Rwy'n fawr i'n fawr o amser i ddau 29 enliad mewn Presiding in 2023 o ddau Chlyw Ffaisgladau i Ffineinsol Cymdeithasol. The first item on our agenda today is an evidence session on the Scottish Ffiscal framework, independent report and review. We are joined today by David Phillips, associate director at the Institute for Fiscal Studies and he is one of the authors of the independent report, and Professor Mary Spour is director of the Fraser of Alasdair Institute. I would like to welcome you both to the meeting. We will go on to it for the session. Before we move to questions, I just set the scene a wee bit. In November 2021, the Cabinet Secretary for Finance and Economy, Cape Forbes MSP, confirmed that the independent report will focus on block grant adjustments only. However, in return the chief secretary of Treasury agreed that this will inform a view that will be wider in scope fathg橋u mili又rion. Maen ni i sechyd doedd y cael ei ddaeth gennymau i'r ULPA ac i wybodaeth byddieth tegwydис i'r middшаeth mewn gennymau i wneud gregoi cyיים deall uchel, ond i Cyfygoedd 23 ni fynd niferいただio dda或n heif expert� Anfang pan transg MIC The more fundamental review that was originally envisaged in the interests of securing long-sought practical borrowing and reserve flexibilities and protecting those arrangements that we already have in place, which work in our favour. I just wanted to set that scene for the questions that follow. One of the things that was secured by the Deputy First Minister was the indexed per capita mechanism for calculating block grant adjustments, which will be adopted on a permanent basis. If you could just tell us what the benefits of that are to Scotland. I noticed at the time that it says further on the paper that this will be reviewed every 50 years, so I'm just wondering if that's what they mean by permanent or if you have another view of what permanent might mean in this situation. Okay, thank you. The index per capita method of adjusting the block grant takes account of two factors, which might mean that Scottish revenues don't keep pace in cash terms with those in the rest of the UK. The first is that it takes account of the fact that Scotland's got initially lower tax capacity than the rest of the UK, so at the point of devolution, for example, income tax revenues per capita, about 79 per cent of those in the rest of the UK. By using a percentage change in tax revenues to calculate the block grant adjustment, that accounts for that, because the percentage is based on the Scottish revenues. The other element is the per capita element, and what that does is it accounts for the fact that there is differential population growth potentially between Scotland and the rest of the UK. How that method works is that it takes the block grant adjustment from the year before and then applies the percentage change in revenues per capita in the rest of the UK and then the percentage change in Scotland's population. That insulates Scotland from both having a different initial level of revenues per capita and if its population change is different. What we've seen in recent years is that Scotland's population change has tended to be lower than in the rest of the UK. Scotland's population has been going up by less quickly, and hence, by account of that, it means that the block grant adjustment goes less quickly than it had to keep pace with the overall level of growth in the rest of the UK. That means that over time we think that, compared to the alternative method, what's called the Comparative Model, it reduces the increase in the block grant adjustment by about £50 million a year on average. That means that each year Scotland benefits £50 million, £100 million and £150 million and £200 million, compared to if the Comparative Method had been used. It is worth pointing out that this method is probably the one that best addresses what's called the no detriment principle, the idea that Scotland shouldn't, in expectation, lose out from tax devolution just because it's been devolved, although it can lose out if the economy performs less well or it can benefit, if the economy performs better and, of course, it can benefit or lose from its policy changes. That method that's been chosen, IPC, by body best out of the ones on the table, addresses that, but it less well addresses than the other principles in the Smith Commission, and that was a key part of the report that there is this fundamental tension between, for example, the taxpayer fairness principle, which says that revenue shouldn't be distributed from the rest of the UK to Scotland post-evolution, and then the no detriment principle, which says that Scotland shouldn't, in expectation, lose out. Those two principles are fundamentally in conflict. The agreement prioritises the no detriment principle and that benefits Scotland financially compared to alternative. In Marys, the Deputy First Minister more or less said that the reason we didn't actually go down the road that we said we would in November 2021 was because the UK Government were basically saying, well, it's a kind of take it or leave it model. Is that what you understand the situation was, that this was the only room for manoeuvre that the Scottish Government had in terms of accepting this? I suppose that it depends what the alternatives were on the table. I know that the committee in the past has had concerns not just about the population risk that the Scottish budget is open to in terms of the overall population, as David has explained, but also the mix of our population, the extent to which it is aging more quickly, or the extent to which our population is made up of people of working age and that sort of thing. Those different options didn't seem to be on the table. Since the fiscal framework has been in place since 2016, both of those methods have been calculated, the comparable method and the index per capita method. It did seem likely that the question about the block grant adjustment in the review would be which one of those is going to be chosen. Obviously, the Deputy First Minister was also looking for further flexibilities, which he did get as part of the agreement. It wasn't just the choice of the Scottish Government's preferred BGA option out of those two, but there was also the further flexibilities on things like borrowing, which have been made more flexible. It looks like the Deputy First Minister therefore made the calculation that it was better to have this agreement confirmed after many years of it dragging on and to take the additional flexibilities that were also being offered. Perhaps, to some extent, given the choices that are facing them immediately for the budget round, the fact that there is more flexibility in borrowing, for example, does help this current year when there is a large reconciliation to be made. David. I can follow on that. I would very much agree with what Mary was saying. There are a couple of other points that I would make. Firstly, in our independent report, we did look at some of the alternative options like adjustments related to demographics. There are two points there. Firstly, it is not clear, at least in the short to medium term, that adjusting for demographics would necessarily benefit Scotland. While Scotland's population is aging more rapidly, a lot of the difference is not then on the working age population, it's on the child population growth. Actually, I've seen some calculations suggest that if you adjusted for the demographic mix, in the short term Scotland could actually lose out because pensions do pay tax, whereas very few children pay tax. It's not clear that Scotland, if you would, in the short term benefit from adjusting for the age mix, or that might change in the longer term. Also, the second point I would make is that some tensions in the sort of principles come to the kind of fore here. Firstly, again, if you adjust for differential demographic mix, you might think that if the Scottish Government has limited control over these long term demographic trends, well controlling for that is consistent with the no detriment principle because it stops Scotland either gaining or losing from things it has little control over. But if you think that these things are to some extent affected by Scottish government policy, for example, they are able to attract workers or businesses to Scotland, well perhaps it's less then consistent with what's called the economic responsibility principle that Scotland should bear the costs or the benefits of its fiscal policy. I think that it's reasonable for Governments when they make a decision to sort of trade off these different objectives and also trade off the objective of simplicity, if you like. The more you add these additional bits to the fiscal framework, the more complicated it gets. We've also seen with the census just how big the kind of not just changes in the overall population but even more so the changes in the age distribution and demographics can be and that would then add another bit of volatility potentially on a sort of 10-year cycle and you have the census updated. So I think whilst there could be arguments made to control for these additional factors like say demographics or tax-based structure or other things, they definitely trade off with respect to complexity and with the other principles of the fiscal framework. The last thing I'd say as well is that in terms of the sort of breadth of the agreement, I think there was a quite a strong difference in opinion on what the fiscal framework itself actually consists of. I think perhaps the Scottish Government and Scottish Parliament's view is this consists of the sort of not just the technical arrangements that are unborrowing and block adjustments but the wider fiscal settlement what's devolved. I think that the Treasury just took a very firm line that that's a separate issue, that's an issue of the settlement not the framework. I think that the Scottish Government made a decision that in order to make progress on the framework those issues could be put to the side and perhaps handling a more political manner. I mean it wasn't a negotiation between equals, obviously the Treasury always had to work hand through these so I suppose that the Deputy First Ministers will certainly put to her no doubt had to accept more or less what progress had been made and some of that progress was in terms of capital borrowing so they'll no longer be fixed at £3 billion in total in £450 million a year for capital expenditure. I mean these will now increase in line with inflation and of course Marie have pointed out the fact that it actually has really been the case from the beginning because the value of that borrowing, those borrowing powers have been eroding significantly over time but what I found interesting in terms of how the capital borrowing power inflationary impact has been assessed it's based on the GDP deflator in between 2324 and 2728 that's predicted to be five and a half per cent in total not this year but over the next four years I mean is that in any way realistic so what that would mean is that the you know the resource borrowing limit would go from 600 million a current financial year to 633 million you know in capital borrowing limit from 450 to 475 etc so how realistic is that Marie? Well you know the the calculations we did were based on the that will be our predictions at the time so as we've seen issues around the inflation and the wider economy haven't evolved quite as lots of people have expected and certainly inflation hasn't come down as quickly as we expected but you know on that that sort of stock of borrowing the increases will be linked to inflation now as I think they always should have been and these limits were obviously set in 2016 in a low inflationary environment but you know I think everybody should have looked ahead to think that these should be index linked because the power of them will will erode over time but you know in the quantum of borrowing it doesn't it's not going to make a massive difference to the borrowing power of the Scottish Government they will in theory have the same purchasing power in years ahead but they will you know they will remain basically tied into the sorts of limits they have at the moment and we need to remember I think that the Scottish Government over the last few years has used up a great deal of that borrowing limit which may well constrain future administrations in terms of the amount of borrowing that's able to be. And then you've submission Marie you've said there's still a question though about whether limits for forecast error are adequate given the risks the Scottish Government is facing and given that forecast error is all that this borrowing mechanism can be used for it's same sensible to consider that it should be extended further you know and that's talking about you know oh. So yeah so I mean the obviously the the predicted reconciliation for this current year for income tax was 712 million prior to the outturn data coming in now self-assessment receipts surprised on the upside and that ended up just below 400 million instead so it hasn't breached the the limit just for income tax this is but it could very well have done and the modelling that's been done in the past by the fiscal commission suggests that that limit could be breached perhaps once or twice a decade the 600 million limit this is so and that's for income tax alone is the borrowing power for forecast errors to be used for for all taxies and and of all social security as well. So I think