Rhaid irywod am wneud. welcome to the 27th meeting in 2014 of the Finance Committee of the Scottish Parliament and could I please ask everyone present to turn off any mobile phones at rather joint devices? We have received apologies this morning from Malcolm Chisholm and indeed from Jean Hurcourt so there will only be five members of the committee today, which allow a lot more flexibility for members in terms of asking questions over our distinguished guests. First to either my business this morning is to take evidence on further fiscal the evolution from Professor David Heald, University of Aberdeen, Professor John Kay, London School of Economics and Professor Ronald McDonald, University of Glasgow. I have been informed that Professor Kay needs to catch a train from Waverley at 11.28, so we will aim to conclude this session by around 11am to allow him to get to the station on time, Professor Kay. All members have received papers from each of our witnesses, so we are going to go straight to two questions from the committee. I'm not going to start in an obvious place. I'll start somewhere, maybe a wee bit unexpected and the reason I'll start there is because you've all got divergent views on this particular issue, so we'll get a wee bit of interaction going, shall we say. The first one is Professor McDonald in your paper you say on page 3 that I quote, the remaining smaller taxes that I would recommend devolving are air passenger duty capital gains tax and inheritance tax, so I'm wondering if you can just for the record explain why you support the devolution of these taxes and I then like to your colleagues if they so wish to comment with their own specific views on those issues, thank you. Yeah, well in broad terms obviously what I was seeking to do in the piece I wrote was to try and address the issue of the vertical fiscal imbalance which is a big issue and has been a big issue in the Scottish Government, Scottish Parliament since its inception. So my main focus is on obviously the bigger taxes, income tax, VAT and so on and I'm sure we'll come back to them later. As you've seen I've got a table there where I try and apportion different amounts from the taxes so the bigger taxes are kind of straightforward, the smaller taxes the ones you focused on, well air passenger duty, we know there's been a big discussion about the environment in Scotland, the Greens are particularly interested in these issues, so control of air passenger duty would be something I think which would naturally be devolved or could be devolved. Inheritance tax and capital gains tax, they're rather small taxes, I mean I'm not going to go to the stake in these as it were, I basically what I'm saying there is I don't have an issue with devolving these taxes, I mean if you look at the evidence I think from I think it's Switzerland where they have devolution within the cantons of these kind of taxes, it hasn't created any particular issues for the overall federal structure, so I don't see there being a particular problem devolving these to the Scottish Parliament. Okay, a healer Professor Kay, would you like to comment? I think I'd make a two point about the smaller taxes, I think one's going to be very careful about devolving taxes that people only want to reduce or abolish because that's not going to resolve the funding issues. Smaller taxes introduce more questions of volatility because it's obviously more difficult to work out what the block grant deduction would be. Capital gains tax I think probably fits alongside income tax, so what one did about income tax might will affect what one decided about capital gains tax. There's considerable opportunities for people to convert income into capital gains and that's one reason why they sit aside. With inheritance tax I suspect you'll probably get a raise to the bottom with people trying to attract high income, high wealth taxpayers into their jurisdiction. I think I'd agree with Professor Heald and I'm sure we'll come back to this point that there's a danger in devolving taxes simply because people wish they could be lower because it's not going to be the case that all or perhaps very many taxes can be lower, but with that caveat, air passenger duty seems to me unproblematic. Inheritans tax and capital gains tax seem to mean other matter altogether. Inheritans tax, if there are material differences we're going to have to think hard about the implications of residence rules and people taking advantage of these residence rules. For capital gains tax that problem seems to me to arise in spades. If one were to devolve income tax, meaning devolve income tax on savings as well as income tax on earnings, that's a different ball game from the business of devolving income tax on earnings. If one wanted to devolve income tax on savings, one would start to think about devolving capital gains tax, but once again we get into issues of Scottish assets, Scottish residence and we get into the interaction between capital gains tax in Scotland and capital gains tax in England in quite a lot of cases if there are material differences. I think that capital gains tax is probably a can of worms that one would prefer not to open. Obviously, the biggie is income tax. Professor MacDonald in Europe said that I have sympathy for proposals that involve the full devolution of income tax and Professor Kaye in your paper. Obviously, it would make sense to take over the existing UK income tax code its entirety over time. That could be changed, but Professor Heald seems to have a lot more caveats in terms of that, so I'm wondering if you can first of all tell us your concerns about the devolution of income tax and where you think the boundaries should go. I realise that you've talked to put that in your paper, but, obviously, for the record, I'm quite keen in hearing your views directly. Also, I would then again ask Professor MacDonald and Kaye to comment if they so wish. Much depends on what people mean by full devolution of income tax. If you look at the party's submissions to the Smith commission, the differences in substance aren't actually as big as the rhetorical differences. If, by full devolution of income tax, you mean that you start again and have a completely different Scottish income tax system to the UK system, that is quite different from Scotland deciding the rate bands and the thresholds. I was at a conference last week, organised by the UK Public Accounts Committee, on which I was told that the UK tax system had 1140 reliefs and allowances, so there's massive complexity in terms of the income tax system. Going back a very long time, in 1976, I proposed what became the tartan tax. I think that the reason that wasn't used is that, when there was a chance to use it, the Scottish Parliament had too much money because of the increases in health and education expenditure in England, and politicians were warned that, if one used it in the downwards direction, the Treasury would exploit the lack of transparency of the block grant to punish Scotland indirectly. I can understand politically that, after the referendum, there's a wind of opportunity where people might get substantial devolution of tax powers that otherwise would have been difficult or in the very long term. One has to think carefully about the capacity to run a Scottish income tax and exactly what you mean by that. For example, does the definition of income remain the same? Does the personal allowance remain the same? What happens to tax bans and tax rates? One of the points that I make in my paper is that, because of some extent the switch between direct taxes and VAT and the increases in the personal allowance for income tax, one is increasing the concentration of income tax revenues from a small proportion of income tax payers. The kind of numbers that I quote in the paper for memory are 42,000 Scottish income tax payers who actually pay 22 per cent of Scottish income tax. One's got a very small number of people. Clearly, the question is about the behavioural response to differences between Scotland and England, and expectations of differentials could have significant effect. It hasn't mattered in the past whether one had a Scottish residence or not. Under the Tartan tax, the difference that it could make, whether it was a Scottish residence or not, was actually capped because the Tartan tax only applied to the basic rate. With the Kelman tax, the potential cost for a very high income person is much higher, and clearly expectations about if Scottish income tax were completely separate. By completely separate, I am talking about definition of income and so on, you could get very significant issues about residents and about movements of population, mobility of population, and people pretending to move when they really haven't. For example, people who have got residences in Scotland and in England as well. How does it work in Europe where you've got a vast array of different types of tax jurisdictions, and you get Germany, Holland, Belgium, Luxembourg, and so on? Surely those systems have been developed by many other countries over time? There's a psychological issue in the UK that doesn't apply in the US, for example. There's partly distances, partly a factor, but the last time I checked there were 23 US states having income tax powers, and the others didn't. Psychologically, partly because of the domination of UK politics by Westminster and the centralisation of the UK media, you can imagine the kind of difficulty one will get politically with significant, even small differences between income tax. The more general point that I would make is that in terms of tax devolution, you've got to be careful that you don't take on lots of fiscal risks without actually having policy control. It's all right saying that Scotland should be funded, that the Scottish Parliament should be funded by its own revenues. That crucially depends on whether you mean genuinely devolved taxes, where you control the tax, particularly the base and the rate, or you mean assignments of revenues, and Professor Kay describes assignments as cosmetic. The question is, within the United Kingdom, how much fiscal risk do you want to take on when you don't actually have the policy of levers? If you're independent, like Netherlands and Belgium, or if Scotland has voted yes in the referendum, that's a different ballgame. However, within the context of the United Kingdom, when you don't have policy control of a monetary policy or over the stance of fiscal policy, I hesitate about how much fiscal risk do you want to take on? Just before I bring in your colleagues, what's your view, if you can tell us, on the control of rates, bans and thresholds? I think that the big issue is going to be about the definition of income and the definition of personal allowance. Scotland has congratulated itself on the maturity of its referendum campaign. I found the debate incredibly depressing, because people seem to think that getting tax powers would mean that you could spend more. Within the context of the UK and Scottish fiscal positions, with what the former head of the IMF fiscal affairs department, Vito Townsley, called fiscal termites, Governments are going to find it difficult to maintain their tax base. The danger that might worry about too much devolution of income tax would be that one would get lots of arbitrage, lots of differences would be exploited, and they would be exploited in a way that would probably force down tax revenues. If one wants to protect the tax base, one wants to protect the tax base, one has to be careful. One's only going to look at what's happening with co-operation tax. At the public accounts committee conference last week, one speaker was predicting the demise of co-operation tax in 10 years. That's probably fanciful, but if you look at what's happening about the downward movement of rates and even when the UK is subscribing to the OECD base erosion and profit shifting project, the UK is using the pay-tip box so that there is a downward pressure on tax raise. If you want a smaller state, that's a good thing. If you don't want a smaller state, you should be very careful. I think that there are a couple of important points there. One is that, as Professor Heald is saying in effect, with increasing mobility of labour capital and economic activity more generally and the growth of activities where it's quite difficult to attach a place to the activity, that's undermining the ease of collecting tax generally. Co-operation tax is probably the worst example of that problem, but it arises for a number of other taxes. But these are not either currently or in the foreseeable future insuperable problems. Actually, if we want to run wildly different taxes in Scotland, in the end, people will make these systems work. I think there's a difference, however, between the situation we'd face in Scotland under independence in which you just have to sit down and make these things work and work out Scottish solutions to these problems and the situation we face with devolution in a unitary state, where we have to ask the question, are the additional levers we would get from things that are going to be very complicated actually worth the bother of doing them so that, as far as income tax is concerned, what it seems to me is likely to emerge from the kind of Smith discussions is giving Scotland control over the rates with a banding pretty much as it is. That would give Scotland a lot of freedom to actually determine additional revenue from income tax if it wanted to. When one starts to ask, do we want in Scotland to take on responsibility for the detail of the structure, then one has to ask, are there advantages to doing that that offset the very considerable administrative problems and negotiating issues that would have to be resolved vis-à-vis particularly England but also other countries in doing that? It's not obvious to me what the balance of that advantage is. Okay, thank you Professor McDonald. Yes, well, as I say in my submission, I mean I come at this more as a macroeconomist rather than from the microeconomics of the different tax rates and so on. But I think if I can summarise Professor Heald's position, it's really an issue which is at the heart of this whole debate and that is whether we try and retain stability of revenue through continuing with a block grant mainly providing the revenue for the Scottish Parliament or whether the Scottish Parliament is prepared to accept more risk. Now, as Professor Heald said, if you have control over tax thresholds, you could end up punishing those who pay higher marginal tax rates, for example. Labour mobility is very high within the UK, so the argument is, as Professor Heald was implying, that these people would move south of the border. But of course that is the main disciplining effect of devolving taxes, that the government knows that that can happen and presumably one would expect them to take that into account in making their decisions. Just simply because Labour and capital are mobile, I therefore would not rule out further devolution of taxes. Therefore, I would come at this from a different perspective. I think, again picking up on Professor Heald said about the referendum, I do think there is a fundamental misconception amongst the polity and also amongst the electorate as to what fiscal autonomy means. People think that if you get more fiscal autonomy, if you get devil max, if you get more revenue, more revenue devolved, it automatically means more spending. Of course it does not. It means much more risk. The kernel of the argument is how you handle that risk. As I said in my submission, I am keen for the Scottish Parliament to handle that risk in as optimal a way as possible, while still recognising that, as part of the UK, we have clearly voted for a social protection mechanism that is about resource pooling and risk