2019 o'r Canyfodol Cymru. Mae'n fawr i'n gwybod i gael gilydd chi gyda i eich cyllid ymwyaf ar gyfer amddangosol. Mae'r 1 ysgwrth angen yn eu cyfeed ASMRtlen am yr Yn Ysgwrth, am washerd erioedd y cyfiawni. Victoria Beattie, mae gennym yn cyd distributioner o gyllid yma, y team yn Simon Fooler, y dyfodol yn y Llyfrgell euchydigfyrdd, yn y Gŵr Wyrhyn Llywodraeth. Mae cymdeithasol ar y dyfodol. Mae yn ymwyaf o fy modau o'r angen, I would invite the cabinet secretary who he wishes to make an opening statement. Good morning, convener. I'm happy to go straight to questions, recognising this as an exploratory subject. Okay, that's helpful. Our adviser has told us that, in 2017 and 2018, Scottish average wages grew less quickly than other areas of the UK, and the understanding that the causes of that relative Scottish earnings slowdown should be an ongoing priority for us, because, obviously, potential impacts. Are you and the Scottish Government concerned about that potential impact and the relative slowdown and the potential impact that it might have on the size of your budget? What measures could you begin to implement to help you to respond to it? Although those measures and levers that I recognise might not be significant? Convener, yes. Of course, we all want to increase earnings across the private and public sector. We've got a very specific public sector pay policy. Some of the statistical analysis would have shown over the medium-term period that the downturn in oil and gas would have been one factor, one significant factor. In terms of economic growth, there's a range of interventions that we're making on my appointment as economy secretary. That would include the economic action plan more around productivity, more around innovation and investment, and what we want to do on infrastructure and internationalisation as well. We welcome more investment in research and development, so I think that all of that gives us the right kind of approaches to support both public sector and private sector enhancement of earnings potential. I'll be further working on retraining, upskilling, and as the economy is transitioning, it clearly is transitioning, making the right interventions to make sure that we're focusing on quality as well as the quantum. For reasons that the committee understands better than any other, it has an impact on us in terms of the fiscal framework and the relative position between UK earnings and earnings in Scotland. He has shown all of that as productivity, which is why we're very focused on productivity. We heard from some of the contributors a panel session that we had, cabinet secretary, about the living wage. Some of that noise was positive around what the Scottish Government was doing around the living wage. Although we might be ahead in terms of the number of people who are registering as living wage accredited, it is still a very small part of the overall business background in Scotland. Is there more that we can be doing in the arena of the living wage to encourage more employers to be involved in a positive way in that regard? Absolutely. Having launched the fair work action plan in supporting the living wage, of course, recognising that some of that is reserved, employment laws reserved, and the setting of the national minimum wage is a matter for the UK Government. Of course, the Scottish Government was the first Government to be accredited with living wage status through our procurement policies and other policies. We've tried to create that culture of expectation. We can't necessarily compel people, but we have tried to create that culture of expectation and encourage it as appropriate. That includes focusing on the business pledge, for example, so it's in terms of private sector practice to try and encourage that in terms of our own employment policies. We, of course, pay the living wage and encourage other parts of the public sector to do the same. Recognising that encouraging as many businesses as possible to pay the living wage—more people are paid the living wage in Scotland and in any other part of the UK, that's a good sign. Of course, we want to get to 100 per cent and continue to improve that as well. There are actions by way of encouragement, culture of expectation and where we can compel in terms of our own employment policies that's what we've been doing. Recognising that that's the minimum in terms of average wages. There's more to do across the composition of employment, but we've certainly been very proactive around the living wage. We'll continue to look at that. For example, we are reviewing small business bonus and the support of the enterprise agencies, the businesses that they support as well. We're looking at how they can further support fair work first. A range of interventions. You yourself mentioned the issue of productivity, and I know that there are a couple of members who want to get into that area a bit more deeply, cabinet secretary. I'll ask James Kelly to begin that discussion. Thanks a lot, convener. Good morning, cabinet secretary. We heard in the last session that the issue around wage growth has been on-going for some time. For example, the average median early earnings are 1.9 per cent below what they were in 2009. As you said yourself, that becomes a concern and it feeds into the fiscal forecast when they're saying that there's going to be weak wage growth and that potentially compromises the budget. This is an issue that's been around for a long time. As you said yourself, one of the reasons for it is to do with weak productivity. Are we interested in your view of what does the Government see as its main task in terms of increasing productivity, and how do you link that into improving wage growth? There's a fair analysis. Over the period of devolution, productivity in Scotland has improved, so we've been closing the gap over the period of devolution, and there's been further improvements since 2007 specifically. Not every year has seen big leaps in terms of productivity, but 2018 was a much stronger year. I'm very mindful that in eight minutes time there'll be further statistics in relation to the last quarter on productivity stats as well, but over the period in 2018 there has been improvement. As to what Government interventions look like, we recognise that productivity is an issue in terms of output. I think that that's why some of the interventions that I mentioned earlier, the economy is transitioning, so we want to look at the economy of today and the future, so that's more around digitalisation. We recognise that automation is an issue, but it has positives and opportunities in terms of coding and designing and digital jobs of the future. Enhanced productivity can also come from upskilling, focusing on quality and manufacturing as well. The spend on innovation and research and development is important for industry, and that's why we're supporting the National Manufacturing Institute for Scotland. We're spending more on our innovation centres working with universities, education and the economy more widely. The education system is clearly focused on skills as well. The retraining partnership will be important as many jobs will be changing, so that will focus on productivity. We'll be working with STDI and productivity clubs, because we recognise a lot of the best practice that might be in companies and they can share that with other companies, so having that good practice on productivity shared is a key issue. In strengthening the economic strategy, the four strands of infrastructure, internationalisation, inclusive growth and investment will all play a part in enhancing productivity. As I said to pay earlier on in terms of living wage, what we pay is important too, so focusing on quality is important. Take childcare where there's an expectation that we'll pay and encourage to pay at the living wage that we're trying to improve quality. Quality and productivity go hand in hand. There's a range of actions in the economic action plan that show that productivity is a serious issue and we want to tackle it. However, the signs are that over the period of devolution we've made progress in narrowing the gap between UK and Scotland. 2018 is a stronger year. Again, oil and gas impact would have impacted on the productivity figures. Now there's some resurgence there and that will feed through to the wider economy as well. There'll be further information on the most recent quarter in terms of productivity, but over the period in 2018 we've made progress, so we need to keep that progress up now. You mentioned technology, which is clearly a big advantage. What are the key sectors that you would see? Technology improvements, boost in productivity, and how do you balance those advances in technology with the fact that there will be automation and it'll produce job losses in some areas? You would obviously want to have a policy that would counter that way, increasing jobs and opportunities in other areas. It's a good question. Recognising the economy as transitioning, we already know that there will be a shortage in digital jobs, so actually there's great employment opportunities in digital already, but we need to make sure that our workforce is trained and has the necessary accreditation and skills to be able to fulfil those jobs and we can attract more. If you take some of the big really welcome announcements, 2,500 jobs at Barclays Bank in Glasgow, 400 jobs at KPMG, for example. There are other financial institutions right now looking at how they invest in Scotland. They will naturally want assurances that we will have the people with the appropriate skills to populate those jobs. Although industry will be changing, manufacturing is changing, but there are jobs in design, in innovation, in coding, in digital, in all of that. If you look at the investments that we've made through city deals, we're looking to the industries of now and the future. Edinburgh is a good example of the city deal investing in data, big data, technology, robotics. Although automation is a challenge in terms of jobs that it displays, it's also an opportunity in the new jobs that it will be creating. That's why we need to calibrate the necessary enterprise and skills system to make sure that we can create as many jobs as possible through that. Of course, it's not lost on this committee that we've got record low unemployment at 3.3 per cent right now, which is outperforming the rest of the UK on 3.9 per cent. Of course, we want unemployment to be as low as possible, employment to be as high as possible, because beneath those figures there will be issues of under-employment as well. However, focusing on quality is those investments around manufacturing. In terms of the sectoral question, we can do more around exports. We launched a new export strategy, Food and Ranks, a very successful sector within that. Whiskey is an example of an industry that has really focused on productivity. It is one of the fastest packaging and bottling lines in the world. I was visiting Shield Hall Plant in my constituency for its 40th anniversary, showing that it has invested in productivity and sustained high-quality, high-paid jobs. We want to share that good technical expertise on productivity. All sectors matter to the Scottish economy, but there are real opportunities in life sciences, in production, in manufacturing as well. That is why the National Manufacturing Institute will be so significant for us. That is Government working with the private sector and academia to make those leaps in productivity. It is commercialising the academic outputs that they are investing in and trying to bring all that together through the enterprise and skills system. You mentioned academic outputs. One of the issues that I pick up on in speaking to businesses is that there is a bit of a skills gap between the number and the experience of graduates coming out of the system, where necessary information technology skills, and what businesses and industries need. What is the Government doing to try to bridge that gap? One of