there is a question to the extent to which this is still sufficient to manage the risks that's there now one could argue that obviously there are chances that there'll be positive reconcilations in the future and you know taxies and will surprise on the upside so social security may surprise on the downside and therefore there's less it needs to be spent than it was budgeted for and the Scottish Government has a facility to sort of save up and put money into the reserve and so on to to even out some of these things as well as using borrowing powers but I do think there's an argument given that this borrowing is only for forecast error and that the Scottish Government may be managing a large reconciliation essentially with six months notice for a budget year that's coming I do think there's an argument for for the the limit to be increased further so that it will actually cover an income tax reconciliation that may come fairly regularly. Okay David yeah I would echo the points that I think one can make a case that because it's that the powers are constrained for use simply for forecast error they cannot be used for other circumstances that you could have a potentially even unlimited capacity to borrow for those forecast errors. I think that's conditional upon the forecast being done independently which it is obviously with the SFC I'd be much more worried about that if it was done by the Scottish Government. I think the other thing one could do if one was concerned about the potential to effectively defer the issues indefinitely would be to say well actually borrowing needs to be prepared within a certain time period so one could combine increases in the borrowing limit with perhaps a restriction on the time period over which those borrowings had to be repaid. Yes and I was going to say the other thing I think that maybe that's not appreciated actually in the short term with the devolution of social security benefits and the difficulty in predicting for things like disability benefits just what share people will actually qualify what way they'll qualify for how long they'll stay on. I actually think there's quite a lot of uncertainty on the social security side at the moment even though these are not quite so demand led benefits sadly and employment benefits should go up and down with the cycle at the point of introduction that is quite a little bit of uncertainty around these benefits so that might be something that's worth looking at in the kind of data as it starts to come through. Are there big forecast errors for social security benefits? I'd absolutely echo that and you know it's been it's been so obvious with income tax because obviously we've had a few years of this now and we've had these large reconciliations predicted and then in some cases emerging in practice but I think yet social security benefits is really important to keep an eye on to what extent we're seeing forecast errors in those. The Scottish fiscal commission you know do their best to forecast the demand which these benefits will see but obviously the Scottish social security agency is wanting to take a different approach. The fiscal commission says that's likely to lead to things like higher take-up and all of these sorts of things but so there is quite a lot of uncertainty I think over how much we might end up spending on some of these benefits as David says they're not as demand led as ones that are tied to the economic cycle but these are new benefits with you know new criteria delivered by a new agency relatively new so keeping an eye on the extent to which these are generating forecast errors that would need to be covered by this facility is an important thing as well. Okay I mean you've said in the independent report David that relevant data used to forecast the block grant adjustments and to determine tax and welfare receipts should also be reviewed to ensure it's sufficiently robust and comprehensive for those purposes and you make a number of other recommendations one of which for example is whether the OBR and SFC forecast could be better tied to minimise this risk. Yes so I think one of the issues you have at the moment with the fiscal framework is that you have the forecast for the block grant adjustment being made by the OBR that makes sense because the OBR is a forecaster for the tax revenues and social security in the rest of the UK. On the other hand the forecast for Scotland for revenues and for spending are by the SFC something that makes sense because that is the official forecast for Scotland they can take out of more factors that are Scotland specific but as well as Scotland specific factors driving differences between those two forecasts they can also just be differences in their judgments about the overall performance of the economy and my understanding is that currently when it comes to the earnings forecasts it's not the case that the SFC thinks that earnings will grow more quickly or much more quickly in Scotland than the rest of the UK apart from maybe a little bit of the financial services industry it's just that the sort of underlying model or sort of framework the SFC uses on earnings projections and forecasts just differs a bit from the OBRs so whilst the OBR's earnings in its current forecast going down below 2% over a few years the SFC took the view that just likely to happen given sort of where wage settlements are and sort of you know sort of benchmarks that kind of guide wage settlements so what that means at the moment is that part of the forecast increase in Scotland's tax revenues relative to those in the rest of the UK to some extent is driven by differences in judgments about the overall performance of the UK economy including Scotland rather than expectations about how Scotland will under or overperform compared to the rest of the UK and it's only the latter part that matters for the actual final ultimate budget impacts for Scotland so what might happen is either the OBR advises up its forecast to match the Scottish SFC in which case the block one adjustments higher things on the budget or the SFC has to bring down its forecast to match the OBR and the revenues so I think that is one of the challenges that you have with a sort of a system of having two separate forecasters forecasting separate sides of the equation now solving that I don't think is super easy because you don't want these guys to just agree on everything because you want to have some if you like you don't want to have a group think you want to have some challenge you don't want people to just be copying each other but I think the extent to which there can be discussions and sort of clarity around what the factors are that are driving these things so to what extent is it differences about you know Scotland's earnings versus UK's versus just overall sort of optimism or pessimism firstly the the focus in body should have a good understanding of that so they can kind of really think about what they're doing secondly I think it needs to be communicated to parliament to the Scottish government so that when looking at the sort of particularly the medium term financial strategy and the spending review there's an understanding of what side the risks are in that because I think as it stands perhaps the risks are weighted more to the downside in terms of like lower funding and on the upside given part of the growth in tax revenues is this difference in overall optimism rather than difference in Scotland's specific optimism yes my for me you know I'd absolutely agree with that and I guess we shouldn't mix up the the spring experience with the autumn one you know there is a much bigger gap in the spring now that things have settled down a bit and you know hopefully there's a sort of a year round budgeting process which we can rely on about when things are going to be but obviously the the spring budget was in early March and then the 31st of May was when the SFC presented a forecast and I think in the evidence that they gave to this committee what I would take from that is that you know not that they know what the OBR is going to do but they expect that probably the next OBR forecast will significantly revise up their earnings forecast that's what I took from from the evidence that they gave without them actually saying that so you know I think that they think that they are in a better place at the end of May and that's probably what they would expect the OBR to do and we have a much smaller gap between the forecast now at the end of November and in December for the Scottish budget which is the which are the ones that matter obviously for setting the budget we've seen the issues when the gap has been longer in terms of the 2020-2021 experience which has generated the reconciliation that we've got to deal with in the 2024-25 budget so when the gaps are smaller there's less likely to be these big divergencies and judgment which are just caused by how the economic conditions have changed which I really think that's what this part of the story between the March and the May earnings outlook but it is always possible that they will have differences of opinion on overall economic performance and the overall earnings forecast which is what really matters obviously for income tax so that is absolutely possible so as David says I think that that's good in some ways to avoid group sync and everybody you know forecasters should have a healthy debate and not always agree on things and they may well have different opinions they have different roles the SFC are there to forecast the Scottish revenues and Scottish economy to the best of their ability and to not take into account how that interacts with the OBR's forecasts of the UK and the BGAs they do a lot to help scrutiny of these things but their role is to get their forecasters right as they can for Scotland and you know so these things will always be intention yes David yeah I come in very quickly I was going to say I think what mommy says there is is correct in terms of it's not the role of the SFC to if you like predict the other side of the equation but what the Scottish government's role is perhaps is to take both sets of forecasts and the potential issues are uncertainties and the balance of risks is it on the upside or the downside to that into account when it's making its budget decisions about what to what extent to try to build up reserves or draw down reserves that's one of the things the Scottish government can do to take account of those potentially unbalanced risks okay thanks just lastly for me before opening it to colleagues finds for futures and fixed penalties understand it at the moment that that's approximately 30 million pounds but will be 25 million pounds a flat deduction from the block grant going forward is that linked to inflation at all and now those figures accurate it's we almost seem to have two sets of figures 30 million a year and 25 million from now on which seems to be a bit of a reduction is that is a block on adjustment that's taken off the Scottish government's funding and Scotland then gets to keep the revenues collected from those so by reducing the block on adjustment that means that scotland gets a gets more than it otherwise would have if they'd kept it at 30 million pounds and by freezing that in cash terms i believe the agreement is any inflationary increases in those Scotland gets to keep in full so i think that the Scottish government would be relatively pleased with that that part of the deal yeah that's right as long as we don't become a more law-abiding society okay thanks very much john to be followed by michael okay thanks a convener the second of the bullet points in relation to the smith commission well it's the second on my list anyway but it talks about the devolved scottish budget should benefit and fool from policy decisions by the scottish government etc so is the assumption there that if scotland varies from the rest of the UK that is entirely scotland's responsibility and it is under our control for better or for worse shall i come in um yes am i on yes yes so um yes so that is the that is the principle that i think is termed the economic responsibility principle and i think the way to interpret that is is that for taxes or for spending that is devolved to the scottish government if the scottish policies whether related to those specific taxes or spending items or more generally for example policies that might boost the economy or policies that might harm the economy that scottland should should bear as far as possible the full benefits and the full costs of those changes um now it's quite hard to do that in in practice um because for example um let's say that one of the um impacts of um a scottish policy is to attract more high-skilled workers from the rest of the UK into scotland now as it as it stands at the moment and the um blockchain adjustment mechanism scotland would get to keep the higher revenues generated in scotland because some of the people are coming from the rest of the UK that actually would reduce revenues in the rest of the UK and slow down the increase in the block grant adjustment slightly and scott would actually gain a little bit more from those extra revenues because it would be it would be gaining both from its higher revenues itself and a little bit from from the impact in the rest of the UK you can see other instances where those effects might work in opposite directions okay that that's helpful can i just see where i'm trying to go with this which is the impact of london because as i understand