sharing. I think that those are the kind of balances that I would like to see. I think that that sheds light on what I am trying to say in my submission. Okay, thank you. I am nearly 20 minutes in. I have not let my colleagues in yet, so I am just going to ask one further question before I do let them in. In terms of their submission, we got from the Scottish Futures Trust in terms of their submission to the Smith commission. They are actually giving evidence following their own evidence. We have talked to them a bit about not having the opportunity to spend more, if you like, through the various taxation routes of the high risks involved in that, but what they have suggested is that, in terms of borrowing, there is a possibility of that because they said that Scotland should have the power to be able to determine the right level of infrastructure investment, to affordably meet its economic and social objectives and how this investment is both funded and financed. What they are basically suggesting is that constraints on borrowing powers should be removed entirely, pointing out that local authorities do not have the same kind of restrictions that the Scottish Parliament is, basically. They talk about it being inequitable that the Scottish Government should have a cash value borrowing limit imposed as a reserved matter, but local authorities are effectively self-controlling under codification of ability to repay. They are obviously suggesting that that would allow the Scottish Government considerable freedom in terms of how it invests in infrastructure and obviously enhancing Scotland's asset base, creating jobs along the way, etc. Do you want to kick us off on that one? I might begin by emphasising what both Professor MacDonald and Professor Heald have said about the widespread idea that fiscal devolution means Scotland has more money and it doesn't, that bluntly at the moment there is a great deal of discussion of people wanting more powers in Scotland when what they really mean is that they want more money for the powers that Scotland in large parts already has, and bluntly that money isn't coming either from a block grant or from taxes. That's an issue in relation to this additional infrastructure spending. The borrowing powers for Scotland would appear, in the first instance, to be a way of giving the Scottish Government more money. Indeed, that's in large part the way in which borrowing has been discussed over the last few years. I think that Scotland ought to have more borrowing powers, but I think that it ought to implement those borrowing powers rather carefully and rather slowly and probably in present situations, given the level of the UK national debt, probably not really at all. I think that we should be careful about saying that there would be benefits from infrastructure spending. I think that we need a lot more infrastructure spending in Scotland and in the UK, but it needs to be well-targeted infrastructure spending. We're sitting in Edinburgh watching going along Princess Street every day what must be one of the worst infrastructure projects in the history of the world in terms of the capacity for useful infrastructure and revenue generation that it provides. I won't touch on which political parties supported that and which ones opposed it. I have no idea. I think that you're not aware of that. Professor MacDonald, do you want to comment on the borrowing issue? Yes. I would echo what Professor Kaye said about the infrastructure issues. He's absolutely right in that. As I said in my submission, if you are going to say to the Scottish Parliament that you have to take on more fiscal risk if we're going to devolve more powers, then you've got to allow them to borrow. This fits in with my notion of the hard budget constraint that you've got to give for this to work. It's not just about taxing at the margins. You've got to move away from what others have called a pocket money Parliament, but you've got to move to a Parliament that has a substantial amount of revenue it raises itself. If it does that, it therefore faces risks. If there's a recession, it's not going to have the same risk pooling, risk sharing that it would if it hadn't got these revenues devolved or assigned, and therefore it has to have some way of making it up. I would argue that the Scottish Parliament should be allowed to borrow for that reason as well, and it should be borrowing on the open market because I believe that's the only really clean and effective way to bring market discipline in to be consistent with the hard budget constraint. I mean, there are obviously ways of doing that through the Treasury, but that would then bring in all manner of stability packs and so on, which I personally don't think are as clean as simply allowing the Scottish Parliament to borrow on the market, because on the marketplace, because the market will ultimately discipline the Scottish Government in its borrowing, and so we should get an optimal outcome in that sense. Just to pick up something that Professor MacDonald said, I get very worried when people start talking about, for example, 54 per cent of the budget for the Scottish Parliament being funded by its own revenue without making it clear that quite a lot of that revenue is outside policy control. So I don't really accept the way that Professor MacDonald uses the idea of the hard budget constraint if you're talking about revenue that you do not control. Assigned VAT revenues, for example, Scotland might either get a bonus in terms of VAT revenue depending on the UK Government decisions or all the opposite way around. I think that one of the things that we should come back to is the question of whether you look at the capacity to raise revenue at the margin, or the average percentage of your spending that you finance. On the point about borrowing, I agree with what's been said. I think that if you have more tax responsibilities, you actually require more borrowing power simply for smoothing purposes. On the question of infrastructure spending, I've made a good academic living for quite a long time out of public-private partnerships. What worries me is that what we will see, because fiscal control is going to be very tight, is that we will move on from public-private partnerships to guarantees. One sees that in the United Kingdom in the context of the Hinckley point C power session, where the UK Government is effectively but not transparently contracting to take the output for the lifetime of the project. On the question of borrowing, there's a question of borrowing for capital purposes, borrowing for revenue smoothing, but there is also the issue about the constraints imposed by membership of the European Union, while the UK remains part of the European Union, simply because the UK Government has an overall responsibility for the UK public borrowing. I'm going to open up the solid press cable. Do you want to add something? Right. I just had two points to add to that. One is that, realistically, the UK Treasury is not actually going to allow the Scottish Government what would be substantive borrowing powers. There are red lines as far as they are concerned, and I feel pretty confident that that is going to be one. The second point, which also relates to the UK Treasury, is, as Professor Heald has said, the amount of off-balance sheet financing of various kinds that has been engaged in and is increasingly engaged in, in order to pretend that the Government is not borrowing as much money as it is. We've been doing that in Scotland as well, and I would feel very keen that, when we have a beefed-up fiscal commission in Scotland, a large part of its responsibilities should be policing that particular activity, so that we're not landing future generations with liabilities that we've taken off balance sheet and shoved under the carpet for a period of years. It's the issue of this hard-budget constraint relative to the taxing at the margin. If I can give you an example, I do believe that, if, say, the Scottish Parliament were responsible for 90 per cent of its revenue generation, even if that is coming from the assignment of taxes, and the Scottish Parliament knows that the revenue it obtains in the next period will be conditional on how it spends its funding, then that is going to give you a very different outcome, a more accountable outcome, in my view, to a situation where it only has to raise 2 per cent of its funding, and the rest is from a block grant, where it relies on the block grant to fund its spending in the next period. I believe that those are two very different scenarios, and I believe that, even if you're assigning taxes but don't have control over the tax in terms of the devolution, I still think that it makes a big difference the magnitude of the budget that is actually devolved in some sense to the Parliament. Thank you. I'll open up the session now. The first person to ask questions will be Michael to be followed by Jamie. Thank you very much, convener. I'll use Professor MacDonald's paper to get me into this area where I've got a particular interest, but it's in relation to the block grant or the continuation of the block grant in terms of social protection systems, as you've called them. Northern Ireland currently has its welfare system devolved, but it has maintained a parity with the rest of the UK. Is what you're describing similar to what happens in Northern Ireland, or are you concerned about that relationship as it currently exists between the devolved welfare system in the north of Ireland and the rest of the UK? Well, to be candid, I haven't really focused on the Northern Ireland situation, but I think my point is that if you go for a purely fiscal autonomy type of setup, then you're not engaged in what I refer to as the risk pooling revenue sharing. I believe the outcome of the referendum was that people want to be part of that risk-sharing revenue pooling mechanism, and I believe that's largely because they want the social protection, what I call the social protection or welfare budget, to be at the centre. Now, of course, that is an issue which is open for discussion, and I do discuss that in the paper in terms of some perhaps marginal changes to the spending. Sorry, the welfare budget spend, but as I see it at the moment, rather than focusing on whether to devolve more powers in terms of the spend side, really what we've got to be focusing on is getting the existing fiscal gap into shape before we start talking about even further spending devolution to the Scottish Parliament. That's really where I'm coming from as a macroeconomist. As I say in my note and as everyone concedes, the Scottish Parliament already has a significant chunk of spending, depending on how you find it, between 15% and 60%, but very little in the way of compensating tax revenues. That means the government's not accountable properly, so how do we address that? I think that's how I'd answer your question. I'd rather focus more on the revenue side at the moment until we get that balance right before thinking about more major spending devolution. That's helpful. Professor Key, you touched on that as well. You raised the question as to whether it's possible to, as you say, unpick the benefit system, and you also raised the question about the arguments for the connection between income tax and benefit policy. Do you want to expand a bit on what you mean by the danger of unpicking the system? There are two issues here. One is that you've just described the situation in Northern Ireland in relation to benefits, where there is part of change things, but in fact nothing has changed. There is a devolution paradox, particularly in what has been traditionally a rather centralised state as the UK, that you as politicians will find that your constituents will allow you to make things better, but will not allow you to make anything worse than in the rest of the UK. Actually, the only solution given a budget constraint, the only thing you can do in that situation is leave things unchanged. You get the situation, which we've described in Northern Ireland, which we've had here in relation to the tartan tax, which is you have the part to change things, but you actually don't use them. The second question is the one I raised of, can we unpick the benefit system? That is, can we find parts of the benefit system that we could devolve to Scotland in meaningful ways that would actually give Scotland the power and possibly the desire to change them without devolving everything to do with the benefit system? To my mind, the desirability of having an integrated benefit system, and indeed an integrated benefit system, which is integrated not just with other parts of the benefit system, but with other parts of social policy and, indeed, which takes account of the structure of income tax as well, makes it quite difficult to satisfactorily unpick bits of that kind of package. I tend towards the view that in this situation one really is faced with all or nothing, that either you want to devolve everything or you don't actually want to devolve very much. Professor Heald, do you want to comment on this? I could pick up a couple of points. With Northern Ireland, essentially what you've got is a administrative control of the social security system. The UK funding depends upon them following UK policy, and there's currently a major political argument in Northern Ireland about the so-called bedroom tax, which has not been implemented in Northern Ireland, and there's arguments between the Northern Ireland Executive and the Treasury about that. You've got to be very careful about language. There is not devolution in practice, because the willingness of the UK Exchequer to fund the Northern Ireland benefits depends on basically doing the same thing. Northern Ireland raises another issue, which is that if you want to devolve income tax, Scotland is sufficiently close to the UK average on almost everything that you can basically forget about tax-based equalisation. You cannot do that about Wales and Northern Ireland, because they are very much poorer than Scotland and England. One of the points that I would argue, if one wants the outcome of this process to be a stable new devolution settlement, we have to think about how the changes might in future affect Northern Ireland and Wales. Although it will be easy to go ahead with income tax devolution and basically saying that Scotland is sufficiently average that we won't get involved in that kind of complication, we have to think about it because of the extension to possible extension to Northern Ireland and Wales, at least the chance for them to decide whether they want to go that way. I agree with much that Professor Kaye said about the question of the benefit system as a whole and the question of the relationship between tax and benefits. The UK policy of the past 25 years has been very much in the direction of the integration of taxes and benefits and where there would seem to be policy benefits in devolution welfare, for example housing benefit, housing benefit. You then come into the problem, which the Scottish Government has made in its submission to the Smith commission, that housing benefit is going to be rolled up into universal credit, so that's an area that we have to think about very carefully. That's a follow-up question to any of you or all of you who want to possibly answer it. In terms of the debate that you've all mentioned earlier, there is this perception that devolution means more spending in the areas that you want to bring it. The idea that devolving benefits would therefore, following that logic, suggest that what it means is that the benefits will be increased in Scotland. Is that your reading of that argument and what concerns would you have about benefit tourism? If we were to have differentials between Scotland and the rest of the UK, what is