the recommendations from the enterprise and skills review was to do just that, to ensure that the education system is delivering for what business and industry actually need. Some of that will be around the necessary professional or company-recognised accreditation. For example, in digital, that may well be Microsoft accreditation. There are a lot of companies doing fantastic work in Scotland that hide under a bushel. They do not want to shout about their success partly because of the commercial confidentiality of their clients, but there is a lot of good work going on in Scotland right now. What businesses have been saying is that they absolutely focus on the skills that are required now. In the future, on digital is a really good example. What the Government is doing about that is ensuring that we have the right partnerships between higher and further education and business and industry to ensure that the courses and the accreditation, if you like, can be built in. Foundation and particularly graduate apprenticeships are really important. If a graduate is going through the education system and getting paid by a company at the same time, that company is maybe offering the guarantee of a job as well. That is good for the academic institution, good for the student, employee and the company. In real time, it is giving business and industry the skills that they need. It is educating that person and not necessarily young people. Of course, there are apprenticeship opportunities open to many, not just young people, but specifically those graduate apprenticeships that are giving people the necessary qualifications, accreditation and pay in their pocket. That seems to be quite good for retaining people in those routes. They come out work-ready because they have been trained in the academic institution at the same time. Sometimes businesses say to me that someone has gone through an academic course and then they become work-ready after a period after that. Many of the interventions and recalibration of the system such as graduate apprenticeships is getting people work-ready as they are going through their education. I think that because Scotland does so well in terms of the population being highly educated, more graduates and most other nations, that is a good thing. Also ensuring that there is the necessary accreditation professionally recognised or recognised with what business and industry want is a very helpful development. That is making a difference to our economy and that is partly why some companies are choosing to invest in Scotland right now and attracting more big companies to come to Scotland because we have that ecosystem of growth and a talented workforce and there are ways into education. Some of those companies, convener, are engaging with colleges and universities to make sure that there are bespoke courses that are right for that sector too. That is the right kind of partnership to connect with the needs of the education system with the needs of business and industry to give people the best possible start in employment. Willie, I see you had to keep you a supplementary in this. Thanks very much, convener. I am glad that you mentioned the digital economy there. I do not want to drop us into a Brexit discussion immediately, but the UK Government's stated intention is to leave the digital single market, which we think is worth about 400 billion euros a year throughout the European Union. Scotland's share of that is roughly about 4 billion euros per year. What is the impact of that going to be in the Scottish economy, particularly the digital economy, if we get pulled out of that market? It is well appreciated that an audio Brexit particular would be catastrophic for the economy in terms of the wider economic impacts. I have published the advice of the chief economist in terms of impact on the wider economy. That is recession, GDP contraction, business failure, impact on Scotland's finances, less exports and beneath all that would be that greater stress for companies because there would be a challenge in terms of available staff, investment into universities, research programmes. I think that a full panoply of impacts on the economy would be very sorely felt. That is why we are trying to avert an audio Brexit. Any form of Brexit impacts on the economy, impacts on individual sectors, I believe that we have published the sectoral impacts as well. It will affect our economy adversely, as opposed to the growth that we would be enjoying if there was no Brexit. Digital would be hit because education is hit, wider economy is hit, business and industry is impacted. That is partly why the digital sector is so concerned about it. Also recognising that digital is an example of an area that is highly mobile in terms of movement of people. Impacting on freedom of movement would also be an issue in terms of employability and available skill, talented workforce, students and research. For all those reasons, it would be a negative impact on the economy. I recognise the link between the digital and the single market and productivity, but this is primarily about pay, so if we can make sure that we are talking about it in that context, I think that that would be helpful. Angela, I think that you wanted to specifically mention the link between productivity, growth and pay. We had a wide-ranging discussion at our round table a few weeks ago. One of our witnesses, Russell Gunson, has said in a quote on him, he says that we need to focus our productivity policy as much on the everyday parts of the economy as well as on the growth sectors that the Scottish Government has picked out. I have been interested in the cabinet secretary's response to that view. What he considers to be part of the everyday economy and how does the Government demonstrate support for the everyday parts of the economy? It seems to me that it is quite easy or easier to demonstrate support and inputs into high-growth sectors. It would be good to have a better understanding of how the Scottish Government is using its particular levers to support the everyday parts of the economy. I am wearing today's national performance framework underpinned by the UN's sustainable development goals. That tries to calibrate all the actions of the Government to focus on our purpose, which is about flourishing society and realising the opportunities that are there. I suppose that one of the ways to raise quality is through what you pay and what we pay for the day-to-day services that are important in paying the living wage, trying to support public sector pay policy that properly renumerates staff. That in itself can raise quality, investing in skills is the right thing to do, making sure that there is good practice at that shared. I suppose that an example of big new commitments would include the childcare policy and setting out that we want it to be paid—all staff to be paid—the living wage. We have made the resources available to do that. The day-to-day spending, the biggest spend that the Government has, is the payment of salaries and the enumeration of our staff. We want that to reflect quality and investment and good practice as well. Right across Government, we are focused on good practice, productivity and proper renumeration for the day-to-day services. I suppose that the reason why I am focused on the growth of opportunities is that there is great potential to create high-quality jobs in those, partly to replace that, which might no longer be there. In the private sector, the announcement that Michelin would be leaving Scotland is a good example where there will not be that same industrial manufacturing at that site in Dundee any more. That is why we are working proactively with the company around what are the opportunities for employment now and into the future. Where is the entrepreneurship? How can we support transition to the circular economy, the low-carbon economy, and how can we create those jobs through our investments or partnership approach? One of the reasons that Michelin agreed to stay and help us with that exercise was our vision for the country, and that was the national performance framework. I think that we set out our vision for the country, the investments that we are willing to make, the outcomes that we are focused on, which cut across portfolios and make sure that there is the right investment through the gender pay gap, through fair work first, through what enterprise companies are doing to create the right culture to approach that, whether it is the businesses and services of the day and then where the opportunities are into the future. I can just pick up a few further things, particularly about how we improve productivity in the service sector. I think about services specifically to people, particularly the care sector, whether it is older people and the cabinet secretary's mentioned child care as well. While the digital services are an enabling sector, as well as a sector in the known right and upskilling staff, there is something quite distinct about what improving productivity means in people-orientated services. It is not quite the same as improving productivity in a big manufacturing sector. It means something different and it has to be measured differently, so it would be good to understand that more, particularly given that the Government has a very clear commitment to reducing the gender pay gap and the care sector, of course, it is predominantly women. That came to a very strongly in a evidence-deep session of the cabinet secretary, particularly in that care sector that Zangilla describes. The challenge of increasing productivity at the same time, particularly in the third sector element of the care sector, how they can match the living wage elements in that, and it was a challenge for them to drive that productivity at the same time and find the wage levels that they needed. That came through as a theme. I suppose that the health secretary or community secretary would be better placed to go into some of the forensic detail of that, but, for my interests—or decisions by way of finance secretary, in terms of that, one of the interventions makes a difference like telecare, so that appropriate use of digital technology can enhance care and then has an impact for staff. Where it comes up in finance, arguably, is where the third sector describes the pressures that can be put upon them to drive that efficiency with the same contracts and the same money, whilst at the same time there is more pressure on them to pay the living wage because we want the quality as well. In terms of the finance interest, there is something making sure that the money that is in the system, because there is health and social care integration and specifically identified resources for payment of the living wage to local government, for example on child care and in social care, there was an uplift to pay for that, making sure that that then follows through to the third sector as well as important because they need to be resourced to pay for that quality. That is a fair issue in terms of how we ensure that the resources are there, but that takes you back to the debate on ring-fencing that the committee has often had, whether we should ring-fence resources that are earmarked for such a cause at a local level. Many third sector organisations ask the Government to ring-fence resources so that they are guaranteed to receive that resource. Of course, local government resists that because they prefer the general payment. We are supportive of the agenda, but there is a question mark as to how much we should ring-fence when we have even clearly identified the resource to achieve the policy outcomes such as payment of living wage within the social care sector. Tom, I know that you want to end, but that is quite a number of SNP voices in the ropes. It is not a bad thing, necessarily. I need to try and keep a balance, but I will let you do a quick supplementary, and then I will move on to others. Thank you, convener, and good morning, cabinet secretary. It is just a very brief