it london is an outlier certainly in the UK and possibly in Europe and broadly speaking in most things scotland competes quite well with the rest of england Wales northern Ireland the rest of the UK apart from london the southeast but if london which i think it's tended to do grows faster than the UK average in the economy and tax and all the rest of it then we have no control over that but we are being punished for it so on that i think i would distinguish between the two sides of the the fiscal framework if you like so i think one of the arguments that can be made for saying well look when we look at the block grant adjustment we shouldn't look at kind of trends in revenues in the rest of the UK as a whole we should exclude london because by adding london in you're making the comparator not fair for scotland because whilst revenues in scotland might keep pace with the rest of the UK experiencing london if the rich in london are pulling away from the rest of the UK and from scotland well scotland can't keep up with that conversely actually if in a downturn there's a huge fall in the top incomes in in london and it's dragging down revenues actually scotland isn't seeing that so why should scotland if you like be be benefiting from this kind of fall in in top incomes in london i think you can make that case i think the other side of the equation though is that the way the spending side of the budget works is that the um as that money is as that tax only in london is spent either it is spent on things that are subject to the barnet formula and hence scotland gets it share that revenue via the barnet formula or it's spent on things that are UK wide whether that is social security or debt interest which on average scotland if you like receives a population share of that spending as well so i think if you look at just the revenue side i think you can sort of make a case that well yes scotland is is potentially being compared to a baseline it's hard to keep up with but if you also kind of run flat on the spending side of the budget that money does come through to scotland if you like through the barnet formula or through spending on UK wide things and i think that's again it comes back to this sort of tension between no detriment from from the tax devolution and then the taxpayer fairness about redistribution of tax revenues from the rest of the UK and again i think it's you know it's where you draw the line on those things the further you draw it towards no detriment the further you move away from taxpayer fairness and you need to draw the line somewhere mary do you want to come on that yeah just to absolutely agree with everything david said you can't divorce it from the way that scotland's funded through the barnet formula and you know if you look at spending on on services in scotland compared to other parts of the UK and particularly parts of england scotland does have higher spending and you know so the fact that revenues generated in in london in the southeast will be funding spending either in devolved areas in england which generate consequentials or UK wide spending is an important thing to bear in mind when we're thinking about the budget overall but as you said scotland has a above average spending but the barnet formula is designed to reduce that gap as i understand it and on top of that the fiscal framework given that london in certainly recent years seems to have been doing better than the rest you know that seems still to me despite what you've said to be again a disadvantage in scotland i mean i'll take it the point if london economy collapses that would benefit us but that doesn't seem to be the evidence so far just quickly and then i'll let if david was talk about barnet convergence you can do so you know that hasn't the barnet formula convergence hasn't really happened to the extent to which it was expected for various reasons including the differences in population movements over the years and also the impacts of things like spending cuts during during the austerity years and things like that so it hasn't really happened to the extent that was expected and you know we do still have significantly higher spending in scotland than in you know every part of england and i think we should bear that in mind i think i would add that you know i'd be with my that the barnet squeeze hasn't really happened to date there was i think yet three factors that have been kind of holding it up one is population two is the cuts in the 2010s three was actually scotland benefited from an error in the way that business rates were accounted for in the barnet formula in the 2010s about a billion pounds by 2015 but that is going to change we already have seen it start to squeeze down since about 2020 in 2019 it was about 129 percent of the average for england per capita in scotland for devolved services it's now about 125 i'd expect it by the close of this decade to be at 122 and falling below 120 by the mid 2030s that squeeze will put pressure on the scotland's budget in the years ahead i think you also write that if it's the case that london and the southeast was a pull away from the rest of the uk in the long run and one thought that was not within the capabilities of the scotland government to make policy changes of the levers available to to change that that it could be a potential for divergence and a foreback on the income tax side but i'd come back to this point that given where the smith commission said that they are these two principles on the one hand scotland shouldn't lose out from tax devolution in expectation effectively on the other hand post devolution revenues in the rest of the uk should not be allocated to scotland from devolved taxes those are just incompatible either one needs to go back to those principles and revise that or choose one to prioritise in this agreement the scotland government and the UK government have i think chosen to largely prioritise in the detriment over taxpayer fairness but not completely and hence there is still some potential for detriment around issues for example like if the southeast and london pulls away from the rest of the UK and scotland so you are saying that having been at 129 percent rightly or wrongly we are on a decline 120 percent yeah and probably in the longer term given current population sort of projections i'd expect it to sort of converge about 115 percent now given scotland's demographics given scotland's social economics that probably is still a little bit higher than scotland's relative needs but it means that many of the things that scotland has traditionally benefited from and and enjoyed such as you know free tuition free personal care for the elderly other things like that those will have to be funded via alternative means going forwards the sort of the more universal social welfare state in scotland will be more difficult to fund in 2030 2040 and even if the UK government was a match spending needs in the rest of the UK which is a big if even if it would still be hard for scotland to fund that going forwards and it has been traditionally in the past given the barnet squeeze but there hasn't been any assessment of needs for quite a long time i think and i mean if needs includes rural areas you know we've got big challenges yeah the sorry i think mary wanted to come in yeah david might correct me if i'm wrong but i think the last big assessment of this was done in the holtham commission for wales many years ago when was that 2010 yeah and yeah that did suggest that scotland had been relatively overfunded by the barnet formula by quite a way and that whales had been generally underfunded and i think that's the last big assessment of this that's been done but i think it would certainly be interesting to update that that did take account of things like the the higher cost of living services in rural areas and all of that sort of thing but it did still suggest that scotland was considerably overfunded compared to need if you were using a needs based formula so i think there is there would be really interesting to redo that exercise and to see where we are now given all of the changes that have happened to you know the health and wealth and the outcomes of all lots of different people across the whole of the uk i think it would be particularly interesting to look at it given the rise in the elderly population and particularly the concentration of elderly people in more rural areas because if you have you know the older population is one where the large share of spending goes and if they are in the more rural areas where it's harder to deliver services i think they have become increasingly more so in rural areas that could change some of the figures a little bit compared to say 2010 when the calculation will last done that's true okay and i think david phillips in your sorry oh no it wasn't you i was going to quote somebody else the deputy first minister told us a previous meeting that both governments were having to make compromises do you see the uk has made any compromises on this i think the uk has made compromises i mean my overall impression is that both governments will be reasonably happy with the agreement because they avoided the big risks they they wanted to avoid so the uk government's compromise was on the block grant index it just block grant adjustment indexation where partly because of individuals involved in the negotiations there was a particular focus on trying to make sure scotland's block grant adjustment mechanism treated population the same way as the barnet formula does so that's what's called the compare model that was brought in in wales in in the fiscal framework there i think the uk government compromised on that it would have wanted to put that in there because it several people feel that it's very unfair that scotland is effectively protected from slower population growth on the revenue side but benefits it from it on the barnet formula side that this is asymmetry in this so the scotland's government so the uk government compromised i think on on that one although as i said i think you could argue that by compromising it made it more consistent with the no detriment principle which is one of the principles of the Smith commission um either the other area where both governments compromised actually was on um the crown of states um the uk government wanted to index i think the crown of states um to revenues in the rest of the uk largely to account for the fact that with these offshore wind farm licenses if it had been fixed in cash terms at its old old level well scotland would have got its offshore wind licenses as revenues and then would have got a barnet share or another share of the revenues being spent from the english and walsh licenses treasury thought that was unfair they wanted to index it scotland's government argued well our position is different because our crown of states actually is quite different to what you've got in the rest of the uk we haven't got part of regent street and and sort of central london states that are racing away in value you can't index it to that in the end they compromised 40 million pounds by 2028 which i think is roughly halfway between full indexation and fixing it in cash terms so i think there was some compromise there um i think um where the scotland government would have felt that it it compromised was perhaps on the um whilst it got an improvement in its borrowing um powers that rather mean index to the amount of revenues or spending at risk which typically goes faster than inflation it was linked to inflation so i think there was a compromise there but i think overall the scotland government we please it's kept the index per capita and it's got some increases the uk government we pleased that it had some increase for the crown of states and that it didn't have to grant very substantially increased borrowing powers so i think both sides that inflation i've got is both sides are pretty happy and the Scottish government i think won an award um for its negotiations at the sipfer um at the sipfer event so i think both sides are fairly happy with what what they've done did you want to come in mary spoj and can you also could you also maybe comment or you're at it where are we now with scotland specific shocks sure um so yeah i agree i think both of them be happy and i think to be honest um generally the teams of officials i imagine the politicians involved will be just be happy that it's that it's done i mean i think that as a convener touched on obviously there's a question of kind of what now in terms of this agreement and any review of it in the future and i think obviously the you will i'm sure be interested as a committee and to what extent there'll be any scrutiny of future discussions or agreements on this given there was very limited i mean there was obviously a consultation that went out but in terms of any sort of discussion or consultation around the agreement there obviously wasn't any and it came out during recess and caught everyone by surprise so the sort of scrutiny and the involvement of Parliament i suppose in this is a wider question in terms of the scotland specific economic shock the provision that was put into the original agreement was that borrowing powers would be doubled for forecast error in the from 300 to 600 million in the event of a scotland specific economic shock which was defined as scotland's economic performance seriously underperforming that of the UK and also being very low as well that provision has been removed and the