the likelihood of there being benefit tourism? You're taking me outside my comfort zone. I would answer it in a particular way. I think that there is a view at the UK level that certain cash benefits should be the same across the UK. We all know that, if you live in London, old-age pensions don't buy you as many goods and services as they would do in the north of England, but we stick to the idea of equal cash payments. One of the problems about devolving welfare is that people would expect it to go up. The media question is, what are you going to finance it from? What are you going to cut? For example, people have argued in Northern Ireland that there is a case for lower benefits in Northern Ireland because wages are generally lower in the Northern Ireland economy, but you can see the political difficulty that that would involve. People have two quite different attitudes. They want local choice, regional, national and subnational choice, but they immediately raise the question of the postcode lottery the minute you actually... To some extent, the UK settled on the thing, on the position that you can actually devolve service provision like health and education, but you do not devolve the level of... You don't vary the level of cash benefits. I don't see any benefit at any advantage in devolving cash benefits unless you're willing to accept the possibility of them varying. Again, my concern would be the expectation would be that they would become more generous. My general principle would be, and this is what I try to bring across in my comments, is that the whole point about the further devolution of powers to the sub-central government, the Scottish Parliament in this case, is that they're better able to reflect the preferences of the electorate in Scotland. One example I gave is we know that in Scotland we've had a different policy with respect to the elderly, and so I think in that sense there's perhaps a case for devolving attendance allowance to the Scottish Parliament, for example. In terms of the example that you gave, I suppose I agree with David's point that if it's actual benefit payments, then you're going to run in perhaps to the same problem that you run into with the tax side of things, that if you tax differentially you will get this mobility and you will in your sense maybe get benefit tourism, but you can see things that are not... benefits that are not quite related to labour mobility such as the bedroom tax, for example, Scottish policy and that may reflect different preferences and maybe there is a case for, for example, devolving benefits which are not specifically related to the mobility of people. Can't see a world in the foreseeable future in which Scotland has enough money to pay benefits sufficiently superior to the levels of England for benefit tourism to be a problem. It's back to this issue that is underlying all of this, which is the tendency to think that devolution of powers means more money to spend on these powers, and it doesn't. Thank you, Michael. Jamie, to follow by Gavin. I've got a question related to Barnett. Given the exchange that you just had, I'm just wondering how much evidence there is beyond some of the pages of some of the right-wing newspapers for such a thing as benefit tourism in the first place. As I said a few minutes ago, you've taken me out of some of my comfort zone. It's not... You'd have to ask a social policy expert about that. I think the answer is not very much, but one has to make the observation that it's a lot easier for someone from England to move to Scotland and feel comfortable here. That is for someone who is unemployed in Romania to move to England or Scotland and feel comfortable here. Okay, thank you. We know that the Scottish Government's submission to the Smith commission, their perspective, their starting point, is that, essentially, the parliamentary results revenue and make payments to Westminster for reserved services, but we also know that the Smith commission is working on the basis of consensus, so we don't know where that process is going to end. If that isn't the position, then, presumably, there's still going to be the allocation of resources, and then the Barnett formula comes into question or into play, I should say. I want to turn to Professor Heald and Professor Cays paper, because Professor Heald, you sit on your paper at the Vau, and then in the best academic tradition, you list the authors, which I liked as Cameron Atal, 2014, on the front page of the daily record. On Tuesday, September, including the three leaders commitment to the continuation of the Barnett allocation of resources, although that sounds definitive, the actual meaning is ambiguous. Professor Cays, you say whatever commitments may appear to have been made in the last days of the referendum campaign, the Barnett formula is now inevitably under pressure. I wonder if you could talk about the ambiguity that Professor Heald speaks of in terms of the Vau and the pressure you speak of, Professor Cays? I think the ambiguity is that, operated literally, the Barnett formula since 1978 ought to produce substantial convergence between public spending levels in Scotland and the UK as a whole. It has not actually done so, and that is, I think, a measure of the discretion which the UK Treasury has exercised in what have not been well articulated ways to be relatively generous to Scotland in that settlement. I think, after what has happened this year, we now have to face the fact that the Barnett formula, which previously was something, I think, understood by only a few politicians and academics, or actually only a few politicians and academics had heard of it, is now something which is very much on the political agenda and that is quite difficult, frankly, to find an objective justification for the generosity that Scotland receives under the Barnett formula. So I think whether the Barnett formula survives in a formal sense on lot. We in Scotland have to acknowledge that this is going to come under pressure and resistance and resentment in a way that I think has not been true in the past. I discuss these issues with the committee in June. At one point, I would disagree with Professor Cay about it. I think that one of the reasons there hasn't been convergence has been less treasury generosity to Scotland, more relative population change. The numbers that I want aren't in the public domain and probably don't exist any more within the treasury, but the point is that the convergence has been largely offset by Scotland's falling relative population. Jim and Margaret Cuthbert have made this point several times, particularly in the 2000s. If you didn't have Scotland's relative population falling, I think you would have actually got the convergence. One of the attractions to me of Barnett is its population adjustment mechanism. We've had a population adjustment mechanism for most of the time between 1880s and now. One of the advantages of having a population adjustment mechanism, compared with the detailed needs assessment, is that if you have a detailed needs assessment, leaving aside whether Scotland is overfunded or underfunded now, what you do is work out how much Scotland needs to spend on health, on education, on social services and so on. It makes it very much more difficult to maintain the bloc nature of that system. What I would like to have now, after the vow, is a serious discussion about a population adjustment mechanism versus a regular needs assessment. One of the problems about a needs assessment is that there is a very obvious international example of how you can do it, which is Australia, with the Commonwealth Grants Commission. However, I think that people underestimate two difficulties. One of them is how big an exercise that will actually be to do it properly, and secondly, the toxic political climate within which it would be done. There are plenty of exercises around—the Holton Commission exercise, for example, said that the bloc grant should be cut by £4 billion—is going to automatically produce the allegation that people have decided to result before the exercise starts. The question about Barnett, in my mind, is the lack of attention paid to Barnett during the Labour Government. In 2002, Alistair MacLeod and I published proposals for the Institute for Public Policy Research on what you had to do to Barnett to deal particularly with the problem of Wales. Basically, nothing happened. That was partly because there was so much money coming through the formula that it had no political attention at all. Clearly, the resentment against Scotland is going to grow. Scotland gets blamed, for example, for the way in which English distribution formula treats the north-east of England badly. Barnett gets blamed for all sorts of things. There is actually nothing to do with Barnett, but we do need a debate now about how the bloc grant works. I disagree with people who have prominent public figures who have said that Barnett does not matter because the bloc grant is going to be smaller, but it matters crucially because while the UK Government has got most of the major revenue sources, it affects how much public spending the UK Government is willing to underwrite in Scotland. Were you talking about ambiguity, essentially, what you are saying is that there could be enough leeway for the UK Government to come up with a new system but to still target the Barnett formula and if they have kept it a vote? It has certainly changed the language debate because I thought what would happen is that Barnett's name would go and something similar would remain. We may now get the position where the name Barnett stays, but the substance becomes different. I would want to interpret the vowel, meaning that the population adjustment system remains with periodic needs assessments, which I have always expected would be a needs assessment in due course, but without treating Scotland as a region within the context of English needs assessment for health and local government. Is Barnett the kind of system whereby the Treasury cannot get its hands on particular Scottish programmes that it does not like, or Northern Ireland programmes or Welsh programmes? Does Barnett mean more favourable public expenditure treatment for Scotland? If I was a regular reader of the daily record, I suspect that I would take that to mean that Scottish public spending was being protected. Is it the mechanism that is being protected? The mechanism is over-criticised, in part because the Labour Government did not properly maintain the system. It just ignored it while there was plenty of money around. Or does it mean that Scotland is going to keep its expenditure advantage over much of the rest of England? We have talked about the assignment of VAT a little already. We know, due to the European Union jurisdiction, that VAT cannot be devolved in terms of setting the level. Both Professor Cain and Professor Heald talked about the assignment of VAT that Professor Heald described as a cosmetic change. You also have a little to say about the assignment of VAT. There are three questions that follow on. Should the fundamental one be assigned to VAT? The second one is, does the Scottish Parliament have requisite levels just now, or should there be other levels that come that can influence the revenue that would be accrued through VAT? Although presumably it would still be the responsibility of Westminster to set the rate if VAT was being assigned, should the Scottish Parliament have some form of statutory role in terms of at least being consulted as to what the level should be? I am not dogmatically against all tax assignment. What I do not like is the representation of getting assigned revenues as being your own taxes. The places where it works, the most obvious case is Germany, assignment works because of the powers of the Bundesrat, because the Bundesrat has those kind of negotiating powers with the federal government. Because there is a political momentum that demands that something big happens, I would not be surprised to see partial assignment of VAT revenues, but clearly the policy levers are going to remain with the UK Government. One of the things that is striking—I was looking at the Northern Island net fiscal balance report recently—has become a bigger source of revenue in Northern Island than income tax. On the basis of the present direction of travel, that might well happen in terms of the future German numbers in a few years' time. I think that what would happen is that the Scottish Government and the Scottish Parliament would start arguing with the UK Government and the UK Treasury about VAT. The UK has got a very narrow base VAT compared with most European countries. I think that it is about 55 per cent of consumer expenditure is within VAT. That helps the problem—it helps the wrong word—but that contributes to the problem of the tax gap on VAT. The Merlys Committee recommended a broadening of that tax base. That is extremely politically difficult to any time—probably even more politically difficult during the context of austerity. One of the consequences of assigning VAT revenues is that yourselves and the Scottish Government are going to want to have a say in UK VAT policy. Whether the UK Government is willing to concede that, and it comes back to the problem of the UK being very asymmetric, in the context of the symmetric federalism of Germany, it is a lot easier to see where the levers for consultation and participation are—very much more difficult in the UK. I cannot honestly see the Scottish Government arguing with the UK Government that VAT ought to be imposed on food and children's clothing, even though I agree with Professor Heald. I think that there is a view that most people of look fairly objectively at the VAT base in the UK have come to that are very—like Merlys—that our VAT base is actually really narrower than it should be from an efficient overall system of taxation. Again, Scotland might want to argue for that kind of say. I do not think that I would actually want to have that say, even if it was not all to say these things, even if it was actually able to do so. Professor McDoff, we need to neglect you, but I know that you have said something about VAT, so if you want to say anything in relation to this area. Only just to confirm, as you have said, it is a reserve tax, so we can't obviously devolve that tax. The only way we can do anything about that is by an assignation. As I said in my submission, I would propose that there is a significant chunk of VAT assigned to the Scottish Parliament, about 50 per cent. One last question, if that's okay, convener. Professor Heal, you say in your paper that the UK Treasury does not have a financial stake in the Scottish income tax base. I would expect both malicious actions and malign neglect. You say what you mean by this, and given a specific example, do we already see a degree of neglect when we look at the process for the block grant adjustment arising out of the taxes that have been devolved? We are still in the situation where the UK Treasury has not given any clear indication how the block grant is going to be adjusted in relation to taxes that have been devolved already, so do we see this process a little already, and can you say what your concerns are by when you say the expectation of both malicious actions and malign neglect? My objectives were chosen to attract attention to the issue. One of the things that you have to think about is that you can't change the system of the Government of Scotland within the United Kingdom without thinking about the UK. I spent 21 years as specialist adviser to the Treasury Committee of the Heads of Commons, and at the end of that 21 years I became more and more depressed about the way that the UK runs its public finances. The budget die is a completely artificial occasion whereby the Chancellor