supplementary. You touched upon the jobs of the future. Recently, of course, the First Minister has declared a climate emergency, and this will precipitate a review of all policies across Government. Clearly, our first priority is to meet those targets and to meet that target by 2045. That is going to generate a range of different areas for innovation entrepreneurship, both in policy and across a whole range of areas in ecology, rewilding, conservation and, of course, green energy. Now, while Scotland by itself cannot solve the climate crisis, it can, of course, be a pioneer and develop and innovate and export that across the world. So while, obviously, we are meeting this environmental challenge, there is clearly economic opportunities as well. How do you think that we can capitalise upon that in Scotland and innovate and develop the technologies that will help us to meet these climate change goals and to capitalise economically as well? The Environment Secretary will return to Parliament with more to say in relation to the Committee on Climate Change report. We need to look, of course, at our policies to respond to even more ambitious climate targets. Scotland has a good track record, of course, of reducing emissions, and we have the most ambitious climate targets in the world. Of course, that requires us to look at our policies and our actions, but there is, of course, economic opportunity in those policies as well. I just gave an example of Michelin and Dundee, so they are not continuing with their industrial tyre manufacturing, but they want to continue to have a presence in Scotland when we express what we want to do around a circular economy, low-carbon transport and entrepreneurship in that regard. I absolutely agree with Mr Arthur on the economic opportunities from the agenda. We should seize them, and that is why we have been investing directly into policies that will make a difference in carbon emissions reductions, but also where the opportunities for the future will come. For example, renewables. As it happens last week, last Thursday, I convened a summit with many of those companies that are interested and stakeholders interested in renewables, particularly offshore renewables, because there is a view that, although we have been consenting and encouraging and enhancing our capacity within the renewable sector, we have not had the onshore industrial jobs that should come along with that. Even though the UK Government has shared that ambition, we have not got the jobs that we would like to have seen. We are looking at ways in which we can use our levers to encourage companies to invest in supply chains and the industrial jobs in Scotland that then match the renewables capacity that we have been delivering. It is a good example of ambitious climate change targets. Creating jobs and employment and economic opportunity all goes hand-in-hand, but it is on the wider issue about our response to the Committee on Climate Change. The Environment Secretary will return to Parliament shortly. Patrick, you are new to getting into your area of public sector pay. Thanks very much. Good morning. On public sector pay, when you announced the public sector pay policy in December, you said that it continues the journey of restoration of public sector pay. Can you describe that journey, how far we are going to get and how quickly? I cannot set out future budgets or what percentage increase there might be in future budgets, but what we have departed from is the 1 per cent pay cap. There is divergence in terms of UK policy and Scottish Government policy. If we had gone much further in terms of an uplift in pay, it probably would have been impacted on actual headcount. We have tried to retain as many people as possible, protect numbers and absolute headcount in giving as fair a remuneration as possible within the bounds of affordability. We have also had a policy of no compulsory redundancies. We have targeted low pay in terms of payment of living wage, cash underpin, we have maintained progression, which is quite significant because that is sometimes lost within the headline figure of a pay increase. However, progression is important to those that are benefiting from the incremental increases in their pay. We have suspended bonuses, so in terms of UK Government continuing to pay bonuses, we have not been doing that, as a massive course within the Scottish Government public sector pay policy, and there are further flexibilities that allow employers within the public sector to target inequalities and equalities issues. All that, as a package, has been a departure from UK policy and has tried to respond to the issues around remunerating our staff. In terms of, for the last two years, the public sector pay policy targeting a higher uplift, those paid less, so £36,500 being the limit of difference between a 2 per cent and 3 per cent pay policy and a cap at the top as well. In terms of the journey of restoration, having moved away from the public sector pay cap of 1 per cent, what we have tried to do is increase that uplift, but within the bounds of affordability so that we are not reducing the headcount. It has been a very careful balancing act. Mindful of the inflationary position CPI and RPI, many people would have had an above inflation increase when you take all of that together. Journey of restoration looks like a fair remuneration, but the percentage at which we can increase it will be dependent upon the budgets at the time and decisions that we make around headcount. Completely, there is a departure from UK policy. It is a welcome departure. I am questioning whether the phrase, Journey of restoration of public sector pay is strictly accurate. It would be wrong to give a false expectation to people working in the public sector. Do you accept that public sector pay in Scotland remains lower than it was in real terms 10 years ago? Yes, as a consequence of the recession and UK austerity, clearly we would want to go further. Equally, I do not want to make people compulsorily redundant. It is fair to say that there has been a trade-off in maintaining headcount and not making people redundant, so we have been employing more people, although there has been a pay restraint that I think is well understood. I think that there has been a pay restraint in the private sector as well, but for the public sector, we have been trying to protect the workforce. That journey of restoration is departing from the 1 per cent pay cap, looking at inflation when we are making decisions around public sector pay policy. For the last two years of the public sector pay policy, there is a differential between 3 per cent and 2 per cent, which is more than 1 per cent. Within that, for sectoral bargaining arrangements as well, clearly different categories of workers have had different pay awards. There is a difference between just because of timing and when the negotiations would have happened and the character of those negotiations, different pay awards for different members of staff, but in terms of overall pay policy, it is departed from the pay cap, which was down to the restraint that is necessary for the time. The balance that you described between a headcount and above inflation pay settlements, that is something that has been debated throughout that whole decade and more. In fact, when John Swinney, your predecessor, was trying to figure out how to respond to the economic crisis and the impact that was having on Scottish public finances, he brought all the political parties together. There was consensus at that point that we did not want to see lots of redundancies in the public sector and that pay restraint was unfortunately going to have to be something that people would live with for a time. We have now moved beyond that and we are at a point where the loss of public sector pay has become intolerable and unacceptable. I think that the fact that some unions, for example teaching unions, have had to work so hard to get the beginnings of restoration in the value of pay shows that. Would you accept that if this phrase, journey of restoration of public sector pay, is going to be an accurate description to people working in the public sector of what they can expect, then it has to mean a sustained period of above inflation pay increases across the board, not just for particular sectors? I do not want to attach a definition to it, convener, but I understand the sentiment of the question. We want remuneration that is fair, affordable and that protects headcount. Arguably, there could be a totally different approach where we have fewer people but we pay them much more. The balance that we have taken is that in executing the Government's responsibilities we properly remunerate our staff and recognise issues of low pay. That is well recognised, the efforts that we have made around low pay generally. In terms of the pay differential, capping increases at the top, not paying out bonuses. It is a range of interventions that I have given us a much fairer pay policy. I understand the sentiment of the question. I do not wish to attach a definition to it other than working through the pay agreements that we have made with our staff and will continue to do in light of the financial circumstances that we face. I think that we enjoy relatively good relations with trade unions as we engage with them on pay going forward and I will continue to do that. Finally on this, there was some discussion at the round table recently that we had on this topic about the indirect effect of the public sector pay policy. Not just the Scottish Government but local government as well. What is the effect on the wider earnings situation in Scotland, the impact on the private sector? There was some discussion about are there ways in which the Government or the public sector more generally can maximise the impact that public sector pay has on the rest of the economy? Particularly given that some of the sectors where poverty pay is most severe are those where procurement is less relevant, things like retail and hospitality. Are there things that the Government and the public sector can do to maximise the impact that public sector pay policy has on the wider economy? It is a fair question and looking at some of the evidence, I think that there is an issue about frankly how much the public sector pays, then does have an impact on what the private sector pays because there will be competition for people. Low unemployment is a good thing, I am sure that we would all agree on that, but there is an issue about availability of people as well, skills and so what we pay in public sector pay policy will have an indirect impact on private sector pay policy. That culture of expectation or raising of quality around the living wage is significant. I think that our efforts, whether through accreditation, campaigning, payment and the living wage are probably one of the reasons why there are more people paid the living wage in Scotland in any other part of the UK. That is quite significant when you also think about the composition of the rest of the UK economy, particularly stratification and the composition of the London economy. The practice that we engage in on public sector pay policy has an impact on private sector also. Specifically around rates of pay and uplift, I think that that will have an impact. We have tried to show leadership in our public sector pay policy on how we tackle equalities issues, how we tackle low pay and how we have also tried to ensure employment through our policy of no compulsory redundancies. Murdo. Thank you, convener. I have also got a question around public sector pay policy. We have seen recently, as I think you acknowledged just a few moments ago, different sectoral agreements. For example, we saw teachers getting quite a generous settlement, which was 9 plus 3 per cent. Mrs Fraser is a teacher, so I am not complaining about that for the audience of doubt. At the same time, we see, for example, further education college lecturers, who regard themselves in a very similar place