point in the introduction, where you said that the expectation is that the inflation next year will fall? I think that he used the word sharp play. What is the reason for thinking that it will fall sharply, given that the costs, particularly if the war in Ukraine continues and supply chains are still giving very high prices? What certainty do we have about it falling sharply, as opposed to coming down, given that the cost factor is still very strong? I could ask Francis to come in on that. One of the key things is the difference between inflation and the price level. The fact that energy and food prices have gone up over the past year, inflation will come down, but that doesn't mean that the prices have come down. They are now at a permanently higher level. The rate of growth is not going to keep on increasing. That is the legacy effect, the real challenge with the spike in inflation. Inflation at 11 per cent, to get us back to where we were, you need negative inflation at 11 per cent next year to get the price level back down. We are all going to be paying more for food in the future. We are all going to be paying more for energy in the future, and that is the debilitating effect of this inflation shock. That is the distinction between inflation and the price level. Why do we think that inflation will come down? Exactly. That is the key point. Obviously, the price level is higher, and therefore the inflation falling back down means that it is all over. It is now bedded in. Although it is worth all the money out that it is true that energy prices have come down from their peak, they are somewhat creating a negative effect game. They are still higher than they were before the crisis, but they were lower than they were in August, September. That is now going to be potentially given, but if they stay low, they may already get up whilst I am speaking. That will be a slightly negative impact on inflation for the coming year. I understand that. That is the rate of increase that matters. Obviously, international events at the moment are incredibly uncertain, a