has to find some rabbit to pull out the hat to catch the opposition off guard. The things that catch people off guard are sometimes the things that go spectacularly wrong in the longer term. One of them I remember is Gordon Brown's zero-starter rate of co-operation tax, which encouraged a lot of dubious incorporations. I think that if one is going to get a stable system working with Scotland having significant policy control over income tanks, I think that it means that the UK has to bring its budget forward from March, April to November and engage the UK Parliament much more seriously in discussions about the budget. The Treasury Committee of the Heads of Commons does not fulfil its role as a tax and spend committee. It is heavily involved in other worthy things, but does not act as a budget committee. The Scottish Government under Kelman has to notify by 30 November what the Scottish rate of income tax is. The UK Government can, in March or April, change rates and tax bans and control how much money will be brought in by those decisions that have been taken earlier by the Scottish Parliament. One has to make sure that there is a basis for co-ordination for co-ordination of income tax. Once the Scottish Parliament gets beyond Kelman-type income tax powers, it is crucially important that there is some mechanism for co-ordination between the UK level and the Scottish level. It is not obvious to me, as on broader issues like monetary policy and control of the Bank of England, that the UK Government has even thought those things through. The particular point about malign neglect would be the question about resourcing of VHMRC in the context of residence. Professor Kay was making the point that residence matters are fundamentally more important once you start devolving income tax than it did before. Whether somebody was a Scottish income tax payer or a UK income tax payer might be important in terms of statistical analysis, but it did not affect what tax people pay. One has to be very careful to make sure that the Treasury-controlled HMRC puts enough resources into making sure that people's residence decisions are truthfully declared. I emphasised earlier that with 42,000 people contributing a significant proportion of Scottish income tax revenues, that tax base is at risk. The UK Government, if it wanted, could attract tax payers by changes that it makes in the UK income tax. You talked about the need for investment in HMRC through the trend over a long period of time, but the UK Government seems to have been disinvestment from HMRC. Have you already said that you are not confident that they are thinking these things through? It is a pretty gloomy outlook that you have got there, is it not? HMRC is going through a technological revolution about the way that the tax system works, in terms of its IT systems. It is very easy from outside to criticize people for getting it wrong. You can see why the labour force of HMRC will change as the nature of their operating systems change, but if you are asking me, does the UK put enough money into tax enforcement, the answer is no. The first question is a very narrow one for Professor Heald. You made the comment that VAT is a bigger deal than income tax in Northern Ireland. Is there any specific reason for that? The trend on basic right over the last 20 years has been damned.  It is one of the accidental consequences of UK decisions. Nobody in London will change the composition of Northern Ireland's tax revenue, but Northern Ireland is a fairly low-wage economy so that putting the threshold up will have a big effect. Changing the balance of taxation between income tax and VAT is going to have that effect. There is no Northern Ireland content to the policy. It is just a manifestation of what happened with a relatively low-income economy and a much higher threshold. There is a Northern Ireland content in the sense that Northern Ireland is a low-wage economy in a way that Scotland is not. The second question is something that we have not really touched on so far, but you have all commented on it in your papers. I would just like each of you to expand on why you reached the views that you did in your papers about the devolution or non-devolution of the corporation tax. Is there a specific reference to the legality issue? That is not an issue that I had encountered much before in the discussion of that topic, but a couple of you have mentioned that quite specifically, so I would be keen just for the record for you to expand on your views on the corporation tax. My understanding is that the EU prevents us in general having differential rates of corporation tax within a member state without a special justification, which is quite hard to construct in the case of Scotland. As to whether we would want to do it, I think that if we could, we probably would want to do it because of the point that we made earlier about the mobility of things in the present world. You cannot just attract economic activity, but you can attract the appearance of economic activity for purposes of your tax base by having a significantly lower rate. That is a reason why Scotland, as a smaller part of the union, might want to do it. It is also a reason why England, as the larger part of the union, would want to stop Scotland doing it. I think that would be the outcome of this particular discussion, so I do not think that devolution of corporation tax is, in that sense, going to be on the agenda, except for a small degree, but the small degree is not for those reasons worth doing. I said my submission for the same reasons that Professor Kay has given that the tax should not be devolved. One European legislation—we know that Ireland in the past had much lower corporation tax, but that loophole is going to be closed now. I do not think that there is the same scope in Europe to do that. I was initially attracted to devolution of some taxes such as corporation tax in terms of tax competition. It seems to work rather well in some federal countries in Canada at the margin, but, as Professor Kay said, given the asymmetric nature of the UK, I doubt that it would work in the sense that we have a much bigger partner who would probably react. The other thing against it would be that, if we were talking about this 10 years ago, when corporation tax was a much higher level, perhaps there would have been more sympathy for some tax competition, but now that it is down around the 20 per cent mark, it is harder to see that that is going to work. In my submission, I have said that I do not see any issue with assigning corporation tax, but I would not see it being devolved. I think that there is one specific Northern Ireland point. I wrote a paper for Northern Ireland economic council in 2003, when discussion of Northern Ireland devolved corporation tax was running very strongly. It is still the issue that is still around and nothing ever happens. There may have been a time in the political history of Northern Ireland when the European Commission might have been willing to tolerate a lower rate of corporation tax, but there is the issue that if one part of the UK had a lower rate of corporation tax than the other, you are going to get both genuine diversion of economic activity and also the fake diversion of profits. You can see clearly why the UK Government is very reluctant. The UK Government, probably on this issue, hides behind the European Union rules about the variation of corporation tax within a member state. I have read the Azores judgment and the subsequent judgments at the European Court of Justice, but in terms of a detailed answer on that, you would have to ask a lawyer. I think that one of the points about corporation tax as well is that the stories that one gets about Amazon, Google and Starbucks are important in the sense that this is a source of revenue loss, but they are also important in the sense of creating the impression among the electorate that certain companies and individuals are outside the tax rules. That is a significant threat. One of my fears about the tax system is the loss of legitimacy of the tax system and that, given the difficulty that large states have in protecting their tax base, having differences between Scotland and the rest of the UK on corporation tax would lead to a lot of arbitrage by very clever lawyers. I do not think that corporation tax devolution is on the agenda at all. I would not be in favour of it if it was on the agenda. The next issue is similar to that. You have all commented on it. I am keen to note for the sake of the record and for you to expand on it. Your views on the devolution or your views on not devolving national insurance—perhaps Professor MacDonald to go first this time. I advocated that it potentially could devolve a portion of national insurance. I think that it has always been thought that national insurance was geared towards the welfare state. That was the original intention and how originally the tax panned out. With the passage of time, it is simply a tax on income and the tax on employers. In that sense, if we believe that taxing income is the key tax to tax in a devolved sense, I do not see anything against devolving a portion of national insurance. Whether it is the employers that bear the burden or the employees that bear the burden, I suppose, is the other issue. Which of the two components do you believe is more mobile, perhaps, would determine that? I certainly would not rule out the devolution of national insurance. I have made the point that I think that the devolution of benefits and the welfare side of things is probably largely an all-or-nothing area. As Professor MacDonald has said, national insurance contributions are traditionally, and to some degree formally, linked to benefit payments. They need not be either in whole or part. You could easily see national insurance being recast as an employment tax in whole or part, which could then be devolved. However, devolving an employment tax is not materially different from devolving income tax on earnings, so that it does not actually, in substance, give the Scottish Government a par that it would not have as a result of the devolution of income tax on earnings. Economists tend to regard national insurance as just a second income tax. Politicians find that you can promise not to increase the basic rate of income tax, but you can actually put up national insurance. There is also the contested area of the extent to which employers' national insurance is paid for by employees. It is an area that the UK level needs urgent attention, so that leaving aside the more general questions about the pulling of risk through social protection across the United Kingdom, that would be getting into an incredibly difficult policy area. However, some of the inconsistencies that we have, for example, in terms of having different thresholds, are a consequence of how politicians perceive national insurance as something that the electorate does not think of as income tax. The UK is not by no means the only country that does that. You see lots of international comparisons of headline rates of income tax, but they generally do not tell you what the social security taxes are either. One of the things that would stop an individual country wanting to relabel them as income tax is that it would make their income taxes sound seem a lot higher relative to other countries than they did previously. Last issue, if I may, is for Professor Macdonald, certainly in the first instance. You obviously in your paper talked about the vertical fiscal imbalance and, indeed, other witnesses in previous weeks have done so as well. I am just trying to handle—obviously, if a country becomes an entirely independent nation state, you would say that there is no vertical fiscal imbalance there. Is there a sort of universally agreed point short of that, at which every economist, or at least a good number of them, will say that there is no vertical fiscal imbalance? At what point on the scale is there a sort of agreed definition that there is no longer a vertical fiscal imbalance? Yes, there is no magic number here. What most people do is look at a simple scatter plot of say the OECD experience. If you do that, there is a cluster, and then you will see countries like Scotland as quite a big outlier. It is really, I think, a question of moving somewhere into that cluster, but there is no magic point. The way I did the calculations was kind of back of the envelope and probably should do them a slightly different way. I do not think that the VFI would ever come down to zero, for example, but all we can say at the moment is that Scotland is a big outlier in terms of developed countries, in terms of countries which have already got substantial levels of devolution, and we need to get the figure more—the tax, spend, alignment, more align. This comes back to a point that has already been raised. I see OECD numbers about the proportion of subnational expenditure financed by subnational revenues, and you see that Germany gets a very high scoring of that, but it does not mean anything, because almost all taxes in Germany are determined by the federal government, with the lender having a significant influence through a Bundesrat, because, generally speaking, the federal government cannot do things without support in the Bundesrat. The UK may be an outlier on those kind of numbers, but it just depends crucially about how you view a Simon rather than taxed evolution in the sense that you have some kind of policy control. Last week, Professor McLean talked about the best taxes to devolve would be those linked to land, because the land cannot move, and that would apply to buildings, land and oil as well, so they were at the top of his list and possibly inheritance tax thrown in. None of you have argued for that, would you disagree with him? No, I would not disagree. I think that that is a very good economic principle, that you tax assets that are not moveable, but I think that given that we need a real movement here in the VFI, as we were saying, you have got to start looking at the taxes of moveable assets, and I think that is where I would be at the moment. No, I would not rule out taxing, but you are saying that as well. The point that I would make on this is that one of the two of the taxes that the Scottish Government already has is legislative control of council tax and business rights. Council tax has been frozen for seven years, and business hasn't been a domestic revelation since the regional council tax banding of 1991. Clearly, the 1991 bandings are pretty irrelevant in terms of what the changing relative property prices have been. Perhaps not so much in Scotland as in parts of England, but there is an important question about the willingness to actually take the political flack and deal with problems, and deal with the system maintenance issues of particular taxes. If you do not deal with system maintenance taxes, those taxes will erode, at least in terms of their legitimacy. The Public Accounts Committee conference that I mentioned earlier was talking about the effect of business rights of online retail. One has to think that one has to be much more proactive—the Scottish Government needs to be much more proactive—about the taxes that it does control. I just briefly underline what Professor Heald has said, that we have three taxes already on land, which are council tax, business rates and stamp duty land tax. In all of them, we've pretty much reached the limits of what is politically possible already, so I do not think that there is more money coming from there. I was not suggesting that there should be more money, because that is in a sense one of the difficulties about council tax revaluation that people think that the Government will get more money out of it. However, my point is that the balance of what people pay has become