borrowing limit was just increased to 600 million all the time so there is no current provision for additional flexibility or borrowing powers in the event of a downturn in scotland that specifically sort of you know just in scotland rather than a downturn across the UK so there is no provision there for further borrowing in the event that that happens now and i mean if there was a specific shock i mean like say tourism food and drink are all particularly scotland sectors would that would that cause us a problem well to the extent which one impacts on the income tax revenue take for example if hours were to be constrained or wages were to be constrained in the event of a scotland specific economic issue the extent to which perhaps there is increased social security payments although as we said earlier you know the social security payments that are devolved aren't generally linked to the economic cycle as such but you know it could have an impact potentially and potentially other spending in areas through you know crisis funds or other things that you know local government manages and these sorts of things so you know it could mean if there was a scotland specific economic issue as we did see in in 2015-16 when you know there was the downturn in the oil and gas industry you know it's likely that revenues there'll be downward pressure on revenues upward pressure on spending and that obviously could cause issues for the Scottish government but remember the additional borrowing flexibilities in the event of a scotland specific economic shock were on the forecast error boring you know so it was additional you know borrowing for that purpose not not just to borrow to spend more money on whatever the Scottish government wanted to spend on on the resource site so you know I'm not sure that there was huge flexibility anyway to deal with those sorts of things given the the restrictions around that borrowing Mr Forbes and that's one thing I'd add as well is that the borrowing powers are not to address downturns in revenues they to address unexpected downturns in revenues and I think that is one thing where there could be a scope to actually further enhance the powers of the Scottish government to borrow so at the moment for example if in advance its forecast that Scotland's revenues perform less well than those in the rest of the UK there is no scope to borrow to smooth that even if that's just a sort of a temporary dip because of a say a downturn in the oil and gas industry that's it's kind of expected to come or because of you know tourism or other factors I think that there would be issues in giving the Scottish government discretionary about borrowing powers that are very large I could talk about those if you want but for a small amount perhaps say one percent one and a half percent of the Scottish government's resource del 400 to 600 million pounds I think subject to sort of like some caps on the total amount some sort of caps on how long the borrowing can be for I think there's a case to give the Scottish government some powers to the spell not just to unexpected downturns in revenues or shocks to social security spending but things that are forecast in advance for social security spending or tax revenues or unexpected shocks to public service spending something of like one to one and a half percent of the fiscal del wouldn't be a threat to sort of you know fiscal sustainability and I don't think would be an issue with regard to fairness to the rest of the UK but would give meaningful more flexibility for the Scottish government to respond to other forms of shocks. Okay, thank you again. Okay, Michael to be followed by Liz. Thanks, convener. So in the absence of any real public discussion before the agreement publication of the report parliamentary scrutiny beyond that so we're left reading priorities into the text I suppose and it seems that the Scottish government has put the population dynamics as a higher priority than perhaps other economic challenges for instance you know low GVA or longer term lack of investment in R&D that might be driven by more capital spend is that you're feeling that they've put that kind of the immediacy of those issues ahead of perhaps longer term economic transformation as they might put it? I'm not sure I would quite go that far my understanding is that on the block gone adjustment you're right that by focusing on population with regards to the block management that has sort of tried to address something that would hit the Scottish budget immediately as I said around 50 million pounds a year accumulating for each year that wasn't accounted for. I think on the capital side of things it's perhaps less the case that the Scottish government didn't want to prioritize that the UK government really didn't want to see too much ground in that area. I think this is a personal opinion not opinion of no inside knowledge or anything. I think the UK government is perhaps concerned that if it was to grant substantial additional borrowing powers for capital investment that those could be used in the short term to substantially boost spending and could be used in arguments about the constitution. So I think that the UK government would have been much much more reluctant to see substantial additional capital borrowing powers particularly in the context of the sort of current setup in the rest of the UK where there are no England only capital borrowing powers. So I think you're right that it has ended up prioritizing kind of short term funding issues over a long term potential investment but I'm not sure that was sort of a thing that was really substantially under the Scottish government's control to really vary. Yeah and I suppose the cumulative nature of the population risk in comparing it to the comparable method on the table you know if those were the two methods that were on the table made it you know from the Scottish government's perspective and no planer to you know it doesn't mean they can also try and push for increased capital borrowing powers and as I said they have extensively used those capital borrowing powers since they've been in place you know up to sort of 75% of their overall cap in the current year. So I guess the Scottish government would say perhaps and then no question obviously they were trying to argue for both but they from their perspective they absolutely had to secure I think the IPC method because you know that cumulative erosion of the spending power of the overall budget would be you know a significant issue you know permanently embedded in the in their fiscal framework. I mean the terms of this negotiation as much as you know other members may describe it as the UK government having the whip hand on this is a two party signatory agreement where one party can withhold agreement and say you know until we get more of what we want we're not going to agree to it as much as you described you know that they're one party I think for very sound reasons as you're explaining that David may be reluctant to go in some direction you know it's a two party agreement so I suppose that kind of takes me to that issue about how rushed some of this feels towards the end you know a long-term process we're locked now into a described in the years in agreement for over 50 years on the basis that it feels like trying to deal with a short-term issue perhaps in terms of those borrowing capabilities to deal with a one billion pound black hole of the Scottish government's own making so I mean is that not part of the risk in the way they've dealt with this about actually setting those really short-term budget priorities how do I get through this budget year and they've locked us into a process for 50 years as a result well well I mean not the fiscal framework provisions do make clear that both governments can suggest changes to the fiscal framework review that would be reviewed by the the joinix checker committee and I imagine that the this committee or future iterations of it in the Scottish Parliament would would be interested into how you know their scrutiny can come to bear on any discussions or make suggestions or whatever in terms of how it can be and I don't think that this agreement is going to lay untouched for 50 years I think that's very unlikely so there are provisions to suggest to make changes there just isn't like there was in 2016 a point at which it would definitely be reviewed and really the trigger for that was because the two governments in 2016 couldn't come to a permanent agreement on the BGA mechanism really and now that they have it doesn't mean that other provisions in the in the framework couldn't be looked at you know obviously the the one billion pound issue that you refer to was was set out in the medium-term financial strategy and that was the revenues that the Government thought they would have access to to spend compared to the commitments they had made so I mean you know that that was that's obviously up to them to explain how they're going to which things they're not going to do in order to meet that challenge and that's what they'll be doing in their budget and I suppose particularly the increased borrowing powers did make this issue a little bit easier given that they are able to borrow for the whole of the income tax reconciliation now whereas they weren't before but I don't know if your characterisation is fair because there are clearly going to be opportunities to review this in future years any the Scottish Government and the Treasury can make suggestions and changes so you know as I say I don't think this is going to remain as it is for for 50 years but I mean before I bring you in David the the Barnett formula that we've been discussing was set in similar circumstances where it thought it might be revised within a couple of years and it's existed for decades and decades and we're still unpicking the complexities of it but maybe my wants to come back to me on that one button before you do it so I think it is I think it is fair to say that sometimes these arrangements which are seen as temporary canon to becoming impermanent fixtures of the system I think it is also fair to say that the Scottish Government would have had a mind on the kind of short term fiscal position when it comes to kind of trying to reach an agreement for the current financial year I think I would point out though I think there might have been a typo in some of the notes because my understanding is is it's not a 50 year review cycle it's a five year review cycle because it's five years but not more than once in any UK or Scottish electoral cycle so I think there might just have been a typo in the notes that said 50 years well upon which basis decisions are made I suppose okay thanks I mean I'm sure a future UK Government if it wanted to be more generous to Scotland could easily reopen those negotiations thank you can I return to the issue of forecasting and OBR and SFC because I think what you've set out for us is extremely important in determining not only some of the issues within fiscal frameworks but about setting budgets and we've obviously had both the OBR and the SFC in front of this committee I have to say extremely professional in both cases is there evidence a statistical evidence within recent trends of the forecasting for both OBR and SFC that there is particular data that is showing a greater issue of error or volatility or is it just the overall predictions that are providing some problems for us my understanding is that there's a particular difficulty around self-assessment because if you look at the most recent year the initial expectation was around 700 million reconciliation it came in just under 400 million pounds through the 300 million pound difference now as a share of overall income tax revenues that's only about 2% or so but as a share of the self-assessment revenues that is probably more like 15% 10 to 15% so there's quite a sort of issue around self-assessment I think there's also a risk you know looking forwards and I think the Scottish fiscal commission has quite a difficult task ahead do we baseline this faster growth and assume that that is now a higher level or there be some reversion to the mean we go faster in this year and then we'll go slower in the subsequent year so I think there's there is a particular issue around there more generally we've seen this big issue in the economic statistics in the UK recently where different earning series are are just giving a vastly different picture of what's happening to earnings so for example if you look over the last few years things like the labour force survey average weekly earnings and ASHE some of the big main surveys we use for earnings they've gone much slower than what HMRC data suggests but if you look at the last couple of months the HMRC data suggests much slower growth than some of these other indices and I know that the SF seeking account for the the the HMRC data that it gets through as a feed but we know that data isn't a full sample so I think there are issues particularly on self-assessment and it is just the fundamental issue that earnings data in the UK does seem to have got a lot worse recently and that is causing some issues in the forecasting process. When you say it's got a lot worse is it that the the trends of that forecast have got worse or is there just extra volatility in the earnings and it's very difficult to predict that is it is it what I'm really asking is is there a problem with the statistics that we're using and therefore there's difficulty for OBR and SFC