in terms of the service that they provide, who have been taking industrial action around the pay settlement that is being offered to them. There is quite a disparity. My question therefore is, do you really have a public sector pay policy, or are you just making it up as you go along? There is an established public sector pay policy, which acts as a guide in terms of public sector pay policy. Each trade union, each sector, each segmentation of staff is entitled to engage with the employer, part of the Government, part of the public sector as appropriate, and that is why there can be departure from the public sector pay policy. It is a guide. It is progressive, fair and affordable. There will be those parts of the public sector that have adhered more closely to it because of the nature of negotiations. Others will have a different arrangement, but I very much see the public sector pay policy as a benchmark. I set out the budget as I have done every year, but trade unions and employees still have the right to negotiate with their employer to depart from it. All the measures in terms of low pay, equalities and proper remuneration are what I expect to be delivered by public sector employers, and many look to it as the guide, but that is not the final say on pay. What you seem to be saying therefore is that sectors that are better negotiators are able to get better deals and therefore break or at least push the boundaries of your policy. I wonder whether you can therefore appreciate the frustration that is currently felt by, for example, further education college lecturers who are not being offered a deal, anything like as generous as the one that has just been given to teachers. Of course the language that Mr Fraser used was not the language that I used at all. Pay negotiations are undertaken based on the circumstances, based on the history, based on the issues of delivery of service and transformation. The issue around teachers pay, for example, is a recognition of education as a priority for the Government. There is a recognition of the transformation that is going on within education, the empowerment of teachers, the skills issue, so there was a lot in those negotiations. We do look at the issues each cabinet secretary will lead for pay in their own portfolios. We will look at those issues to then arrive at a conclusion on pay. However, the public sector pay policy is a guide, and each category of staff segmentation is entitled to negotiate that, and that is what has been happening. The different pay awards will come down to the negotiations at the time, and the information, the pay claim that is put forward by the representatives of the employees, and then we conduct those negotiations. However, I would say again that the public sector pay policy is a very strong guide to that and absolutely sets the position of the Government out. Okay, well it sounds like more of a muddle to me than a policy, but thank you for answering my questions. Okay, and thank you for your comment, Murdo. Good morning. I'm interested in wages in rural areas, so in my region it's one of the lowest paid in the south of Scotland. Some of the salary is more than £2 difference lower than average in Scotland. When I looked at rural wages, the first thing that comes up when you google it is farmers and agriculture, but there are more than farmers and agricultural workers in rural Scotland. There are one woman, one man, micro businesses and small businesses. I'm interested to hear about the challenges of the cost of living in rural areas, transports and issues. There have been food pricing comparisons done by the citizens advice across Dumfries and Galloway looking at massive differences in grocery baskets from main supermarkets. I'm interested to hear about what can be done, what is being done to support rural wages and growth and all of that. Fergus Ewing, of course, leads on rural economy, and Cabinet has been given recommendations by the council and rural advisers. Much of that was about the vibrancy and the ability for rural Scotland to realise the opportunities that will be there through economic growth, entrepreneurship, building the infrastructure that can unlock the potential of rural areas in Scotland. I know that the point was made about farmers, but that's one of the reasons that ensuring that loan arrangements were in place so that farmers who were receiving cap payments were able to benefit from even earlier payment through the loans arrangement system, because, recognising what farmers are contributing to the economy runs right through the supply chain, ensuring that loan payments were in place and then the cap payments is good for the rural economy, with about £0.5 billion investment into the rural economy. The enterprise agencies have been working in rural areas, whether that's high or Scottish Enterprise currently operating in south of Scotland. In south of Scotland, of course, we'll have a new enterprise body that will invest in employment opportunities in a sustainable way into the future. Then there's the other wider investments into the rural economy that will make a difference in terms of infrastructure, education or even the public sector pay policy that's supporting public sector pay in rural areas as well, recognising that and having a disproportionately positive impact. Issues like small business bonus, so other tax leavers have been helpful here, helping small towns and villages to survive the last recession and some difficult times in terms of our town and village centres. Other tax support, I think, has encouraged those entrepreneurs and smaller businesses in rural areas that benefit, for example, from the small business bonus. I think that there's a range of interventions that have supported rural communities and there's more that we can do in that regard and that's why we're engaging with the Council of Rural Advisers. I found it really difficult to get the number of living wage employers in Dumfries and Galloway and 20 are registered, but I'm sure there's more than 20. Again, what can we do to encourage living wage employers to register that they're living wage employers so that maybe Dumfries and Galloway could be seen as not the lowest in living wage employers? Well, many businesses in Scotland will probably be fulfilling all the criteria for Scotland's business pledge but don't necessarily seek the accreditation to get the credit for doing that. The same goes for the living wage that not every employer that's paying the living wage might seek the living wage accreditation that they should, so I'll give that further thought as to how we might be able to enhance the recording and reporting of employers that are doing it. Again, that might be largely for the private sector to be encouraged to showcase that companies are actually delivering it and might want to get the credit of the accreditation for so doing, so I'll give that further thought in terms of how we could try and capture that figure more fully. We just discussed the role of trade unions in negotiating different settlements in different sectors. I just wanted to ask you about the role trade unions can play in driving economic policy, productivity, growth and wage growth. For example, the council of economic advisers, which I presume is one of the main advisory bodies to the Government on those issues, to my understanding, doesn't have any representation from the trade union movement. Do you not think that we should have, if we're serious about wage growth, if we're serious about productivity growth, a meaningful partnership at the highest level of government between industry and labour to drive that forward? I understand the question that Neil Bibby is asking about representation there, but the trade unions have direct access to government through the range of meetings that we have with them. We have regular meetings with the STUC, cabinet secretary regularly meet with the trade unions within their portfolio. I regularly meet with civil service trade unions and alongside the First Minister regularly meet the STUC on an issue by issue basis we do, so I don't think for a minute that there isn't a trade union-designated representative on the council of economic advisers. They're not engaging in their economic policy and advice, because they are, whether that's on pay, on the economic strategy or whether that's engaging directly with the highest level of Scottish Government. Trade unions say that we have biannual arrangements and we have other regular meetings with cabinet secretaries, but there are arrangements for the trade unions to meet directly with the First Minister and cabinet secretaries as appropriate, so there is a regular feed-in to our policy. I appreciate what you're saying there, but on the one hand you're saying that we're meeting with the trade unions over here and we're meeting with the council of economic advisers here. What I'm suggesting is that we do not need an actual proper partnership between government, trade unions and labour and industry and economic advisers to drive that forward in terms of wage growth and economic growth. I hear what you're saying about engaging, but do we not actually need to get everyone in the same room at the same time to drive that forward rather than meeting people on different occasions to discuss different things? I conceded that I understand the rationale for the question, but probably more important as to who's in which meeting is do we engage with the trade unions and the answer to that is yes. Do we actually say engagement with trade unions as employer is a good thing? The answer to that is yes. We say so in the Fair Work nation policies. We say so in the Fair Work agenda that the trade unions were wholeheartedly welcomed. There are many fours in which we engage with trade unions. There are many ways in which they have shaped and contribute to our economic policy. Again, I understand the request for representation there. That's not a request that I'm aware of having been made by the S2UC because there is well-established arrangements for engaging with Scotland's trade unions, which I think has led to a good relationship. If you look at the difference in the relationship between the UK Government and the trade unions and the Scottish Government and the trade unions, we have channels of communication. We have appropriate forum in which to discuss matters of interest to employees and to wider economic strategy, and that's been satisfactory. Through even more importantly than the meetings, through our actions, we have shown that we have been able to take the trade unions views on board, not least in our employment policies, in as much as they are devolved to Scotland, in our economic strategy, in the fair work agenda, in the fair work convention, and in our wider policies. One of the areas that came up as part of the round table discussion, I think that we need to make sure that we put on the record the gender pay gap, and we have heard evidence that the gender pay gap had been falling reasonably quickly until about 2011, but the gap had closed relatively more slowly since then. I wonder what in your view on that action might be, that leavers might be able to the Scottish Government to help to address this issue? Again, recognising that many of the legislative leavers are in Westminster, but, by our policy actions, we have outlined the gender action plan. That is about employment, it is about addressing the gap, recognising that progress has been made. We have narrowed that. We did publish on International Women's Day on 8 March that Fairer Scotland for Women, the gender pay gap action plan, and it covers the range of cross-governmental approaches that were taken to tackle that inequality that women face within the labour market. Of course, there are issues of discrimination and inequality that we are tackling, but I can revisit the strategy and present it to the committee if you want the detailed actions that we have outlined. Jamie Hepburn is the appropriate minister that leads on that specific line