illogical and indefensible in parts of England, because the revaluations have not been revisited. The Scottish Parliament may remember the book committee on local government France, which the then First Minister disowned the report on the day of publication. I am quite aware of how politically sensitive such things are, but if you do not maintain the system, expect a loss of legitimacy of the system. We are going on to maintaining the system. My point was what taxes should we have devolved. My question was about the land, whether it should be linked to land, so I think that we have probably covered that point. One of the ones that is linked to land is oil revenues, because oil cannot move. The points that were made in some of the papers that Professor MacDonald wrote in page 5 of the UK effectively smooths that out. Could that same result be achieved by Scotland having an oil fund and effectively smoothing it out, so we save up in the good years and then use the money in the poorer years? Yes, potentially. However, as we discussed during the referendum debate, I think that it would be some time off before Scotland could do that. Certainly in the full fiscal autonomy model, it would be very difficult to do that in the near term. It is certainly something that is possible in principle, but it creates additional problems in thinking about the devolution of extra powers, because it introduces the importance of an asymmetric shock. If oil revenues were to be devolved, the geographic share of oil revenues were to be devolved, it would open Scotland to much more on the way of asymmetric shocks. Therefore, the whole idea that macrostabilisation would come from the centre would be brought into question, I think. In short, in answer to your question, yes, in principle, it is possible to have a stabilisation fund. In practice, I cannot see that being achieved in the near term, and I think that there would also be difficulties for macrostabilisation of having potentially asymmetric movements in revenue there. If the oil price was high to start with and we could save some of the money up, it would work, but it would be harder to do it if the oil price was low to start with. It is going to have to be really high, though, is it not? Given what we know about the expenditure side of Scotland's budget, it would need to be much, much higher than it is today, and I think that it is much higher by even historical standards. We have talked about benefits and pensions quite a lot. The word pooling came into several of your reports, and Professor MacDonald's. As I understand it, what Scotland spends as a share of its GDP or tax revenue on pensions and benefits is broadly similar to what the UK spends, and I believe that it is slightly less. There is no pooling in that area, so presumably it would be quite easy to split them. Is that the case? I am not sure whether the technicalities are splitting, but whether you would want to do that or not is a different issue. The pooling and risk-sharing come through common unemployment benefits, for example. If the whole of the UK moves into recession at the moment, if people in Scotland become unemployed, they go on to common unemployment benefits, which is a shared resource across the whole of the UK. Obviously, to buy into that system, you have to put a shared amount into the centre. If you are talking about taking that out, then you would be thinking about what you pay to the centre for other shared items, such as macro-stabilisation. It is not entirely clear to me that taking pensions and benefits out of the overall system would lead to a better result and a better outcome. Scotland is not benefiting from this pooling, and England is not benefiting from this pooling, because they are both playing their own way. Pooling is a theoretical concept, but it is not happening at the moment. As I said, if you have a downturn in the Scottish economy, you are basically and say that there is not a downturn in the rest of the UK, then the current system ensures that resources will flow to Scotland. If you break that link, that is not going to happen. Professor Cair is not here. Right, but splitting is not a nightmare in revenue and expenditure terms. It is, however, a nightmare in administrative terms, and the splitting of pensions is something—again, it is one of those problems that one had to solve one would—but it is a very unpleasant administrative group of administrative issues to face up to. Previously, you mentioned the cost of having a separate system, so I suppose that is what you are talking about again. It has also been mentioned already that the UK has an incredibly complex income tax system, plus we are running this parallel income tax and national insurance. Do you think that it would be possible for Scotland to have a much simpler system based on principles and to combine income tax and national insurance? Yes, it would. One should not exaggerate the extent to which one can have a simple income tax system. Income is just inherently a complex concept. I am saying that because there are a lot of people who have ideas that you can have, as it were, income tax legislation defined on one or two sheets of paper, and you really cannot. It does not have to be as many thousands of sheets of paper as it is, but it has to be quite a locket. Another point in relation to tax is how different taxes are linked to each other and the idea that income tax and capital gains tax are linked together. It is also true that income tax and corporation tax are linked, because people will incorporate or unincorporate depending on how it suits them. Is that an argument for saying that it is better to have a bundle of taxes that all tie together rather than just having one or two? There is such an argument, but it would become a serious argument if the structure and base of income tax in Scotland were to be materially different from that in England. I think that one would have to worry about the relationship between income tax and corporation tax, as far as small businesses were concerned. At the levels of a few points of difference, which I think is all we could realistically be talking about anyway, I do not think that those are very large issues there. The UK had an issue in the 2000s because of the starting rate of corporation tax. I was reading a relatively old IFS budget report, Green Budget, which was making the point that there has been a very significant rush between corporations because of the starting rate of corporation tax. Interestingly, it did not fall back to the pre-existing position when that starting rate was abolished. I agree that if you are running a Scottish income tax, the relationship to corporation tax is a very significant issue to watch. That would not persuade me to want to devolve corporation tax, but that is certainly one of the difficult interfaces. That was just a very foolish policy, which one hopes no-one will adopt again. Okay, thank you. I can touch on one other subject. The comment was made earlier about possibly a race to the bottom, especially on air passenger duty, but inheritance tax was mentioned as well. I think that Professor Heald mentioned that in your paper. I suppose that, with air passenger duty, the other argument is that the UK as a whole could get more tourists. It would not just be more people coming to Scotland, less people going to England, but more people might come to the UK instead of France or Germany because it was more cheap to come here. Is that an argument that is valid? I can see that there might be a diversion of traffic and some traffic generation, but it is interesting that Northern Ireland has got partial devolution of air passenger duty, and there is one flight out of Belfast international airport. Clearly, that is not going to have a significant effect on the rest of the UK, but, for example, Scotland significantly reduced air passenger duty. Presumably, it would have some effect on the north of England airports, so it is going to create internal political trouble within the UK. I have no idea what the European Commission would say in terms of state aid. One of the places that I would not want to go with is that there are too many disputes with the European Commission and the European Court of Justice about what constitutes a state aid and what does not. Although, at the moment, tons of people go down to Manchester to fly from there. That relates to the big significance of Manchester as a hub. Finally, the experience of land and building transaction tax is that we have made it more progressive and the land cannot move, so, hopefully, we get more money from the richer and less from the poorer. Do you not think that inheritance tax could be used in that way? Most of the inheritance tax stuff would be fixed as well? I do not know if anyone has got a view on that. I am by no means an inheritance tax expert, but my suspicion would be that it would very quickly enter into the tax planning calculations. If you had different rates of inheritance tax in the UK, presumably dependent on the person's residence, there would be lots of inheritance tax scheme sold. If the question is whether Scotland could raise more money by higher inheritance tax than the rest of the UK, I would be extremely dubious. I would be much more likely to expect an attempt to attract high-income tax payers, for example, to Wales, if Wales had that power, as a way of attracting their income tax now, as well as their future income in inheritance tax. Professor Cate, do you want to say something in that? I just say that inheritance tax liability is a slightly complicated mixture of where the property actually is and where the person who owns the property actually is. This becomes quite a complicated group of issues. I think the issue that Professor Heald has mentioned of people actually, if this becomes devolved, it starts to be more attractive to lower tax in order artificially to induce people to purport to be resident pair than it is to raise tax by making it more progressive. That has concluded questions from the committee, and time is against us. I just want to ask one point, and that is just to Professor MacDonald. You talked about an assignment of VAT 50 per cent. I am just wondering why 50 per cent is not 90 per cent or 20 per cent or 100 per cent? Why do you think 50 per cent would be appropriate? I basically, as you saw in the calculations I did for the committee, I cannot say their definitive, I would not say their definitive. It was simply an illustrative exercise to show how we could get a VFI which was more respectable, more in line with other OECD countries, but as I say in the document, you could tweak the numbers in different directions, I think, to get a balance that was perhaps more favourable to a particular position, and not particularly, shall I say, hung up on the actual number there. I just wanted to come in. If you have partial assignment of VAT, the question that I want to ask, if VAT revenues go up significantly, is there adjustment to the block grant? If VAT revenues go up significantly because of a UK tax policy change, is there an increase in the block grant? As soon as you start getting those into assigned taxes, you have to start asking what the grant consequences of a UK change to that tax are. I am just wondering if there are any last points that any of our witnesses would like to make before we conclude. I thank you very much for the very detailed answers to our questions. You will be glad to know, Professor Key, that you are willing time for catching your train. I am now going to call a short recess until 10 past 11 to allow an exchange of witnesses and an actual break for members. Our next item of business today is to take evidence on the Scottish Government's draft budget 2015-16. Welcome to the meeting, Barry White and Peter Rieke of the Scottish Futures Trust. Welcome back to the committee. Members have a copy of the paper from the Scottish Futures Trust, so we are going to go directly to questions. As always, I will start off with the questions and then we will open it up to colleagues around the table. First, I want to say that it is very impressive that the Scottish Futures Trust has made £640 million of savings and benefits and supports 6,700 jobs, so congratulations on your successes in that regard. However, I want to query some of the figures that you have presented to us today. I noticed an example in your paper in paragraph 1 on the introduction. You talk about £671 million of additional investment in 2014-15. However, when we look at the figures that I presented in page 164 of the budget, what we have seen is that not only do those figures coincide with that figure, but also what we have seen is that, in terms of this year, what has been expected is that over three-year periods to be spent is £195 million less than was estimated only two years ago, £614 million, as opposed to £809 million in those figures, although the figure that is presented in your paper is a £57 million increase on that. I am just wondering whether you can actually talk us through those figures, because you will recall from our report last year that the committee commented on the significant overestimation of a delivery of NPD projects in specific years. Once again, we appear to have a situation whereby we have an overestimation. Good morning, convener and members of the committee. Thank you for the opportunity to be here today. Maybe just before I respond to that particular question, it is probably just worth registering with the committee that on the M8 project, which is part of the NPD programme, I am a director of that company, and I just think that it is a courtesy just to make sure that the committee is aware of that. I am what is called the Public Interest Director, which is the part of the NPD structure where the Public Interest Director protects surpluses and the profit-capping nature of that. For absolute transparency, I am officially a director and a company's house term of that company. When it comes to any matter of detail around the M8, I might ask Peter to talk about those rather than me, but that is just something that I would like to register first of all. The £671 million, NPD is one of the things that the Scottish Trust does, we do many other things, and in coming, for instance, we work on the low-carbon and energy efficiency sites, we work with local authorities, and we have worked with them to quadruple investment in street lighting. In the paper to the committee, what we did was take the NPD investment and add on to that in terms of total additional investment, what we do in the national housing trust and what we do in things like tax incremental financing and the growth accelerator model. The growth accelerator model is a recent innovation that is launching a very major investment into Edinburgh, where Henderson real estate in the back of the growth accelerator model are going to invest some £400 million into the centre of Edinburgh. In looking at additional investment as a whole, what we have said is that, in addition to the NPD money, which is, as the figure is, in the budget, there is national housing trust investment, where we are buying houses out in the market, and there is also TIF and growth accelerator model investment. What we did was give the total additional investment figure over and above NPD, whereas, in the budget, it is purely an NPD figure. The reason why I did not pick that up was because I thought that it had just been a change since the draft budget had actually been published and also because the figures, for example, in terms of the national housing trust, when you talk about the years' concern, for example, £15,16 million and £42 million, I should perhaps have thought that there was a £57 million gap, so maybe that's £42 million and maybe TIF is £15 million, but I maybe didn't actually go through those