to interpret that or is there something else that is causing a problem there's definitely issues with the statistics around labour market statistics currently there's been a big drop in the response rate to surveys like the labour force survey and the annual survey of hours and earnings ashy and that's made it much harder to know what's generally going on both to employment and to earnings particularly for those parts that are not so well covered by by the the income tax statistics so what's happening to the self-employed and what's happening to those at the bottom of the market? I think the financial times had an interesting article about this just a couple of weeks ago that the actual data presentation is is making life very hard for OBR and for SFC. Do you think obviously that this matters to us big time because obviously the data is absolutely crucial in not only informing us what the current economic picture is but for informing government when it sets policy? Do you think there is anything else that we can do to help to reduce the forecasting error which obviously has created difficulties between OBR and SFC over certainly the last few years? I think that it would be difficult to reduce the forecast error much more. I think that there are huge challenges with earnings and all the data about the labour market right now that have been well documented in terms of O&S's difficulties with the response rates and the labour force survey and whether they're going to be addressed by the sorts of transformations that the O&S are trying to put in place. I'm not sure to be honest. It's a big challenge and we've seen this feed through even into what the Bank of England is thinking about the economy and the decisions that they're making because they're hearing very different signals about wage growth in the economy. And remember the SFC has extra challenges here because it doesn't have all of the data sources for Scotland that the OBR have at the UK level so it doesn't have AWE equivalents to be able to look at them and see that they're different to the HMRC data. All they have is the HMRC data and they're doing their best to try and forecast. So extra data sources could possibly be made available to allow them to do these sorts of things but there are huge challenges in collecting the data at the UK level at the moment and so it is pretty difficult. I would always advocate for more access to data for analysts and researchers. HMRC data is a particularly difficult area for academic researchers and researchers at the side of Government like David and I. So any more access to data will help but forecast error is always going to be a feature of it and the SFC's forecast error is because they are forecasting for a smaller economy. The data and the forecast are likely to be slightly more volatile so whatever forecast error the OBR has you're probably going to get a slightly bigger one just because of a smaller economy and these are part of forecasting and it's just sort of amplified for Scotland because there's the SFC forecast error, the OBR forecast error, they could go in the same direction but they might go in opposite directions and therefore the sort of issue is amplified for the Scottish budget. Which hits the nail on the head that in Scotland a difficult job because of those two forecasts you're having to deal with rather than just one and given what you've said if we do have to accept that there will be a degree of forecast error we've got to play that into the system. Do you happen to know that when both the OBR and the SFC are looking back at the predictions that they made and how that turned out in practice is there a lot of co-operation between the two just to assess where some of that forecast error came in? In your opinion is that sort of well documented? Yeah, they work together very closely as my understanding and we'll be trying as fellow analysts and forecasters doing a very difficult job to wherever possible learn from each other and to improve the situation. Let's not forget the last five years or so when the SFC has been set up has been a mad time economically and lots of things have happened that weren't expected. There have been a lot of difficulties that none of us could have predicted but yes my understanding is they're working very closely together as fellow analysts to try in wherever possible share information and to understand where their models are maybe looking at things slightly differently to try and reduce differences. The OBR has recently done some work looking at its Scottish forecasts and it actually focused more on its own forecast of Scottish revenues as opposed to its forecast of our UK revenues which go into the block on adjustment which actually is what matters for the Scottish budget but that sort of I think can be really useful and I think you know both of them do forecast evaluation reports as well which look at kind of the historic performance of you know their forecasts and try to learn lessons from those and I'm pretty sure they also look across their two systems. I was just going to add as well that these issues around sort of forecast errors the fact that there will always be forecast errors I think means that it is worth thinking about that I said not just the increase in the limit we've already seen which will help address bigger forecast errors than previously but is there a case to go even further than potentially say look can bother to cover any forecast error but subject to some overall cap and some sort of time limits on repayment I think I'd also go back to the fact that actually understanding qualitatively at least which direction any adjustment may come from I think actually is important and then it's up to the Scottish government to set its budgets with those risks in mind. My own view is a little bit that in 2021-22 when we've had this reconciliation that it was quite clear at that stage that Scottish revenues weren't going out, pace those in the UK by £500 million or whatever was said. It would have been possible for the Scottish government to bank some of that money into reserves to reduce potentially the amount that needs to be taken in borrowing in this year, sorry in the coming year to help smooth things. That's very helpful and I think the committee would agree with that statement that it's an exact science obviously, we have to accept that but it's just trying, is there anything we can do within terms of budget analysis and fiscal framework analysis to ensure that the forecasting error is as minimal as we can possibly make it. Kezia Duggan, we've talked before about the issue of the RUK forecast which the block grant adjustment is based upon coming from the OBR, the differencing off of the OBR Scottish forecast from the UK forecast, but the Scottish forecast is done using a different economic model and not Scottish specific economic determinants. The OBR, in their commentary around the Scottish forecast, do seek to adjust the Scottish share based on Scottish specific factors and some of the work that they're doing to look at that may well improve it and I think that that's a potential area for that, more work could be done on that area because the RUK forecast, as I say, is differencing off that from the UK forecast and their view on the Scottish economy not being based on a Scottish specific model is potentially a bit of an issue. Obviously there are other approaches that are going on in other parts of the UK on this sort of issue, Wales has made a different decision about the extent to which it's got its own fiscal institution, it's asking the OBR to do so at the moment at least. It will be interesting to see how those different approaches to this are leading to different outcomes in terms of things like reconciliations and forecast errors and so on. Good morning. I just wanted to go back to a comment that you made earlier, David, in terms of CAPEX and what you thought the accommodation that had been made by the UK Government. In some respects, I'm surprised that I can appreciate why the Scottish Government wanted to fix on the IPC for all the reasons that we've discussed. In terms of the current fiscal challenges, I'm also surprised that it did push more around the CAPEX thresholds given what it could bring—well, there's a very real need for capital projects, but also what it could have brought to the economy in the complete absence of really any of the meaningful levers to grow your economy that might ordinar in the respect, because a lot of what we're discussing is dancing on the head of a pin, really, in terms of this nature of this fiscal transfer, the way things are happening in the UK. So, do you agree with my assessment, if you had been doing that, would you also have been pushing hard on increased capital borrowing powers with the very intent of using them, because there's a good reason to do so in the current economic climate? First of all, I must say that I don't know what was going on behind the scenes. We wrote the independent report and had some discussions with the two Governments in the context of that, but I do not know what conversations and how much different aspects are being pushed by both Governments. I couldn't say whether they should have pushed it more or whether they pushed it as hard as they could, and it was a red line for the UK Government. I don't know. As I said, my sense is that the UK Government would be more concerned about giving ground on borrowing than it would be on what accumulated quite large amounts on the BGA side, but in any one individual year, relatively small amounts. So, I wouldn't want to comment on whether they have tried harder, because I don't know how hard they tried there. What I would say on the capital borrowing limits is that, on the one hand, I think that you could argue that, yes, given that we know inflation for many things on capital, it's actually outpacing the sort of GDP deflate for the moment, which was the kind of comment raised earlier. Actually, if you want to maintain the real value of the capital borrowing, linking it to capital inflation as opposed to GDP inflation might have been a start. When it comes to what is actually the priority then in terms of further increases to increase capital investment or increase resource investment, I think that there's a kind of question there about what is the Scottish Government's real challenge. Is the real challenge at the moment actually maintaining services and maintaining the resource side of the budget, or is it maintaining sort of the investment in the economy? And also, what is the supply side capacity for these things? Is it a supply side capacity to deliver substantially higher investment without driving up costs further? I don't know the answers to those, but I would hope that the Scottish Government was doing some work thinking about those things when thinking about its negotiation strategy, not just thinking about what are the numbers, but where can it have the biggest bang for the buck and where can it avoid, for example, having spill of effects that end up pushing up costs and doing some of the potential benefits that the higher limits could give you? That's very helpful. Do you want to come in that quite now? Yes, I just absolutely agree. A lot of the challenges from Government capital spending can actually be about the capacity for delivery. Obviously, there have been lots of challenges through Covid and everything else about the supply of materials and also labour, but Government has to consider those things to what extent is their capacity to deliver on this capital spending programme that they are looking to set out. There have been significant challenges in some parts of Scotland in doing that in recent years, so it's definitely something to consider, because, as David says, otherwise you might just push up prices further. I'm not sure if it's the same in Scotland, but certainly in England capital budgets are consistently underspent because delivery lags planning. That's very helpful clarification, thank you. On that point, in terms of the baking in of some of the things that we're discussing today in the nature of fiscal transfers, how does that now compare with other fiscal transfer systems that we see elsewhere in the world? I mean, we've previously talked about how complex it is. I suppose my question is, are we simply baking in the complexities that will need to be managed going forward when we've talked about some of that earlier, or does it start to move to more comparable methods elsewhere? I don't think so, but you're the experts. On that one, I'd say that because the UK started with a highly centralised position and it's been devolving things, rather than starting with a decentralised system and centralising certain things, this idea of being block grant adjustments linked to particular taxes is quite unusual, but that reflects a starting point. We're moving from a point where everything is centralised to decentralised and trying to avoid a way of possible detriment, avoid a way of possible taxpayer unfairness. I think it's understandable how we end up in that situation. That is quite unusual and it is quite complex. We actually think things are less complex than in many countries, is around what happens after the point of devolution. Many countries don't just have a fixed block grant adjustment that goes up in line with what happens in the rest of the country or doesn't respond to changes in the relative circumstances of the countries. There's some sort of insurance or equalisation mechanism