of tasks with seeing the action plan through. In that area, whether you say it yourself or Jamie Hepburn, it would be useful to get further information from the Government on exactly what they are doing so that we can make any considerations that we have as full as possible. Any other questions from any of my colleagues? In which case, can I thank the witnesses for their time and the cabinet secretary for his contribution and discussion, and I should also thank my members for their questions? I now suspend this meeting just for a few minutes to allow a changeover of witnesses. Colleagues, our next item is to take evidence on Scottish VAT assignment from Derek Mackay, the Cabinet Secretary for Finance, Economy and Fair Work, Jonathan Sewell, who is the head of income tax and tax strategies unit in the Scottish Government, and Ian Pierce, who is the economic adviser in the Scottish Government. I welcome our witnesses to the meeting and I invite the cabinet secretary to be sure issues to make an opening statement. Thank you, convener. Again, I am very mindful that the committee is exploring this issue and looking at the evidence as we are continuing to work it through with the UK Government. Officials are doing their best to try and arrive at a situation where we are confident in the methodology. I should say in that regard, though, even though discussions with the UK Government are on-going and I have raised them most recently with the chief secretary to the Treasury, I think that there are a lot of issues around the volatility, the question marks around Brexit, the numbers and the margin of error that we are dealing with. We will never have an out-turn statement, so it is based on estimates. However, as we are exploring that, I have raised my concerns with the chief secretary to the Treasury because, to continue, we would need to sign off of the Joint Exchequer Committee, where the UK Government and the Scottish Government agree. However, as we are working through all those issues, I am increasingly minded to postpone VAT assignment until VAT powers can be further discussed at the time of the fiscal framework review, to give both Governments time to assess the robustness of the model and understand the impact of EU exit. I am very happy to explore that with the committee this morning for the reasons of my concern around what that might do to the Scottish budget, and that is something that I am very happy to explore. Okay, thank you, cabinet secretary. That is a substantial move to say that you are considering postponing VAT assignment. We still have to go through the process today to make sure that, if that is what you finally come to, we understand some of the dynamics behind it and some of the challenges that might lead you to that position. Therefore, I think that the evidence taken that we would do this morning should just be on the same basis of being as robust as we can on the process to enable you to come to whatever conclusions you are going to eventually come to. Thank you for informing the committee on that. As you know, one of the major challenges in the assignment of VAT, unlike the other taxes that you mentioned yourself, will never be the outturned data. As a result, a signed Scottish VAT will need to be estimated. That introduces, as you said yourself, another layer of that volatility. To what extent do you think that that volatility could be mitigated if the VAT is finally assigned? Is that volatility? Can you explain a bit more why that is beginning to drive your thinking in this area? One of my concerns is that it is based on survey data and it is based on estimates that will never have the outturned data. Because it is one set of estimates against another set of estimates, unlike income tax, for example, it will not be reconciled. The margin of error for both could be such that we could be either positive or negative because of the margin of error of both, which does not give us the certainty. If we were, for example, having to take money out of the budget or use our borrowing powers or reserves, whatever it happens to be, to address, say, if there was less revenue, that would impact us financially. It is that concern around the accuracy that gives me the concern here on the approach. Recognising that this is almost £6 billion of revenue, so not being certain on the accuracy of the approach, does concern me. In terms of timescale for what could resolve that, I think that if recognising when there is transition period at the moment, if we had more time, we could look at the data and the surveys and the estimates. We would have more information to go on. We do not have that right now. Added to the uncertainty right now is the potential Brexit impact as well. That will hit the economy, consumption and VAT receipts. We do not know if that would be disproportionate to Scotland. It is a lack of data right now that I think is an issue. Coming through this period of uncertainty just carries the risk that I am not convinced that we should carry on recognising that, on VAT, it is as a nation and not a power. We cannot push and pull levers to make a difference in relation to VAT income, but it would be that as a nation. It is the level of risk that I am concerned about and the consequent impact on how we would address any negative impact through the block grant adjustment that all members are familiar with in the lack of policy levers. We do want to see that power devolved, but it is not as devolved power as it stands right now, because it is an asignation that carries a disproportionate risk because of that uncertainty in the lack of data. Having boosted data samples will have more data. I think that being able to discuss this more fully in the review of the fiscal framework, and it could be a power, not an asignation, but we would have more data in which we could make an informed judgment. That is the kind of position that I have expressed to the chief secretary. Effectively, what you are saying is that, in terms of the modelling that goes on, we need to see that over a longer period of time to see if the risks can be mitigated and what the actual trends and flows might be in that process. Absolutely. Even though it would still be based on survey data, at least we would have had that assessment over a period of time. Taking into account the brexit uncertainty that we are facing at the moment, heading into what might be an impact in the economy, volatility, added uncertainty based on concerns around the level of accuracy at the moment, it does not feel that we are in a position to sign that off. Thank you, convener. I think that this is worth exploring in some detail. We are talking about a lot of things at once here, so I wonder if we could pass it a little bit and separate out exactly where the concerns are. In particular, how much of your current position that you wish to postpone this or delay it is associated with brexit uncertainty and how much of it would have been the case regardless of brexit? Perhaps we can put brexit to one side for a minute. I want to come back to it in a minute, but we could just put it to one side for a second and let me ask you this. Notwithstanding brexit, given that, as I understand it, there never can be out-turn data, so there never can be a reconciliation process, was this doomed to fail from the beginning? I think that it was very difficult because it was only a verasignation rather than the power being devolved. Many people perceive it as a power devolved to Scotland and the control of VAT, but we will not. I think that it was always challenging as a signation, but what we need for a signation even to proceed is confidence in the accuracy of the estimates to truly reflect what is going on in the Scottish economy. Indeed. Is that possible? We all agree that we would want to have confidence in the estimates. My question is, is it possible to have confidence in the estimates given that the UK Government and its officials have spent two years or more working on the methodology of trying to nail down the estimates so that we are not just talking about it, so that it is not just guesswork? The question that I have for you is notwithstanding the brexit uncertainty, which I will come to in a second. Is that possible? Is it doable? Having already agreed to boost the data, it still does not address the issue of accuracy. I have two very well-educated officials who might want to offer a view on whether we can fix that with even more data, but I fear not that, because it is survey on survey, estimate on estimate, the accuracy issue is what is very difficult to overcome. We as politicians and as Parliament, because this is about Parliament's powers, not just Government, make a decision on what level of risk we wish to carry. The level of risk that has been identified at the moment has not been overcome even with boosted data, even with the best will in the world, even with the co-operation of civil servants. No, the answer is that we have not found a way that addresses that issue of risk, which we will return to is compounded by brexit uncertainty. To be absolutely clear on this, notwithstanding brexit, the Scottish Government's position is that the risks associated with the assignment of VAT are so uncertain, because we are only talking about estimates and estimates, we are only talking about survey data and there is no out-to-end data that this could not be done to the satisfaction of the Scottish Government irrespective of brexit. What we signed up to in the Smith agreement, as I understand it, is that there has to be joint sign-off to the process of assignation and that is what we have not identified yet, the system that gives us confidence on the accuracy of the assignation. That has not been identified yet and civil servants have not yet identified a system that can deliver that level of accuracy as the position. We do still wish to take on the power of course, recognising that it is not a power, it is assignation, but as it stands at the moment the level of risk is such that we are not in a position to sign us off. The reason why, of course, the Smith commission unanimously recommended that there could be no devolution of powers with regard to rates or exemptions of VAT is because such recommendation would be illegal. It would be contrary to European law. European law, as I understand it, prohibits more than one rate of consumtional sales or value added tax in a member state. To be clear, it is not that the United Kingdom Government is saying that we are not going to devolve, it is that European Union law, when we still continue to be bound by European Union law, makes it illegal. Is that a correct analysis? That was correct at the time, yes. The position of the Scottish Government is that one of the advantages of Brexit is that it now becomes possible to think about the devolution of VAT rather than the mere assignment of VAT. This is possible only if the United Kingdom leaves the European Union. Mr Tomkins is at least accurate in the proposition that he is putting forward. It is still not a compelling reason for the Scottish Government to support Brexit nonetheless, and it would not change my vote on voting to remain within the European Union. However, it is true to say, as Mr Tomkins has described, that the UK Government now has choices—may well have choices in terms of that different legal position—and could devolve the power if they so wished, which they could not have done within the previous arrangement. That is an accurate position, but in itself it is not a good reason to support Brexit. Can I come to what you said about Brexit earlier in your remarks to the convener cabinet secretary? This is my last question on this for the time being. You said that the Brexit uncertainty might have an impact on consumption and might have a disproportionate impact on consumption in Scotland that would, I take it from your tone, be adverse to the revenue stream that would accrue to the Scottish Government under any methodology for calculating a VAT assignment. What is the evidence