figures, so apologies for that. On the broader point, though, that I was making about the fact that your estimates are still considerably lower than they have been in each year, there seems to be this issue of overestimation of budgets. I notice, for example, that you've talked about under schools, for example, that you talk about inability to proceed on common good land, out-term statutory consultation processes, land acquisition and ground conditions. I do realise that there are things that actually come up that prevent delivery of such projects, but why is it that year on year we still have this overestimation? We know every year that there's always a kind of issue about potential delays in projects, and we've all experienced that in our own constituencies, but it still doesn't tell me why. It's never the other way. It's never like, oh, well, actually, we thought it would be, I don't know, £809 million. It was actually £900 million. You know that you do seem very cautious in your estimates. Well, the estimate for last year, we did actually exceed by 21 million, so there is movement both ways. The movement this year is something like £142 million from what we said last year, but £20 million moved forward and £89 million moved back. The actual overall difference over three years is something in the order of just over £30 million, which is 2 per cent across a programme, across a total of £1.7 billion. What we have done for the committee this year is set out two things. We set out a very clear table saying what the main reasons for that movement was, and what we are keen on is that we do push for pace, and we continue to achieve financial clues as well ahead of historic norms. The average procurement starting to financial clues time across hub and the NPD programme, which is how those projects are being procured, is still around 17 months. The historic norm that is published by the Treasury is something in the order of 34-35 months, so we are making rapid progress, and I think that our ambition for the programme has helped to make that progress happen. What we have done this year, and that is the second point that I would like to make, is that in looking at the forecast for 15-16, which is the budget scrutiny currently being done, we actually have taken on board with what the committee said last year, and we have added 100 million of contingency to that number. The current profile of work suggests that, for 15-16, the estimate could be 100 million higher than what we have said, and taking on board what the committee said, we have taken 100 million off that, so we have always said that there has been uncertainty, and we have reflected that now by adding that contingency in. I am sure that colleagues will want to explore this a bit further. In your letter to John Swinney, you said that the £1 billion programme extension will benefit from the lessons learned in delivering the current projects, and we are currently putting together detailed implementation plans. Can you talk us through what those lessons are? We always learn lessons as we go along. We are learning them within the current programme, and we learn them for the future programmes as well. The first lesson is to say that it is really important for the construction and other industries that they know which projects are coming up and when they are coming so that they can plan their resources accordingly, and that they can build up and get the right skills in place at the right time. We will continue to let the industry know, as early as we can, what is coming. What we also know is that this profile that we have given to you here is an estimate of future workload, which is not a budget. It is probably a lesson that for the industry and for all those concerned, when that happens, it is less important than that the projects are coming and broadly that they need to resource up for them. We will publish detailed information on individual projects at the right time for those individual projects. We will seek corporate commitment on project timescales and resourcing from the individual bodies that are running procurements. That is an important principle for us across the programme, is that on individual projects there is accountability rests with the procuring body for those individual projects, and we want to strengthen the commitment of those individual bodies to deliver it and to get in the right resources in place to deliver those projects. We have a series of detailed lessons that have been shared across the programme already and they are available on our website. That goes into all sorts of commercial and practical details about how to specify buildings so that we get what we want and how we should commercially pay for those buildings through the payment mechanism, which is quite a detailed formula that we are spreading best practice across the public sector so that we can drive down transaction costs for both the public and the private sectors in doing these deals and we will continue to learn those lessons. We will have a focus on getting the right projects and the right deal and I think that that is shown by the fact that in the hub programme, for example, there is a less than 0.5% cost growth between the outline business case stage and the construction completion for the projects that have been completed and from contract award to construction completion across the programme we see zero cost growth. Continuing to learn that lesson that we get the right projects and do the right deal by getting experienced individuals in locally accountable project teams to do the deals is exactly what we will do over that programme extension. That is impressive indeed, but when it happened, it is not important, I think, that it probably is for the people who are awaiting such projects. I wonder if I can switch over to the National Housing Trust, which, as you said in your paper, is a joint venture between SFT private developers and local authorities allowing affordable housing to be developed without Scottish Government grant subsidy. I am noticing the figures that you have provided. There seems to be a year in your decline in that from £3.9 to £8 to £3.25 to £2.77 going into next year. When we look at the capital value of that, it seems to average out at about £150,000 per unit, which seems quite expensive for an affordable home. How big are those homes? There are a variety of sizes, and I think that two or three bedroom abeaths are the most popular size within that. However, those are homes that are being built without grant subsidies, so there is no offsetting of any £25,000 or £45,000 grant, as might be the case in other areas. Generally, those homes are in the eastern side of Scotland, and they are in the hotter housing markets. A lot of them have been in Aberdeen, a lot have been in Edinburgh, and those houses have been bought at market rates. We are using a Government guarantee to get cheaper loans in a partnership that has allowed them to be rented in the mid-market rent sector without Government grants. There is also a wider benefit for the nationalising trust, for the residents. It is not only that they are getting a balloon market rent, but quite often their energy costs come down considerably. In addition to that, they have a very professional landlord service. The demand for those homes has been very significant. We are looking at ways of doing more mid-market rent, which we view very much as in addition to the Government's other housing programmes in terms of social and council house building. We see that as an additional way of bringing in more housing supply, which is a critical challenge that we face as a country. Why are the numbers going down from 398 to 277 over a couple of years? The numbers really flow off the back of a series of procurements, so we have procured a number of phases, and as houses are then handed over as they are built out. We have launched a further procurement with the City of Edinburgh Council for up to 500 further homes. You will see what numbers are going to go up again in future years as the outcome of that procurement comes around. However, it is a phased procurement, and as we get blocks handed over, it is very much part of the success that so much has happened already. Because it is not grant funded, it is dependent on the market and market conditions rather than grant funding. It follows the profile set by the developers when their developments are being built out. In Pageth, you have reported that 21 per cent of UK construction contracts and 53 per cent of infrastructure contracts are awarded in Scotland in the most recent of October 2014 in statistics. That sounds incredibly impressive, but what is the average size of those contracts compared to the average in the UK? What is the table and diagram on page 3 of the report show? The first table shows that construction GDP growth over the past 18 months in Scotland has been 9 per cent compared to 7.6 per cent in the rest of the UK. If you stripped London out of the rest of the UK figures, you would see just how much on a regional basis the construction GDP has grown in Scotland. We do not have the separate London figures, but we know that London is a really vibrant construction area. The diagram by Barber ABI and Barber ABI are a very well respected monitor of construction workflow. They published the UK Government's construction pipeline, for instance. What that monitors is a percentage of the total orders placed in the month, so that is what those percentages are. In June, for instance, they reported that half of all public healthcare orders in the UK were placed in Scotland. What we have shown is the most recent data, which is September data, published in October. In September this year, compared to last year, there has been a lot of growth in Scotland, 34 per cent more this year compared to last year. The figures that you have quoted in terms of the 21 per cent and the 53 per cent are the total of the UK orders of that type that they have monitored. It is a percentage of the whole UK market orders. I do not know what the total UK market order figure is. I am just wondering what it is in cash, because one contract could be worth £100,000 if it was worth £10 million. I do not really know that it means a lot to that particular figure in itself, to be honest. The GDP figures show that the construction industry in Scotland has had strong growth over the past 18 months. What this chart shows is that the forward order book is looking strong as well. In terms of the outlook for the industry, that is where some of the quotes from people like Alan Watt from the Civil Engineering Contractions Association, the core message on workload is pretty heartening, not only for work in progress, but it is important that there is a very good future outlook as well, expressing some concerns about skills after that. Skills is an issue that is concerning all of the industry at the moment. What the chart shows is that the Scottish order book is a strong order book, and that gives industry confidence to recruit. That is a really important part of it, and that is why the £1 billion extension to the NPD pipeline is so important, because it is sending industry a signal that this workflow that is here today, the orders that are coming through and the future workload, actually means that Scotland is the place where investing in recruitment and investing in skills is a good place to do so. Just one final question, and I will open up the session to colleagues. That is on the issue of borrowing, which, as I said to you in the interval, I did raise with a previous panel of witnesses. It is just to ask what discussions you have had with the Scottish Government in terms of the planned use of capital borrowing as we go forward. The use of capital budgets and the prioritisation of investments, as we have always said, is a matter for the Scottish Government, and we are implementers. We have looked at the implementation of the future NPD programme and the £1 billion extension of that, and we are in discussion with officials all the time about that and how it will, the lessons that we have learned, et cetera, et cetera. At a detailed level on the NPD programme and that form of revenue-funded investment, we have discussions on a very regular basis on that, but the overall way that investment is split and what comes out of capital budgets and what is delivered through NPD is generally about which projects are better suited to individual styles of investment. We have always said that the NPD and the revenue-funded projects are better off suited for the larger-scale investments, and that is what we are continuing through the £1 billion extension that we have just talked about. The first colleague to ask questions will be Jamie, to be followed by Michael. Thanks. You mentioned the 6,700 jobs that are being supported across the country, which is obviously very significant for Scotland as a whole, and I am wondering if those figures can be broken down by project. I am not necessarily asking for you to detail all that here now, although, if you have any examples, that might be more meaningful to local communities if you can see all those projects delivering an excellent amount of jobs. Is that something that you can provide to the committee? I think that the 6,700 comes from the general metric that the Government applies, which is, I am right in saying, the 6,771 million transit to 6,700 jobs. It is using the Government figures that say that, for x expenditure, you get x and y jobs, so in some ways we could allocate it out against projects, but it would simply be on a formulaic basis. I think that that is at a programme level when you are doing this. It is very much using that overall approach rather than building it up from specific projects. Okay. That is actually quite useful clarity. Okay. You say that the European Infrastructure Investment programme remains more large. Is that type in Europe? Can you give us some comparisons? Across Europe, the Dutch Government of a very big programme and the French Government did have a very big programme. The IMF, according to David Smith in the Sunday Times, concerned about the slowdown in Eurozone's growth, has called for more debt, finance and infrastructure spending. What I could provide to the committee is an update to the evidence that we gave maybe one or two years ago in terms of the relative scale of other areas. However, we know from the European PPP Expertise Centre that publishes statistics on what individual countries are doing that what we are doing in Scotland is one of the biggest on a perhead basis, obviously, across Europe. I think that there was a very major announcement by the President of the United Kingdom coming in of a great desire, was it £300 billion, Peter? The challenge being set by the incoming president of the European Union is can we do more infrastructure investment involving both public and private investment? We are probably interested to see whether Europe starts to step up both on the IMF and from the challenge being set by President Euker coming in. If you could provide the detail that you suggest, that would probably be quite helpful. On a related point in your paper, you say that Scotland's infrastructure activity is written risen by 34.4 per cent when compared with September 2013. You offer some comparative figures for the regions of England and Wales, and it is considerably larger than the next. Largest increase is the south-east of England, which is up by 3.1 per cent. The east of England is down by 12.4 per cent and London is down by 9.5 per cent. That is quite a disparity, can you say why that is the case? To be fair, in all those things, it is about trends rather than about absolutes. It could have been in last September that London had a very active month, so it went down 9 per cent. It still means that there could be