on an on-going basis. For example, in Germany or in Scandinavia, if your economy grows faster than the rest of the country, you get to keep some of that, but you hand somewhere back to the central government that can be redistributed. Similarly, if you fall behind, you get some insurance to stop you falling further behind. When the Northern Ireland Fiscal Commission looked at this for Northern Ireland, it said that, although we agree that, at least in the first instance, the principles underline the Scottish agreement that it should be economic responsibility, Scotland should gain or lose if its revenues grow faster or slower from devolved revenues so that it has responsibility for its policies, there should be some backstop to that. Because we know that revenue performance is partly driven by Scottish decisions, but partly things outside of the Scottish Government's control, there should be some backstop if revenues fall too low or some sort of mechanism to redistribute to the rest of the UK if they grow particularly fast. That is something that we don't have in the fiscal framework in Scotland. Many countries do, so I think that in future arrangements and future reviews, it would be worth looking at. Is some form of on-going insurance or caps or ceilings, does that make sense in the context of the Scottish Fiscal Framework? Yes, absolutely. The Northern Ireland report goes into this in a lot of detail. It is really interesting discussion about the extent to which, obviously, the devolution of taxes adds to accountability and all of these things, but that this is something to consider that is not present in the UK system, which is quite unusual. However, it is built on the fact that you can totally see how we have got here, because as David said, we have the centralised system and Barnett had to remain, was also one of the agreements. Therefore, the complex position that we have ended up in is the best way to meet some of those principles that are set out in the Smith commission, albeit that they are intentioned. It is completely understandable by how we have got here. There must be some quite significant reforms for it to be more like a more, you know, federal system or a different approach. Just one last question picking up on what John Mason was talking about earlier. To what extent are we baking in the recognition of the kind of just tremendous pool that Vince Cable said for the vortex that is London and the south-east that sucks everything in? Are we not simply recognising that that will continue to be the case and always be the case, even allowing for a technical mechanism where, if there was some cataclysmic event, with very little capacity, regardless of whether it is Scotland or anywhere else, to do anything about it, within what is now being devised? As I said, I think the fundamental tension on this should London and the south-east be excluded from the comparison comes back to this how to prioritise no detriment versus tax for fairness, how to square the revenue side and the spending side of the budget. One way you can do that whilst keeping with a relatively simple mechanism that compares to the whole of the UK is to have this backstop, which says that if this trend were to be an ongoing thing and Scotland were to fall behind, that there is either some sort of reset mechanism or some sort of insurance mechanism, which prevents that continuing indefinitely. Equally, if Scotland were to actually do the way round, the flip side is that if Scotland were to improve out of the rest of the UK, there would need to be some sort of reciprocal arrangement, but those mechanisms might be a way to address those sorts of concerns that John Mason raised, although having the main underlying system still be not overly complex and still based on revenues in the whole of the UK. Whilst recognising that spending in Scotland is being supported by the revenues that have been generated in London and the south-east through Barnett, it is always important to remember that. We have covered all the summer of changes in the fiscal framework except one. It is a fairly minor one, but I think that it would be remiss not to touch on that. I wonder if you can tell us, David, about what is going to happen with the coastal communities funding and what that will mean for Scotland. We understand from the agreement that it will be absorbed into Barnett with no immediate impact on funding, but what would be the long-term implications? I must own up to not having looked into this in any great detail. I can explain it in the principle, so by rolling it into Barnett, what it means is that, subsequently, that will then be in the comparability factors that are allocated to a department in England, so that, subsequently, any increases for that department, Scotland will get a population share of the increase that relates to that part, which is the coastal communities fund in the rest of the UK, also in England, I should say. If Scotland would otherwise have received a bigger-than-population share increase in subsequent funding, then Scotland would lose out from this mechanism. If it would receive a smaller, it would gain from this mechanism. It depends on its relative use of these... What financial parameters are we talking about? I must say that I have not looked at this issue, so I... I am not sure, convener, either. Sorry. Well, on that positive note, we will end the session. I want to thank both our witnesses very much for contributions. I know that we are going to be involved in the next session, but we will just call a wee break to 5 past 11 in order to bring in new witnesses. We now move to the next item on our agenda, a round-table discussion on value-added tax assignment in Scotland. For this session, I welcome to the meeting Charlotte Barber, deputy president, chapter of the Institute of Taxation, David Phillips, associate director of the Institute of Fiscal Studies, John Island, chief executive, Scottish Fiscal Commission, Professor Mary Spouge, director of Fraser Island Institute and Mark Taylor, Audit Director, Audit Scotland. We have around 75 minutes for this session. I would like it to be a discussion between us all, so if witnesses or members would like to be brought into discussion at any point, please indicate to the clerks and I can then call you. Initially, I am going to ask a question to yourself, Charlotte. Anyone who wishes to comment on that, just let me know and we will follow the discussion as we move forward, so it will be somewhat different from the last session. In your submission, Charlotte, on behalf of the chapter of the Institute of Taxation, you have said that the lack of a suitable model for identifying and assigning VAT revenues raised in Scotland, the lack of policy autonomy that would be afforded to the Scottish Government from a policy of assignment and the down-introduction of additional risk to the Scottish budget, meaning that you view that that would be a very highly risky adventure, so to speak. I wonder if you can expand on that. Thank you very much, convener, for inviting me to speak and for our submission. That summarises our submission as to where we are, that we spoke at around table previously on VAT assignment and had reservations about it at that stage. For those three main reasons, there has been some interesting work in the intervening period, I think, however the reservations remain. Broadly speaking, VAT assignment means taking all the VAT in the UK and then trying to work out an allocation, a divvying out of the kitty, to give some to Scotland that is meant to represent Scottish VAT. I am not convinced that we have got an assignment model that makes it clear any actions that the Scottish Government has taken that then influences directly that VAT that comes back. It is very difficult to see the connections between the two. Obviously, in very broad principles of the economy grows, you would hope to have more VAT, but I do not think that you have close connections. I think, too, that because you are assigning part of UK VAT in its broadest sense, then you are not going to have a lot of influence on policy over VAT. That, too, is questionable if you are trying to tie tax and policies together. Last but not least, as we have been discussing in the earlier suggestion, any kind of modelling will bring in risks, so you have further risks attached to that. From last time when we looked at the models, the more you try and pin down where the risks sit and identify them and tighten them, the more complicated you make it, the less transparency and visibility you have. It is not dissimilar to some of the forecasting discussions that we have had earlier on today. John Island, for the Scottish Fiscal Commission, you have said that we are still in a situation where the estimates of VAT raised in Scotland are too volatile to be suitable for the purposes of VAT assignment. As far as the fiscal commission is concerned, we want to hold back on the political debate about VAT assignment. For us, the practical issue is how we would forecast what is assigned. For us, that is difficult and is difficult for a couple of reasons. First of all, we still do not have absolute clarity on what the VAT assignment model was. The best information we have is the 2018 paper from the Treasury and HMRC on the model, but that still leaves lots of important details unclear. There is a lack of transparency in terms of what the assignment model is. We have had, since we last had a round table, a lot more assignment data being published by HMRC. That is helpful. That allows us to get a better sense of where our forecasts work or not. However, there are problems there that data is back revised. As you can see from our submission, the charts and the figures in there, the last publication had a third of a billion for each year for most of the back series. For the last observation, it had a billion revision. That sort of volatility makes it hard again to forecast. It also makes it hard to operate the reconciliation process as well. There is an issue there. I think that the final issue for us is that we are forecasting the output of a model. By definition, that model includes a lot of random error. We have to forecast not only the real economic VAT, but the notional VAT. If our forecasts are going to be accurate, we have to forecast that forecast error. That is very difficult too. There are a number of practical issues around the VAT assignment model that concern us. Before I get trampled in people wanting to come in, because no one has so far, I just want to add to what you have been saying. The HMRC did a presentation this morning. It said that the changes between each publication in the last year were indeed the highest. They have been in the last decade at 9.81 per cent. Mark, what you have said is that implementation of the VAT assignment would further increase uncertainty, volatility and complexity. We are used to those things in the fiscal framework. Per se, the fact that those things exist is not problematic. Our entry point for this is that, for this to work, there needs to be that public confidence in the robustness of how it works, and there needs to be that public confidence that the benefits that it brings in terms of the aims of the Smith commission around accountability and the like. We heard discussion about those aims this morning. There is more information to understand that. Stripping back from that, the other thing to flag, and I am sure that we will get into more detail around that, is that, although in other areas of the fiscal framework there are risks of estimation, there is a small amount, for example, in the Scottish Income Tax outturn. In terms of scale, that is all estimation, and therefore it brings in a new thing in a fundamental way around estimation error, where we will never know how much that error has actually played out in any of the outturns, because the outturns themselves are estimates as well, so there is a new thing to understand and deal with. Since we last discussed this with the Finance and Constitution Committee on a similar round table, there is more information, as John Ireland says, available from the HMRC, which helps to get more of a sense of the scale of those risks and the scale of that estimation error, but we are still a long way from really understanding how much that plays through. The last thing that I just mentioned at the outset is, in terms of the ability to manage that estimation error, the resource borrowing powers are not available for that, they are available for forecast error and not for the estimation error, so there will be a lack of clarity about the volatility, how much of that is due just because of how statistically we have measured that and how much is due to performance of the economy and how that plays through the model. We will never know that, and there will not be the ability for Government to use any stabilisation mechanisms, borrowing powers, to adjust to that, so it adds an extra layer of risk on top of that volatility complexity and uncertainty risk that already exists in the fiscal framework. I am going to bring in one of my colleagues, a couple others, who want to speak while I am going to bring in first. First of all, David, you have said just to add a wee bit more to the mix. You have said that VAT is properties that make it a relatively poor candidate for devolution, although we are talking really about assignment here at the moment, and then you are going to say that the administrative difficulties involving VAT to Scotland