that supports the fear that any Brexit impact on consumption would be disproportionate in Scotland? Because of the nature of VAT that is paid in Scotland, I do not know if the officials want to offer you. I think that there are two aspects around Brexit and VAT. Firstly, there is a question about disproportionate impact in Scotland. The majority of VAT is paid by the household sector, so based on, for example, the consumer sentiment index, which is by the Scottish Government, there appears to be a larger impact on household confidence in Scotland relative to the rest of the UK, which appears to be associated with Brexit. Does that seem to be a larger effect that has happened in Scottish households relative to the rest of the UK? There is also a second question around Brexit and uncertainty of VAT, which is the fact that, as has been discussed, VAT is, to a degree, a harmonised EU-wide tax. Therefore, the collection of VAT and the paperwork systems are designed in such a way that they do not distinguish between import VAT from the EU and import VAT from the rest of the world. Therefore, at the moment, as I was on where, new paperwork is not necessarily in place to collect VAT, depending on how we were to leave the EU, there are risks on going around the collection of VAT and how it would be collected close to the EU, which means that 1920 as a base year becomes very uncertain. I understand how the impact of Brexit would be disproportionate in Scotland with regard to the rest of the United Kingdom, which is the issue here. Obviously, household spending is one of the largest components of driving VAT and developing the economy in general. If Brexit has a larger effect on household confidence in Scotland, why would it? Obviously, households in Scotland have a slightly different preference potentially around Brexit. They voted slightly differently to households in the rest of the UK in the referendum. Therefore, they may be more risk averse around the impact that Brexit would have on their personal finances, which would lead them to save more and spend less. There are a number of channels by which Brexit could— Hang on. Would you expect to see the same effect therefore in London, which we also voted heavily to remain? Are you seriously suggesting that parts of the United Kingdom that voted to remain are going to lower their consumption after Brexit compared with parts of the United Kingdom that voted to leave? Is that the position of the Scottish Government? It is not the position of the Scottish Government. I think that there is evidence to suggest that households have already changed their behaviour to a degree if you look at the household survey data about how they are responding to what they perceive as future risks to their income. Obviously, depending on how you view your future risks to your income, you might change your spending patterns. On average, Scottish households have a discernibly different approach to their future risks than, on average, households in the rest of the UK. That risk could therefore crystallise in the future in different spending patterns. I think that I can return to it again to be helpful, but it is a fair question. It is the concern that we have put up on uncertainties for a question around accuracy and about to engage in a fiscal system and a fiscal change at a point of expected turbulence if there is, indeed, Brexit. The economic consensus is that there will be an impact on different sectors and, including on different areas, and you would expect patterns of consumption as well, because that is, of course, a consumption tax, if you like. It will have that impact, so it is the potential differential between the two, the estimates between the two, and, if we have discussed at great length, because of the different operation of the OBR and the Scottish Fiscal Commission, there are issues about the different analysis that are driving the number that we are beholding to. It is the level of risk. What is unknown is, yes, the potential divergence between the economy in Scotland, the economy in England, consumption and then VAT and the interpretation of it. It is the uncertainty that is piled upon, the uncertainty in making the shift. It is such a point of volatility that feels ill-advised. Who knows what the circumstances of Brexit will be? Who knows what the outcome of the next few weeks will be. The point that I am making is that there is more time to give us more data and more comparative analysis of what is going on. I think that that would be in our interests. We could see what the divergence is and then make a decision on that basis, which I think is a better position than it feels as if going to this blindfolded. Okay. I am going to come to Murdo in a little while, because Murdo wants, I think, particularly in questions around the devolution of the VAT and some of the challenges on that. I want to get James in. Emma, is that a supplementary question that you wanted? No, it is the accountability issue. I will come to that. Thank you, convener. Cabinet Secretary, you are correctly in a position where in order to have confidence in the VAT assignment process, you need to have estimates that are accurate and robust and that you are confident in. Just in terms of the data sources in the current model, it has been said that 70 per cent of VAT relates to household spending. In terms of the data sources in the current model, how confident are you in those? I think that that is my point. I am not hugely confident that we have gone as far as we can and even boosting the sample data does not give us the kind of numbers that would fill me with confidence that will absolutely truly reflect the state of the economy and the levels of VAT being paid within Scotland. In bearing in mind, that is a £6 billion assignation. If the margin of error is tens of millions of pounds or even hundreds of millions of pounds, that is a risk. We, fundamentally, would have to pay for that through the budget. The level of risk, the margin of error is such that it could have an impact, a material impact on the resources that we have available. I am happy for the officials to say more about the data sets, but I am not filled with confidence that that gives us what we need to justify the level of risk that we are carrying. It is also worth reflecting on that. The volatility created by the data sources working together, the surveys working together, is not a risk that we should be facing. There is a performance risk around volatility, and that goes with all tax, and that is managed as we do within the levers that we have to do that. The way that the surveys work together, even if there can be confidence with some of the surveys, the way they work together, just creates an additional uncertainty that, to us, would not appear robust or appropriate for how to best manage the public finances. As a methodology stands currently, are you able to express a level of error, a level of confidence in the calculation that has been made? I am not asking you to state that level of error, but does the methodology contain that? It is not something that we can state at the moment, it is something that has been looked into, and we intend to come up with that number, which is obviously an important number. The reason why we do not have it at the moment is because there are a large number of different components that go into the model, not just the household survey, and each of those has an associated individual uncertainty. Whilst we might know the associated individual uncertainty, we are looking at different methods for adding them all together. That said, broadly, numbers that are already in the public domain, for example, around household surveys, suggest that uncertainty levels of around 2 per cent is quite standard for a household survey. That is the sort of ballpark that you might expect any survey-based measure to provide. However, as it stands currently, you do not have an overall figure in terms of what the level of error might be plus or minus. What about the position about VAT exam businesses? I just bore down on that question, because there are a couple of paragraphs that are provided to us by our advisers and the SPICE. Around this whole issue are confidence intervals, and the paper produced by the Treasury and the Scottish Government said that one of the main limitations of that paper was that it did not preside any assessment of the confidence intervals that are likely to be associated with the VAT estimates. For context, it describes how the GERS methodology states that there is a 95 per cent confidence interval, which means a plus or minus £223 million potential in terms of the GERS figures. If we do not have that even confidence interval information, though the potential for volatility and fluctuating position of VAT in the Scottish budget must be significant if we do not even know what that number is. The committee may be aware that HMRC will be publishing statistical publication on VAT assignment at the end of this month, which will hopefully provide more clarity on statistical confidence intervals around the VAT assignment model estimates. I just want to make sure that that was very valid point. Can I just ask about VAT exam businesses? We have seen some suggestion that that has not been properly built into the methodology. Is that the case? I am not quite sure. I fully understand the question. VAT exam businesses account for around about 15 per cent of total VAT liabilities in the UK. That is reflected in the VAT assignment model, where it is estimated how much VAT liabilities are coming from these businesses, and then we have an estimate within the model of how much VAT they are generating in Scotland. In simple terms, yes, VAT exam businesses have been built into the model with Scottish specific estimates in there. Can I ask about sample sizes? You have said that the sample sizes have been boosted, so what are the original sizes and what would have been boosted to try and give you more data? The boosting sample size only relates to the household sector of the VAT assignment methodology. It does not relate to other areas such as VAT exam businesses. The achieved sample size for the household sector is around 725 households in financial year 2017-18. 