quite a lot of orders to play. I think that what it does show is both in the GDP growth figures, which is looking back the way and forward the way that the impact of the investment plans is very considerable. The budget for 2015-16 is something like £4.5 billion of an investment planned from a capital budget of about £2.7 billion. What we are saying in Scotland is a strong commitment in addition to capital budgets to invest heavily. What that is flowing through to is the orders figures that we are saying. I do not believe that the rest of the UK is doing the same additional investment of the type that we are doing in the NPD. The Welsh Government is looking at starting to do some NPD programmes and we know that Northern Ireland is talking about it. England has a priority schools building programme, but in relative scale it is relatively small. What we are doing in Scotland is using the powers that we have and we know that more powers are coming in terms of borrowing. We have submitted our own views to the Smith Commission on borrowing powers where we believe that there is a slight inconsistency in the current borrowing powers and that our projection for next year is that NPD could provide more than £900 million of investment whereas borrowing powers would only allow us to do £300 million of investment. Our argument would be that both of those have to be paid out of the same pot of money in terms of the repayments and therefore having the flexibility to choose whether to do NPD or to do borrowing seems to us to be a sensible choice for Scotland to have. Just turning back to the issue that the community touched on, the national housing trust. You have already talked about the reason for the change in the number of homes each year, but the bottom line is that you do not have an actual target in terms of the delivery of number of homes through this date, do you? We set ourselves a target that started doing 1,000, so that is what we had just said. We would do 1,000 homes. That was a cumulative target. Yes. The national housing trust partly responded to the time in which we started working on the national housing trust developing the idea in 2009. It was relatively untested and was an innovative idea. While we were working up the concept, Treasury added a levy to the public works loans board, so the interest rate went up from a working assumption of 3 per cent to 4 per cent almost overnight for the type of money that would be boring, which would be five to 10-year money. There were aft of things that happened and a number of challenges were overcome, but the national housing trust was responding in part to the downturn in the housing market. One of the hidden benefits of the national housing trust is in Dundee, for instance, where the national housing trust is buying 99 units from a developer. It has allowed that developer to open up a whole site for 200 units. The other 101 will be sold privately or rented to the private market, so it is partly providing more affordable rent homes, but it also helps to stimulate development overall and to unlock sites that will otherwise sit mothbald. If you go to a bank with a pre-purchase agreement or an agreed purchase agreement for 99 homes, it is much more willing to lend you money to develop the infrastructure of a site. The national housing trust, in its current form, will probably run one or two more phases, perhaps the phase with Edinburgh might be its last phase. We will have to continue to innovate and find different ways of doing housing, so that is the challenge that we are taking on, but the national housing trust, we have learned a lot through that that can be applied to future ways of doing affordable housing as well. You pre-empted my follow-up question. It was devised as a response to the downturn in the housing market, but, as the housing market comes, you still see a role for the national housing trust, but it might just have to develop and innovate and do different things. The times in which we are working in mean that the concept of developing one way of doing things and sticking with it forever is not going to be likely outcomes. What we have to do is be nimble and be willing to adapt and change. You can see that the national housing trust has started doing it in joint venture with private sector developers. We have now branched out into doing it in the partnership joint venture with local authorities. What we will continue to do is look at new ways. Given changing economic circumstances and changes in the house building market, we will have to change and adapt, and that is absolutely right, and that is the challenge that we welcome. However, the underlying issue is that we need more homes built, and that is the challenge that we are looking at. We are looking at how we can find, whether that be private rental sector or whether that be affordable. We need to find more ways of doing it. The national housing trust has been a fantastic way of doing it, but perhaps that will not be in its current form the way that we do it in the future. The bottom line is that, as you have just said, we need more homes built. You have made the point that it has been quite focused on a few specific areas of the country that seems to be rolling out to others. Can we see that it has been rolled out elsewhere? I look forward to supporting houses that have been built in my constituency and coming along close eye. Absolutely. You take the point and can it be rolled out elsewhere, although feel free to commit to building houses in my constituency. Naturally, we offer it to everyone, so we offer every local authority the chance to be part of it. Some grab that we are willing to move forward quickly, and we move forward with those that we are willing and able to do so. That means Dumfries and Galloway, Inverness, Falkirk, Stirling and Dundee. It is a widespread initiative, but what we need is a partner who is willing to move quickly and be nimble. Wherever they are, we will work with them, so there is no barrier set by us. I think that I am reading the message. Thank you very much. Michael The before by Gavin. Again, it is going back to the issue of borrowing. I do not know if you can answer this question, but I am asking if you might be able to help us in understanding the way that the budget might pan out. The Scottish Government's budget for 2015-16 sets out the three options that are available in terms of borrowing. They are the national loans fund, the banks on commercial terms, or by issuing bonds. The Scottish Government has said that in due course we will learn which of those methods or combination of those methods that borrowing of £304 million is going to take, but have you had any discussions with the Scottish Government about what would be most attractive to the financial sector that you are dealing with in order to get those projects that are going to benefit from borrowing moving forward as speedily as possible? We obviously get market feedback on a reasonably frequent basis because we are dealing with banks and financial institutions on projects that finance deals through the MPD and hub programmes at the minute. As for under the Scottish Government borrowing exactly which route that will take, I am sure that will be a decision taken in due course depending on a detailed assessment made at the time. We know with the MPD and with hub that there is a wide variety of factors to be taken into account when you are selecting who to borrow from and what structure to come down. One of those is the absolute price of funds from any given route at any given point in time. One of them, another one, however, for example, is the repayment profile. In MPD and hub we have a structure whereby we start to repay our financing when the buildings are occupied. Here we have all the additional investment that we have talked about already today. The unitary charges or the repayments for that start when the buildings are occupied, not immediately as soon as the borrowing is done. That is another factor that is important, is how the repayments are done. They are fully repaid over a 25-year life of the building. I am sure that a detailed assessment is going to be necessary on not just the cost of finance at any point in time but other factors such as how quickly borrowing can occur and the repayment profiles and the flexibility over that as well. In essence, we cannot expect a date in which the Government is going to announce £304 million through this method for these projects. Is that unlikely? I think that the great flexibility that borrowing gives you, and that is one of the reasons that we put on our Smith commission about borrowing powers, is that you do not have to choose the projects. You can choose to use the money and then borrow to fund the projects, whereas with MPD you have to attach the financing of the project at an early stage. The flexibility of borrowing powers is that you can, in effect, use it to increase your capital budget. If the capital budget is £2.7 billion for the UK Government and you can borrow £300 million on top of that, you can, in effect, express your capital budget as the total of those two things. Or you can choose to say that we are going to use the borrowing powers to fund a particular programme, an ear market against a particular programme, and then you profile your borrowing powers against it. I think that that is a choice that the Government would have to make in terms of whether you want to, in all the countries that are borrowing it to invest, set up funds, such as the building Australia fund or the building America fund. That says that you want to be very clear that this is borrowing for investment. You actually ear market as a fund and publish the details around that separately. You do not have to do that with borrowing powers. Our view on borrowing powers is that they are a very flexible tool in terms of what you do and how you do it. You could borrow, for instance, and decide to use that on anything that you normally use your capital budget for. Flexibility is one of the big benefits of borrowing powers. I mean, and there is the hand of benefits of the borrowing powers, but they are down side, they are still going to be paid back at that point. But in terms of looking at this budget, which is what we are doing, we are scrutinising the Scottish Government's budget, it is not clear how the borrowing is going to be used. That is the point. We know that there are three options available to access that borrowing. What I am trying to establish is, can we expect an announcement that will say, here is how much we are going to borrow, we know that it is going to be the maximum, here is how we are going to do it, and here are what those projects are going to be, or can we expect, as we move throughout the financial year, to see changes in how we borrow additions to the projects that are being borrowed against? Is that the more likely scenario, rather than a big bang announcement of x amount of borrowing, x amount of projects, and down in a particular way? That is not something that is in my gift to answer. We can help the Government with the technicalities of borrowing and whether you adopt a bullet repayment or whether you adopt a repayment profile, whether you go 10 years, whether you go 25 years, that is sort of our expertise, and that is where we can add a lot of value in speaking to the market. We know what markets are. By the way, that is actually a great time for financing projects. We are getting really attractive rates on the projects that we are financing. In essence, the question that you are asking, I am afraid, we really cannot answer that. I think that perhaps others would be better placed answer than us, so I am sorry that I cannot. On page 2 of your report, it is item 4 investment for growth, and it is really about tax incremental financing. You have given us some helpful statistics. The programme for TIF is forecast to deliver up to £261 million of public sector investment over the period from 1314 to 2324. Is it possible to get, in writing, a breakdown of what you think the profile of that expenditure is likely to be, or at least at this stage, are you able to say that it is going to be fairly light in the early years and it is mainly going to be loaded towards 2324, or is it more front loaded or spread evenly? Do you have any sense of the profile of spend for the TIF projects? The overall level of public sector investment is calculated at a high level based on the enabling projects that the different local authorities involved in the TIF projects believe that they will have to deliver. The timing when each of those projects will be delivered will be subject to individual decisions made within each of the governance arrangements for the TIF areas. We are not able, at this stage, to say that that individual project with that budget associated with it will be delivered at a given stage over that programme duration, which is intended to be the full enabling period that TIF supports. It is difficult to be specific then, I suppose, is what you are saying. Fair enough, I accept that. You are coming to us in a year's time, for example, for the part of the budget process and your reporting back. What is the likely expenditure on TIF for £14.15 likely to be? You are saying that it is hard to project too far in the future. Is it a kind of rough projection of what you think will happen in the current financial year? Is it the nine million? Right. In the second paragraph under heading four, we estimate that that is what the likely public spend will be. However, what I would really like to come back and talk about is what the private sector is doing as a result of this. I think that there is a multiplier effect between what we are doing in the public sector. Things like the St James quarter investment through the agreement with Edinburgh, for us, the biggest prize there is not the public sector investment, but what we can actually invest in an area that allows or unlocks private sector investment. Let us come to private sector investment in that case. You have said again at the end of that paragraph that private sector investment of around five times the sum of £1.3 billion is anticipated to be leveraged. Is that £1.3 billion or the five times multiple, is that a best-case scenario? Is that a central scenario? Is that a cautious estimate? How likely is the £1.3 billion? How likely is that to actually happen? What is your central? One of the great things about TIF and the growth accelerator and all the economic investment approaches is that it requires local authorities to put forward business cases that are absolutely true business cases because what TIF does is that it allows them to borrow in the belief that their business case is right. They are forecasting that on the back of the TIF and Glasgow, for example, that private sector investment will flow and therefore there will be an increase in non-domestic rates and, after allowing for displacement, they can keep the non-domestic rates. What we are actually finding is that when people do business cases in TIF, they really think about them because they are actually taking a risk that their forecasts are right. When they are doing their forecasts, the business case regime around that means that if they are over-optimistic in their forecasts, the financial cost of that investment will fall back on the local authority. Therefore, we believe that the forecasts are reasonably prudent. They are not necessarily the best case or worst case, but the nature of that type of investment means that it is not a business case that actually promotes overstatement because otherwise they would be taking risks back internally. I think that that is why in some cases, some of the TIF business cases, if you had asked people to submit a business case simply applying for a grant, people would normally turn that round