should not be overstated. I think that the model of assignment that has been suggested so far for use, if VAT is assigned to Scotland, is a statistical model, so it is not one where you actually work out exactly how much VAT was collected in Scotland. You do not assign a tax base to Scotland, you try to estimate a share of the UK tax base that can be reasonably apportioned to Scotland. That comes with a number of issues we have just talked about. I think there are ways in which you could perhaps now reduce the degree of measurement error, particularly on the consumer side, so rather than just relying on the LCFS, I think there is now scoped, for example, use credit card and debit card data and real-time information from banks and so on to improve the modelling of that side of things, but that sort of mechanism would always be a statistical mechanism. As has been pointed out, you actually never have an outturn, you just have an updated estimate, you have a forecast estimate and then an updated estimate. When I talked about VAT being a relatively difficult candidate for devolution or assignment, I think the alternative approach would be to say, well, let's actually split up the UK's VAT and try to assign the tax base more directly to Scotland, so to ask companies to split out their sales and transactions, not just with other companies, but intra-company transactions when things move, for example, a warehouse in Northumberland to a warehouse in Fife or a warehouse in Fife and a shop in Northumberland. If one does to ask companies to do that, that would actually allow you to do a full assignment and not have these forecast errors, but that would be a lot of additional administration and compliance costs for an assignment model. Even for a devolution model, it would be only worth going through that sort of issue if one expected it to be notable, significant changes in tax policy, rather than just changes around the edges. That was the point I was trying to make. We shouldn't say that VAT cannot be devolved to Scotland. If Scotland wanted to make substantial policy changes, it is a tax that can be devolved. We see subnational taxes, although generally sales, as opposed to VAT taxes, in other countries. Substantial policy change can rationalise that, but if it was to be devolved and made very little changes or certainly assigned, it wouldn't make sense to go down that route of actually trying to split the tax base up. That leaves you with a statistical methodology, which I think can be improved on what's in there now, but I still think that it will be in a situation where, knowing to what extent changes from year to year are actually because of economic fundamentals versus changes in the measurement error, that could be an issue in terms of the financial accountability for the Scottish Government under the assignment model. I know that I've spoken on a lot of issues there, but I hope that that makes sense to my points. There are two things for me about the sense that this makes overall, and then the practical difficulties with doing it. Others have said in their submissions and in their comments so far that the extent to which VAT that is generated is related to the economic activity that the Scottish Government may have control over in terms of generating or supporting in the Scottish economy is questionable. Also, there are lots of issues around the distributional effects of VAT and the sort of things that are levied on and so on. To what extent it makes sense that this is a tax that would be assigned in order to incentivise support or growing the economy and so on. I would question that. It does open up a large proportion of the budget to significantly expanded risk, but the biggest problems are really about the practicalities of assignment and the fact that, after almost a decade of work, there isn't a model that is sufficiently accurate or can estimate these things to precision that is suitable for this purpose. As David has pointed out, there are potential improvements to the consumption data that the O&S is looking into for all those issues around estimate and consumption in the national accounts. Those investigations into those data have been going on for some time, and there are lots of issues about using scanner data, credit card data and so on, because it doesn't identify individual products. Those are not without challenges, but it may be that the estimation of the household portion of the VAT assignment would improve over time. That is possible, because it seems like there is data that could do that. The rest of the model is subject to quite a lot of national accounts data, which is open to revision in perpetuity forever. Some of the questions that I would have about this is not just the extent to which there would be volatility in the estimates, but what degree of time are those estimates going to be open for revision and reconciliation, because the entire series of national accounts is revised quite often, and particularly the areas that are using national accounts type data around things like financial services and so on. That in particular is open to revision and methodological changes and so on. I don't think that there is a way that this could get to a point where it was suitable for this purpose, so I just don't think that it's a good idea. I'm not hearing an overwhelming endorsement from people around this. I was going to say around today, but it was more like horseshoe, to be honest, so we don't bunch together. John Mason. Thanks. A couple of questions, and I think that David Phillips has partly answered the one that I was going to ask him, which was what he meant by the phrase, I think, the noise versus signal ratio would adversely affect the financial incentives, et cetera. My other question was to Mark Taylor, really, that you said you thought that this would be difficult to audit, and I just wondered what that meant. Shall I start with that one? Thanks, John Mason. I guess that the starting point for me around this is absolutely recognised on the back of what it said around transparency, the importance of that, that from a parliamentary perspective, to have something that says, we've looked at this and we think that it's right, it's really important and really valuable, and we've had initial discussions with both Scottish Government and National Audit Office about the shape of that and what that might look like, and there's a long way to go before we're able to resolve that question. I think that the fundamental challenge is that this is a statistical estimate and those things do not get audited, so what happens in income tax and what happens in devolved taxes is you have actual transactions where the audit process confirms the existence of the transactions and some estimation and some balances around that, but effectively it is actual things that happen that they're recorded and are able to be capable of being audited. In a statistical estimate it's not an accounting discipline, it's not that same recording of financial transactions where you would end up with an audit opinion in a similar way that we've got an audit opinion, both from National Audit Office on Scottish Intercom tax and from teams within Audit Scotland on Revenue Scotland's taxies and the like, Social Security expenditure and the like. That gives a fundamental challenge about what do we mean by audit for this figure. In that initial reflection I think we recognise that there's work that Audit Scotland to do to kind of explain all this, to set out the process, to give some comments, to give a degree of transparency, a degree of assurance about it's well managed, we could do something around that. We also think we could probably do something working with colleagues in the National Audit Office ultimately that says it works the way it was planned to work, the way it's set up is the way in which it's been executed and possibly even those numbers that come from those places have been input correctly into a process and been reflected properly in a process. So there are different flavours of audit in amongst that. What I think we're clear about and we said in our paper is that the opportunity to have a firm audit opinion on a number that we have in other aspects of the physical framework seems very unlikely. We need to get into the detail, we need to have much more discussion, we need to actually have a model that's agreed so we're talking kind of in hypotheticals at the moment because they're still not in agreement but that's the kind of sense of where we are in and around that at the moment. Yeah, you know in statistical models such as this in statistical publications you know obviously there's the role for the Office of Statistics Regulation here in accrediting statistics that they are you know produced you know free from political interference and to good standards and all of these sorts of things and provide public value so you know they presumably would have some sort of role in something like this in order to ensure that it was accredited as a national statistics publication and these sorts of methods have been used not quite over engineered to the extent that the current VAT assignment model is but you know to estimate statistics that are credited like like GERS, Government Expansion of Revenue Scotland and like the country and regional public sector finances that the ONS produced they are good estimates probably or the VATs that's raised in all of the 12 regions of the UK regions and nations they're good enough for statistical publication but they are not precise enough for budgetary purposes they're not precise enough for that assignment it's not that the estimates aren't probably quite good estimates it's just they're too imprecise for the purposes of budget setting in my view and Charlotte you said VAT would be the only assigned tax in the package of taxes to fund Scotland the UK government would retain full legislative and ministers responsibility and the aim of VAT assignment would be to bring great accountability decision making in Scotland but the Scottish Government have no direct control to our VAT rates and policy so it's going to come back to what you're seeing. I mentioned at the outset and maybe if I could make two points please in answer to that going back to what I said at the outset if you're just getting part of the kitty divvied out then obviously you have little direct influence over that wider kitty you're not going to be able to change the rates you're not going to be able to decide something should or shouldn't be taxable and on it goes so I don't think or you know what rates you would charge and I don't think that's necessarily an attractive way to make a government accountable for its economic policies and I'm not sure we often talk about how much taxpayers do or don't understand tax I don't think it draws those connections any closer maybe leave it at that the other point I wanted to maybe mention following on from what David said we've been talking about an assignment model and I wouldn't like to leave it on the table but you I mean you can evolve the tax the way you do with income tax say on rates or you could fully devolve it as you can with others that they're still in the making however I would have grave reservations about suggesting that we go down that route for two reasons one is that I think the AT is designed to go across a bigger single market rather than be chopped up into bits of market with everybody accounting for different rates or different things in those bits and we're quite a highly integrated economy and I know John Mason we've discussed in the past what you would do about products which are you know various stages in the in the production then you're in and out I'm not sure our major retailers are going to want to account for different rates of VAT in different parts of the UK that would be quite hurdle to go over I think unless of course as you say David you really radically changed what you were doing with your VAT but then you open up the doors for competition between different regimes and competition is one side of the equation the other side of that one is avoidance thanks I mean the practical issues I think Charlotte sets out feel to me to be absolutely huge and I suppose at the time of Smith commission I was very far from privy to any of those discussions and we just have to assume perhaps some of the motivations around this that is it the case that income tax is not a sufficient indicator of economic performance and therefore the desire was to have a kind of a basket of different taxes that would be indicative of how Scotland was performing I suppose I'd be keen to hear on people's views as to whether just having the one indicator around income tax performance perhaps creates a very limited set of incentives for the Scottish government and institutions to drive activity in one particular way within our economy and that perhaps skews some of the incentives in the way that government might act David yes I was going to talk to you anyway but sorry so I might come in there yes so I think you're right that having a sort of a broader basket of taxes can give you a broader basket of incentives in particular especially as the personal allowance has sort of risen substantially since 2010 or it's now frozen again but with the personal allowance sort of you know taking perhaps around 40 to 45 percent of adults out of income tax particularly those with low incomes and even those above the threshold pay relatively small amounts until they've got substantial