725 households? Yes. It seems quite small. Is that one of the problems that the samples are very small? One of the challenges with the VAT assignment household survey is that because VAT is quite a complicated tax in the sense that you charge different rates depending on the type of product, you need to ask quite detailed questions about household expenditure to understand which products they are purchasing. In comparison to, for example, the Scottish household survey, which has a much larger sample size, does not ask very detailed questions around what households are spending on. We have an unfortunate situation where we need to collect very detailed information. That becomes quite burdensome both for the households involved but also the people collecting the data and that limits the household size, the sample size that can be achieved in these detailed surveys. What is the calculation of the total number of households in Scotland that would be contributing to that? Do you mean how many households in Scotland would be paying VAT and would be involved in the survey? No, you have said that in this sample of 725, so you are obviously using that calculation and extrapolating it across the whole of Scotland. I am just wondering what has happened in that 725. There are slightly more than 2 million households in Scotland and I would expect that nearly all of them would pay VAT because almost any form of household expenditure, other than very basic foodstuffs, would include some form of VAT. Even heating or electricity would attract VAT at the 5 per cent rate. Would it be very difficult for a household not to spend anything on VAT? It seems a small sample size given the size of the population that I have paid for. Is there any concern that the size of the cash-only economy in Scotland is any higher or lower than the rest of the UK? That is a risk that is very difficult to quantify. There are two aspects of the cash-only economy. There is a question about the cash-only economy where traders are below the VAT threshold and therefore are not required to buy VAT. That is something that the model can attempt to adjust for. Then there is another aspect to the cash-only economy, which is where people are perhaps avoiding VAT, and that is something where we have very little information on and which to make a judgment of whether it is different in Scotland or not. I want to cut my model on that, but I am very conscious of the fact that there are still a number of people who want to come in on some of the technical issues, but I do not want the matter of the potential devolution of VAT to be lost in this discussion. Murdo had some questions on that. Thank you. My colleague Adam Tomkins has touched on this already. We know that that devolution is not an option now, so this is a hypothetical question post the EU. If that devolution was legally permissible, is it the Scottish Government's view that that is something that is practical and desirable? For reasons that are well understood, the purpose of the Smith commission was for the Parliament essentially to have the powers and be responsible for the money that is raised and the money that is spent. It used to be a just a spending Parliament now, of course, we are raising our own revenues. Having the power is more desirable than simply and the issue with that is the level of risk that we are carrying because we can never be sure that that was a fair analysis and, as I said, the Brexit situation is added to that uncertainty. Of course, the Scottish Government is of the view that we want as much devolution as possible. That includes the fiscal matters, but it has to be right and appropriate and based on the evidence. Of course, we would be supportive of the power of devolution of the 80 to Scotland. I was not in the Smith commission deliberations, but as a Scottish nationalist naturally we would argue for the devolution of powers, so it is more attractive to have the powers than just a assignation. As you can see, we have tried to be helpful here. It is not a lack of welling. Is the risk that this committee is considering, and advisers to this committee have surely identified the level of risk that has been asked to consider the issue here? On the level of risk, of course, the level of risk in terms of devolution would be exactly the same as assignment, although I appreciate the point that there would be a greater level of accuracy around devolution. Of course, the volatility of VAT receipts would be the same in terms of devolution as it would be in terms of any assessed survey model on assignment. It is the volatility of Brexit right now that is adding to the issue of general volatility, so if you want to set that aside for the sake of this discussion, the important point around devolution of powers is that you can then push and pull the levers to adapt to the policy choices and have the ability to be agile to the needs of the economy and set VAT rates that are appropriate to the circumstances to stimulate the economy as appropriate and use the power as an economic and social lever. However, the issue here is that it is not particularly accountable or transparent or it is not able to be evidence as to what was actually raised in Scotland, and that is the difficulty. Understanding the level of risk that we are carrying does lead to material considerations in the budget because we will have to provide for it if the block grant adjustment and the estimates are not to our mutual satisfaction. When we took evidence on this a few weeks ago in the round table format, it might have been me or my colleagues specifically asked about this question of devolution of VAT. It is fair to say that it was a very negative reaction from the witnesses that we had. We were very concerned about the practicality of devolution of VAT because it would require a very substantial additional burden on Scottish business to create a separate Scottish tax point. Secondly, because the nature of VAT is a tax that flows across boundaries, both in the UK and the devolved system with international boundaries. A Scottish business might purchase goods or services from a business in Manchester, for example, and might reclaim VAT that is paid on that goods or services. How do you account for all that? Do you appreciate that there are real practical challenges here and also a potentially very substantial additional cost to Scottish business from going down that route? That is why I am proposing to discuss this further with Treasury to look at it as part of the fiscal framework review. We have agreed that we will conduct that, allowing the Parliament a full Parliament's time of powers and a Smith agreement, but recognising the risks that have been fairly identified, we will have further discussions on that. What I think will equip us better and inform us better is a number of years' evidence on that, in terms of what the numbers produce and what the surveys show us. There will be further data released by HMRC, but if we have more information, then at least we understand the risks more fully as opposed to signing up to something right now that might be to the detriment of the finances and the people of Scotland without being convinced about the levels of accuracy. What I am saying and what I am minded to do is that we should have further transition, further accountability around looking at those numbers and the analysis. I hope that this current Brexit uncertainty is resolved and we are not doing it at the point of maximum volatility. I am trying to be constructive here with Treasury. As I said, as a Scottish Nationalist, I would not surprise Marddow Fraser to know that I support the devolution of fiscal powers to Scotland, but I am proposing a way forward to recognise the concerns of the committee around accuracy and what other commentators have said, around the consensus on the level of risk to try to find a way forward in a constructive fashion with Treasury. It is to say that we should review that as part of the fiscal framework review, because we will have more data and more information. We recognise that that was only a verasignation, not a power, but the circumstances may well have changed that might precipitate the opportunity to revisit that discussion. The words level of risk have come up a number of times. Angela Constance, that was an area that you were particularly interested in. I am particularly keen to understand a bit more about what level of risk could be tolerated, given that risk can only be minimised and can never be eliminated. I am also interested, cabinet secretary, following on from Marddow Fraser's questions about we have known about some of those potential difficulties. For a while, the committee has certainly been looking at that. For a while, in terms of the layers of complexity in the problems with no outturned data, sampling size and fluctuations based on sampling as opposed to revenues, it seems to me that those are just the practicalities of devolution or the complexities that we get into when we have partial devolution or partial assignment as opposed to the devolution of powers. I am also understanding about what level of risk could be tolerated and I am interested to know more about what you are seeking to discuss with the Treasury, what discussions you have had today, if you can give us a bit of a flavour of that. I suppose that I would be quite interested to know whether the Treasury and the UK Government would share some of your views about the difficulties here, because they appear quite, you know, they are not manufactured difficulties, they are not even, you know, at the core of their political difficulties, but when we are talking about, you know, some of this is just technical stuff that you would hope there could be a shared understanding and a shared acceptance of. Convener, those are very appropriate questions. In terms of other views, not just the Scottish Government, if you are very mindful that Fraser of Allander Institute said late on last year that implementing a policy that exposes the Scottish budget with unnecessary risk simply to increase the impression of accountability is not a good way forward. It then went on to say on 6 December that a key aim of the Smith commission was to improve accountability and make Scotland's politicians responsible for the money that they spend, unfortunately rather than helping to deliver the same, the current proposals for VAT assignment risk undermining that principle. That is the view of independent economists in terms of what has been agreed. Officials have been working together, but it requires political sign-off at the Joint Exchequer Committee, so that is between the Treasury and the Scottish Government. As that work has been built up in terms of the methodology, I think that I have been quite open with committee that we were building up that work, we were engaging in it constructively to see what it would produce and what it produces for me is an unlevel of risk that Jonathan Sewell will just come back to in a moment in terms of that level of risk. Level of risk because of the lack of out-turn data and because of the question around accuracy and because of the Brexit volatility into the bargain. I have been briefed by civil servants on the work that has been going on in anticipation of potential sign-off with the Joint Exchequer Committee. I have raised it with Liz Truss, the chief secretary to the Treasury, both in writing and in person to say that I am concerned about that, the level of risk that they would be carrying and the material impact that I would have on the Scottish budget. I have raised that in writing and in person most recently at my last meeting with the chief secretary, and I propose to do so again when I think we have a further meeting of finance ministers quadrilateral, which is intended. The next meeting will be in Scotland with a date yet to be confirmed. I have been raising those issues with the Treasury when I have become concerned by them and we have not got that agreement to take to Joint Exchequer Committee. Can I ask Jonathan Sewell to cover the level of risk from the civil service point of view? As the cabinet secretary says, there is an area of risks. Some are potentially more measurable than others. A lot of work that has been going on is trying to identify and measure those areas where we can, but unfortunately there is quite a lag on some of the data. Again, as we mentioned, there will be some additional data produced by HMRC at the end of the month, which should help us a bit further. One of the problems is that, because of the different areas of risk and the different abilities to measure them, it is hard to come up with an overall risk figure for it in terms of quantifying it. More how we are thinking about it is that an appropriate level of risk should be that proportionate with the ability to manage it. That is what we are trying to work through at the moment in understanding of it. As we said previously, there is volatility with any tax receipts that is part and parcel of it. Some taxes are more volatile, some are less, and that is not a terrible one for that. What we have with this process is that we are exposed to the risk around the risk that is generated by the survey approach. That is, again, more difficult to handle because it is effectively not based on real performance. It is hard to measure and it is hard to address. Again, we are doing our best—we can—to try and find this out. You are right that we have been looking at it for a while, but one of the problems across pretty much all the fiscal devolution is that there just tends to be lags associated with the data. Especially when we are talking about £6 billion, it is a very substantial figure. In our minds, it is probably best to have that time to understand it and not expose the budget to a significant