incredibly quickly because they would put a business case forward to win their slice of the party. What the TIF regime does is actually really interesting alignment. It means that people have to genuinely believe what they are putting forward because they are taking a risk on what their predictions are. On displacement, do the individual local authorities make assumptions about that, or do they get input from you, or do you have control over that? Who decides in a business case how much displacement is there likely to be? Is there a standard approach? There is not a standard approach because the nature will change whether it is hotels, commercial retail. It is an individual assessment. The local authority will propose a displacement rate. We will assess it along with Government, and at the end of the process is an agreed displacement rate. It is not a formulaic approach. There is a matter of judgment in it. If they were being over-optimistic about displacement, you could or you might say to them, Luke. We have discussions along those lines. I will ask you for a specific question. Can we come on to NPD? It is a letter that you wrote to John Swinney on the 7th of October, which came with your submission. The 1314 figure in that table in the letter, you say, is 177 actual? Is the accounting done? It is not a sort of best-guest actual. Is that the final figure? What is the status of that figure? The figure is based on all the profiles that are now contracted of the activity that has taken place in the year 1314. In terms of the 1415 figure in that same table, that is 614. If you do a sort of comparison taking out the M8 savings, it was 757 a year ago. The changes appear to be schools, colleges and community health. They seem to be the three or the biggest changes. Can you talk us through the changes to each of those three schools, colleges and community health? I think that we have said largely about community health and schools. Peter, do you want to talk about the differences? There are, as we have put in the letter, a number of areas, principally in schools and community health. There are different classes of those movements. In schools, first of all, there have been a number of projects where it has not been possible to proceed with a project as it was scoped originally. It is maybe better to talk about that by way of example. The barhead project is possibly a good example where the school was announced in September 2012 as part of the phase 3 of the Scotland Schools for the Future programme. East Renfrewshire Council at that stage anticipated that that project could be on-site in 12 to 18 months of that announcement. The design was developed pretty rapidly through HUB based on the successful project at Eastwood. That project was just about ready for financial closing in the spring of 2014. All the way through that development, the council had a preferred site in mind and that preferred site was on common good land. In parallel with the project development, the council was doing diligence on its ability to build on that site. Unfortunately, after taking that through legal process and rights to the court of session in the end, they were told that they weren't able to build on that site. That has led to the project being put on hold for around about nine months. Only now is the council just about selected another site. We'll have to go through an element of redesign to make the work that they had suitable for the new site and to proceed on that basis. There are some pretty binary points that happen as you go through projects. There are other examples where statutory consultations that councils expected to get through were not supported, so they've had to change their plans. That's a class, if you like, of things that have happened on individual projects. We are very supportive of local authorities and other procuring bodies across Scotland buying the right thing. It's really important that we both buy the right thing and get the right deal for those things. The second class of issues that we referred to in our letter on schools has been where we have had to take time on individual projects to get the right deal for that project. That might be to do the right commercial deal with a contractor. It might be to make sure that we have the right contract in place for the life cycle maintenance of that building as well because we're not only interested in putting up the right buildings, we're interested in them being looked after for 25 years. We will always support authorities and indeed ourselves will occasionally hold back projects through our key stage review process where we don't think that that deal is right for the longer term. In schools it's principally getting the right project and getting the right deal. In the community health sector, which is the other area that we've put in our submission again, there have been some delays, there's a pretty quickly changing time in the delivery of health and social care, as you know. What we've seen in that area is that the evolving integration agenda has caused a number of projects to pause again to think about whether that's the right project for the long term and to re-scope a project to include, in many cases, more involvement of local authorities, so integrating health and care services. That integration, first of all, as you can imagine, there is a redesign of a facility to include more services. The other parts that come with that is often an opportunity for the resighting of a service and a facility that might be now sighted on land that was in council ownership rather than in health board ownership. Resighting can lead to redesign and it also means that projects face scrutiny and affordability considerations and value for money considerations from two bodies at the same time, the local authority and the health board. That parallel processing of projects through development and governance generally takes longer than if there's only one body concerned. We still believe that these will be the right projects for that extra work that's been done and for bringing bodies together to procure. Bringing bodies together is a tricky thing to do, but it is absolutely right for those projects. Across the schools area and the health community projects, those are the main features that have caused projects as we reported and, as we've always said, there are uncertainties. Those are the things that have happened to cause that movement. You've put a prediction as it were for 2015-16, which is £954 million. You said in response to the convener that you've effectively got a float or some leeway of about £100 million in there. Your central guess is that you might end up doing more than that, so you're trying to be cautious there. Clearly, there will be some factors out with your control and some of the issues that you just described could conceivably happen in 2015-16 as well. Is it your central scenario that for 2015-16 it will be £954 million? Is it unlikely to be less than that? I think that what we've done has taken a prudent contingency, but I think that we would always caution that when you're dealing with international financing markets, the source of finance we're getting at the moment is coming from literally all around the world, and we welcome that because we're actually getting great deals on financing. We actually believe, taking into account what the committee said last year, I think that the contingency is very helpful in adding certainty, but I think that we'd always say that we still require projects to be done. Picking up a point to convener that you made earlier, we do care enormously about when things happen, but there is a danger in projects when the timing becomes the overriding factor. There is a whole history of public sector projects where a project team has been set a deadline to meet, and that forces people to make decisions that aren't good long-term decisions. Therefore, while we push for time, we push for pace absolutely and we want to see things happening as quickly as possible, what we won't do is get ourselves into a position where we actually end up with those wrong decisions being forced by a deadline, and it would be wrong of me to list projects that history shows where that has been the case. We all know of many where that has been the case where a sense of urgency at the start creates a long-term problem, and as Peter said, what we're saying for instance in hub is a lot of price certainty being maintained. The affordability in the programme is very strong as a result of the decisions being made. From that point of view, pace absolutely, getting things done absolutely, but we can't let ourselves be in a position where we hand the negotiating position to the private sector to go, well, we know you have a deadline to meet, so we'll sit back until you concede all our points. We're not having that. That's helpful. I'm grateful. Thank you. Thanks, convener. Probably to pick up on just one or two points that have already been mentioned. In your letter to John Swinney, which Gavin Brown was just talking about, you talked about the figures that we have provided in Annex 1 are a projection of capital investment, not a budget, and I think that the word estimate came in somewhere as well. I think that estimate might have been an alternative for projection. Can you spell out for us how you see the difference between projection, or estimate and budget? I suppose that budget—a projection and an estimate are largely two words, the same thing. We're looking forward, but you can do a projection based on a set of facts that—or you can do a projection based on people's estimates, if you see it. Maybe not making it clear. Looking into the future, if you have a set of commitments, you can say that those commitments are going to cost X into the future, and that's a projection. If, however, you're projecting into the future, we're certain things still have to fall into place, that's a projection based on an estimated figure. Does that help? I'm not sure. Peter is very good at explaining. The implication for us of something being a budget is all of the implications that you know well from the scrutiny of the Scottish Government's budget, which is that it is set on generally an annualised basis, and the phrase that's quite often applied is, it's use it or lose it. What we have here is a set of projects that, yes, we now have to be paid for in the future, out of budgets set for revenue expenditure out of which the unitary charges for these projects will be met, and, as I said earlier on, that budgetary implication of these projects starts once the project has been completed and is in use, so there's at least an 18-month construction period or even a three-year construction period for the larger projects between when we have absolute certainty on the cost, when the contract is signed, because, as we've said, the variation from that point under this route is extraordinarily small, and when the budget implication of the project occurs, and that annual profile of budget is very well known, very well understood and can be put into the overall Scottish Government budget. One of the differences is that budget is very much tied to time, whereas projection, you're thinking just more that the overall cost. So we're making a projection of the profile of when construction activity happens. Construction activity is, in the long term, paid for out of revenue budgets, but while it's happening, it's simply a projection of when the activity on the site will take place, which is very important for the overall construction industry and the jobs that we've talked about, but isn't an annualised sum that comes out of a particular pot in a particular year? I think that we'll leave that one at that stage. Another thing that was mentioned was that Mr McMahon talked about the difference between NPD and traditional borrowing, and you made the point in your submission on the Smith commission that you think that there should be more flexibility. I mean, I was under the assumption rightly or wrongly that all those schemes—PPP, PPFI and NPD—are only there because we can't use traditional borrowing, but would you actually be arguing that in some cases NPD is better than traditional borrowing even if it was available? As our chairman has said, we're ecumenical about what we do. We seek value for money and there are countries around the world that have borrowing powers that still do project finance structures, such as Germany as an example or France. Both of them have borrowing powers as countries, but they choose for out-of-band improvements or for TGV enhancements to do it through partnerships with the private sector, so there are different reasons why you would do different things. Our starting point isn't an ideological one, not far from it, whereas ours is one of value for money. It might be right at times to consider on a particularly risky project or the private sector a better place to take that risk and pay that higher cost of finance. For us in Scotland, the main benefit that we're getting from NPD is that the Aberdeen Western peripheral route, taking that as an example, under capital budgets would not be built for probably five years or more. The availability of budgets would determine when it could be built. By bringing it forward in time and getting the benefit of that now will help the Aberdeen economy and the Aberdeen International Business Park, one of its prime selling points where the ready-built or the process of building a third of a million square feet as a headquarters office, and the tenancy agreement for that now, it's hugely improved. Road links that are going to happen when the AWPR is there. We knew already that projects such as the AWPR or the M8, even before they're finished, are starting to have an economic impact. By being able to accelerate and bring those forward. I'm going to bring them forward because NPD effectively, as long as we can afford to repay it, is limitless, whereas the only problem is that the capital borrowing is very limited. Is that the problem? The point that we're making in the Smith commission is that it would be better to have the choice. That's our point. It's not that we're saying one's better than the other. I think that one has a lower cost attached to it and is more flexible, borrowing. I think that the other brings in some private sector expertise and risk management that might be worth paying for in certain circumstances. The point that we're making in the Smith commission is that if we're paying for this one way or the other, why artificially restrict one? That's a point that we make. The third one that we've already touched on is the question about mid-market rent or affordable rent. The phrase was also used, more affordable rent. You made the point that this was mainly in the east coast where rents and housing costs are higher. Can you clarify for me a little bit as to where we're talking about with those rents when we use the terms like those, affordable or mid-market rent, because there's no hag involved, no grant, so obviously you're having to cover all the costs. For example, you might get somewhere where a house, if it was a social rented housing with a housing association, you might only be paying a couple of hundred pounds rent in a month, but if you went out in the private sector it would be a thousand or something, so there could be quite big gaps in there. Where does this kind of housing fit in in that range? This fits at around 80 per cent of market rent, so that's the type of level that we're talking about. If you're sitting in a private rented home already, with probably very little hope of getting a social rented home, it's actually quite a significant saving. The target market that national housing trust has largely serviced is people typically working households on and around median income. It's available t