risk. The final part of Ms Constance's question was what I am asking Treasury to do about it, which is essentially that 1920 was to be the transitional year for implementation in 2020-21. I am saying because of all the issues that have been well layered this morning that we should have further discussions. We should look at extending that transition because if we had more of an understanding around the model, we would know what the numbers would tell us. We will have that, hopefully, EU exit certainty in terms of what is happening. Government's position on Brexit and where Scotland lives within that is well understood. For all those reasons, we want to be in a much stronger position to understand all that before it impacts on the Scottish budget. Because of the timeline of the fiscal framework review, it feels timely to discuss it again at that point. That is what I am asking Treasury to do rather than proceeding with this level of risk. Alex Rowley. Thank you, convener. The question is really on cost. If the Cabinet Secretary could let us know how much what the cost has been of calculating this assignment exercise today, and I appreciate that some of those will be one-off costs in the first couple of years. Really, how much would it would this exercise be costing annually? More importantly, how related is that cost to the accuracy of a figure that is produced? If, as you mentioned, we are only doing 725 houses, how many houses need to be done to improve the accuracy figure? At the cost of that is £1 million in total. The Scottish Government pays half of it. Of course, the sum that we are assessing here is around £6 billion, so you will understand why the level of accuracy and the level of risk that we are looking at here is significant. The question is really on how much would the relationship between spending that money and the accuracy figure and how many more houses do you have to do to improve the accuracy figure? What kind of assessment has gone on to that exercise? I think that we could survey more people, but it is the issue on estimate that is never resolved on a model that is yet untested. That is the principal issue here. We could pay more money and we could pay more for more surveys, but it will not address the issue of survey on survey, no outturn, no reconciliation and a volatile period without having tried the model. I do not think that officials would say that there is any amount that you would spend that resolves those issues. You could make marginal improvements, but you still would not get to the overall accuracy. Thanks very much, convener. Just on that whole 95 per cent confidence interval issue, if you do not mind just clarifying for me, are we saying that we cannot work out a figure that gives us that 95 per cent confidence or is it so far and below that it is just too risky to proceed? Bear in mind that it is a good question, convener, but when you are talking about the assignation of £6 billion, the level of accuracy is really important. If there is a material impact on tens of millions of pounds on the Scottish budget, that is significant because that would be tens of millions of pounds that we do not have to spend or would have to find elsewhere. There is a concern about that. What level of tolerance would the committee accept that we would be wrong by, and we would ask the people of Scotland to carry, maybe, unfairly? The £6 billion figure is the assignation. Even that tiny margin of error on both sides of the calculation could lead to an outcome that would be materially significant to the budget. Is there any merit in trying to get some kind of agreement about a ceiling and a floor variation so that no matter the scary figures that you get, there is an agreement that will not go above or below a certain? That is a good point and a good suggestion. If the committee shares the view around the level of risk that others have done, that is what I would be minded to suggest to the Treasury. The Treasury might come back and say that there is a mechanism that resolves its concerns. Maybe it could put in transitional arrangements so that there is no financial detriment. Maybe there are things that the UK Government could propose that I would be open to such as no financial detriment recognising that we cannot push and pull levers here to fix the VAT issue. If the UK Government wants to respond with some sort of protection or mitigation, I would engage constructively with that, but my point right now is short of that. Not implementing until we have more data and a deeper understanding of what the model produces feels like the right thing to do, but it is a good question. If the Treasury wishes to bring forward some form of mitigation as its transitional arrangement, maybe that would be very helpful and we could consider that. I would of course bring that back to the committee, convener. The fiscal commission will have to build in its VAT forecast for future budgets, Derek. Imagine that it is important that the figures that it uses are at least sort of reliable. The fiscal commission's forecasts are absolutely significant in general in the whole BJA and reconciliation. You will be bound by that, won't you? We are bound by those arrangements in terms of the fiscal commission forecasts. As a fiscal commission, what discussions have you had? I am trying to estimate this, but I must be terrifying them if I want to have a better description. What discussions have you had with them? I am happy to ask officials to declare the level of terror within my fiscal commission. I think that they are enjoying their role, but they recognise, as committee is well aware, that, at least where we have outturned data, there becomes a moment of truth, the point at which we can reconcile figures that were based in estimates. It is difficult to hear as you never quite get to that, and Johnathan can cover the engagement with the Scottish Fiscal Commission. We have engaged with the fiscal commission. I thought that you were terrified, but I thought that you were going to say that. I could not possibly comment on their level of terror. They would have to offer that. We have engaged with them regularly on this matter. They have also been engaged with HMRC on it. Again, it would be for us to see to comment on this more, but they agreed that it was some of the same challenges that we faced in terms of interpreting the data. Thank you, convener. I am interested in issues around accountability, and Cabinet Secretary, you have just described words around who is accountable. The Scottish Fiscal Commission is responsible for forecasts and receipts assigned to the Scottish budget. The OBR is in charge of producing forecasts of VAT for the UK as a whole, but the UK Government and the Scottish Government have jointly developed this methodology. We have just heard lots of words about risk, and data, and boosted data, and accuracy. Who is accountable? I am accountable for Scotland's finance secretary to Parliament. That is partly why I am expressing to the committee that I am not convinced with the level of risk that we would be carrying. I am accountable for what we sign up to in the Joint Exchequer Committee, and I am accountable for Scotland's budgets. There are methods of accountability for SFC, of course, to Parliament, and they publish their forecasts.  In a constructive way, you would expect not to change forecasts, but through a constructive challenge as well. There are various strands of accountability in how all the different institutions work and how we operate. I think that I have been very open and transparent with this committee that some of the concerns that you and others have been raising, I share, in terms of the level of risk. For the reasons that I have explained, that has not been resolved. That is what is leading me to the approach that I think we should engage further with the Treasury. To reiterate the uncertainty, the instability and the issues around Brexit, is that just another issue in the whole mix of things that is leading to a proposed delay in this process until we have, I guess, better data? Yes, convener. This is a transitional year. We will have one year of the data. If it was implemented in 2020-21, I think that the timing is just absolutely not right for all the reasons that I have given and therefore I think that we require further time. For all the reasons that I have given at committee, yes, I think that we need more time and engagement with the Treasury to try and resolve this. It is helpful that you introduced the issue of transparency. I know that Tom was also interested in transparency and public confidence in this process. Absolutely. This is clearly a very complicated matter. Fundamental to the whole Smith process and the Scotland Act was about increasing the accountability of this Parliament. Given the challenges that we face in wrestling the fists and the challenges around transparency, do you think that that raises broader issues about democratic accountability and ensuring that the public has that understanding, given the existing complexities of the fiscal framework? Clearly, the fiscal framework is incredibly complex. When we come to out-turn figures, the actual published out-turn figures on income tax, for example, at least we will know exactly what tax was paid and then we can do the reconciliation with the forecasts that were made that we were bound by. The difficulty here is that we will never have that out-turn, we will never know in the real world what tax was collected in Scotland. It is my concern around level of risk, volatility, uncertainty and not being convinced by the robustness of the model, so we could give the model more time to run before we make a decision on its appropriateness. My point is timing here. What might be a major shock in the economy if anodial Brexit goes ahead or Brexit goes ahead? It is the worst possible time to engage in this estimate process that will never have a reconciliation but could, in fact, if the figures are not on our favour mean that we have to make decisions in a budget, there will be a material impact on Scotland's budget and the decisions that we make as a Parliament. I do not think that that complexity will help accountability or transparency in that regard. In just a very final question, cabinet secretary, just to ensure maximum transparency, I noticed that a member of this committee during the proceedings tweeted suggesting that that was a power. I wonder if you can just confirm absolutely once and for all that the VAT is not a power being devolved to the Scottish Parliament, it is a signation just to avoid any doubt. Candina, I have been paying so much attention to the questions from members. I have not been engaged in Twitter whilst I have been given evidence at committee, but if someone has tweeted that this is a power, not a signation, this is a signation of attacks based on estimates, it is not a power. We have no power over VAT in Scotland. Thank you for clarifying. What have an investigation? That is what we will do. Have an inquiry. Find a Twitter. I want to understand some of the landscape of the discussions between Treasury and HMRC. From the Fiscal Framework document, it suggests that the discussions between Treasury and HMRC in the Scottish Government then go through the GEC. I do not want to make a difference in the Treasury and HMRC, but who is actually the HMRC that you are dealing with on this issue, or is it the Treasury? Is Treasury in terms of the politics and agreement? It might help us in terms of if we decide to take full evidence, it is probably more appropriate on that occasion. Naturally, convener, HMRC would inform Treasury in the way that Revenue Scotland would inform the Scottish Government. That is helpful. Thank you very much again to our witnesses, particularly the Cabinet Secretary, we have been here for almost two hours now. Our members for their questions. That concludes the public session of the Finance and Constitution Committee this morning.


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