incomes income tax means you expose more to higher income people VAT would mean that more of your your tax of new performance depends on what happens to lower income people as well and you might think that's a good thing if you think you want the government to kind of consider income inequality as well as to consider sort of growth in the top of the distribution so I think you know there can be a rationale for tax assignment other countries do use tax assignment to give those incentives even if there isn't the power to vary the rate so perhaps not quite as down on tax assignment as a methodology as some people but I think the practical issues in the context are difficult to address in terms of the incentives that are provided by VAT it would depend very much on how VAT was devolved if you were to devolve it so if you would think about devolving it rather than just assigning it if you were to devolve it on the same way it's devolved across international borders within international border when something's exported it's subject to zero VAT and the VAT becomes fully charged when it's imported if you did that for Scotland as well treat the Scottish English border as an international border for VAT purposes that would mean that there's an incentive to grow consumption in Scotland because it would be about the amount that's consumed in Scotland depends is what drives your tax base if you were to do it rather than you treat like an international border but that the amount that people can reclaim in VAT depends on who they're buying from so if someone is English buying from Scotland an English business buying from Scotland they can reclaim the Scottish rate of VAT if someone's a Scottish business in buying from England they were claiming the English rate of VAT the incentives there could be quite different rather than an incentive to boost consumption in Scotland it's an incentive to grow value added in Scotland so you can design VAT in ways that within the UK either provide an incentive to boost consumption or to boost effectively production value added there's different ways you can do it but as I said the administration and compliance costs in doing that getting companies not just on their transactions but their intercompany transactions said to do those things you only read on to do that if it's going to be a substantially changed policy but I do think you're right that one of the ideas here was to give it a broader basket incentives although I also think part of it was reference to like what share of taxes are going to be devolved in Scotland so I think somewhere it was just let's get to a certain share of the budget devolved in Scotland rather than any sort of full appraisal but David was it not the case that devolution wasn't considered because when we were part of the European Union it wasn't actually permitted to devolve to sub-state legislature so assignment was the only way in which VAT could even really be considered yeah but of course now that is one of the potential things that could change post-proxy but as I said the compliance that I've been cost potentially quite large I mean one of the things that you've actually suggested in your paper David is potentially you know sales tax there rather than VAT I wonder if you can talk to us with that. So the complexity with devolving VAT is because how it is sort of not discharged at the final point of sale it's charged on each transaction and so what happens is is that a company selling to a company company eight and a company B A charges VAT B reclaims a VAT B charges it C reclaims it and it's only at the final stage then where the consumer can't reclaim it so it's what's called a fractional collection system that means it's quite complicated to devolve because lots of goods are transacted across borders not just across companies but within companies and you would need to you would need to do that with a sales tax that's not the case of the sales tax it's just charged on final sales to consumers and hence you only need to sort of think where is this being sold to a consumer that's how sales taxes work in the United States where you actually see very very local level sales taxes you know individual cities with 5000 people might have a sales tax that differs from their neighbour now two challenges with a sales tax the main one is you need to distinguish between consumers who pay the sales tax and businesses who don't pay the sales tax so whilst it kind of solves the issues around all these intercompany transactions and the kind of production chain it opens up a new issue around potential avoidance and evasion around you know people claiming that they were business so avoid having to pay the VAT or pay the sales tax when they go to the store the other issue is that all of the tax rather than being collected as as a fraction across the sales process production process it all comes at the final point of sale and hence if there is any evasion you lose all the revenue rather than just the one transaction in that chain so I think if you wanted to devolve a tax to Scotland or actually within Scotland to different local authorities that's been discussed actually within England and Wales local sales taxes a sales tax as opposed to a VAT is an easier way to do it but it brings challenges around evasion even if it makes the general administration and compliance burden lower yeah I mean there's there's also a the issue at cross border purchases etc but we do have sales taxes in the united states europe is quite common aren't they around in the united states yes in europe they are sort of sometimes like particular taxes for particular services for example tourism taxes you can think of a tax on sales of tourism services but it's really united states and some sort of countries like traditionally india brazil some of the large feddable countries have sales taxes that vary right down to sometimes local levels so we'll get four political parties represented around this table and we'll get five experts on this issue who is all who all thinks that assignment of VAT is a really great idea at this time so i know i want to join heroically i thought you were about to come in there not just remember this is like an auction anyone actually twitches you'll be called to speak david you you had your finger on the button at one point there but you desisted because we seem to have come to the situation where we're all more or less in agreement that this presents considerable difficulties right across the board whether it's from a forecasting point of view it's from a practical point of view you know whether it's from an audit perspective does anyone see any real benefits to this that we could perhaps we could eventually reach a benefit is there any kind of perfect way in which we could get to that as it always going to be a bureaucratic and costly distraction which isn't going to add any benefit to scotland anyone want to contribute for or against our committees previously have come to exactly the same conclusion as we have as in there are strong reasons why this is so complex and difficult the practicalities are just too great to well the 11 to 16 committee which i was convener actually did look at it briefly and we took the view that there hadn't been enough i mean we were just that they've set up the scottish fiscal commission was an embryonic stage you weren't at the stage you were at now and it was hoped that perhaps in future years we'd have be able to look at this in greater depth our predecessor committee in the last time of parliament were very skeptical about this actually being a practical way forward but it's because it remains part of the kind of smith commission i think it's been one of those i mean i take the view you know that you know the smith commission isn't necessarily in tablets of stone you know it's some years ago now and i think we have to evolve beyond it in some areas and this might be an area where we have to say in the foreseeable future this isn't going to be a run-up for but scottish government officials are actually looking at this but yet we can see no practical or pragmatic way forward on wonders whether that's a good use of of public resources michael i mean i do believe that the principles which we've talked about at committee this morning about economic responsibility for the institution the devolved institutions in scotland to focus more on how do we grow the economy how do we get money in people's pockets to generate the taxes to actually provide the public services that we need is the right thing but i think it's fair to me that we've had the institutions have had a good shot at this over some years to try and develop robust mechanisms to project and deliver some kind of mechanism that this might be achieved and it doesn't feel to me that that work is bearing particular fruit i mean the evidence that we took from in private session from hmrc around this i think i was less than convinced by in terms of the ability to produce reliable forecasts around this on kind of survey data alone with some other indicators i think but it's obviously a stream of activity that they are funding and supporting is a view to that this is continued government policy i think we could reasonably ask whether it's money that's being well spent at the moment but my general broader opinion on that is i think that david philips points i think around the fact that we need to make sure we have a focus on a broad economy that takes a different form of just the rather than a kind of a very narrow view of one part of the tax base that we need to understand where the role of people who are not earning high levels of income whether that be wealth whether that be people who are living in relative poverty whether that be people who are you know whether be pensioners or our students or people at the bottom end of the income scale we do need to think about how the governments and centers are structured properly to do that but it doesn't feel to me that this is a practical means to do that at the moment yes i mean i mean so for example the hmrc said you know uh you know john ireland i don't know how you would feel about this but their survey basically said that today it would be 2.3 plus or minus a 95 confidence interval so that would be there kind of um that they would be looking for just a ballpark in terms of their predictions but as we've seen the revisions that i mentioned earlier on 9.8.1 9.81% out in the current year which is highest over a decade so it almost seems as if volatility has increased rather decreased as of progress with looking at this how would you feel about that i know in 2020 was an outlier issue i think it's hard to it's hard to unpack the sort of the pandemic and what happened to the pandemic is sort of the the more the more embedded uncertainty i think it worries me that there's still a lot of uncertainty in the hmrc things and i think the other thing that worries me to be frank is a lack of transparency i think we've made no real progress at all in understanding what's in that as high in the model that's an issue obviously marks can those will don't understand why hmrc are being so secretive um but i'm sure they have their reasons yes i'll let you in i'll say to David um i was going to say that i think the one issue that one needs to get a member here with the sort of confidence intervals is that this is not just a kind of case where you've got a sort of a sample of data and you're trying to estimate a sort of underlying population from a sample it's not just a sampling issue here there's fundamentally a measurement issue there's errors around what are we actually trying to measure are we are the proxies we're choosing the actual um doing a good job of actually proxying um v at so i think that actually working out what the kind of errors are around those is actually is actually very difficult compared to just standard sort of you know statistical uncertainty well we did query that because i mean you know i mean i specifically asked about scotland relative to the other 11 nations nations regions of the UK because geography demography profile is a lot different for example rurality is quite different from you know parts of you know midlands for example is less less variable but i think i'm just going to let john mason and he'll be sitting but just um we've obviously talked about v at assignment and everyone seems to think that for the reasons that we've already been discussed you know the fact that it's the scottish government we need to have any control over it whatsoever it's a bit of a dead duck what do people feel the same about the devolution of v at this time or have people got different views on that but john will start with yourself well i'm happy to give in on that one actually because i was just going to make a comment really i mean when this was first announced i thought it would be a good thing partly because as david kind of explained there's different models i assumed that if we attracted a factory to scotland that factory would add value and the whole point of v at is that it attacks on added value so the more factories and we've been quite successful at that inward investment that that would allow us to build up v at from that point of view but as we and we also the briefing this morning clearly that's not the model that's being looked at it's purely the end point as to where the consumers spend their money so like everyone else agree with what michael marrard said i'm very sceptical about this going ahead as it is i'm not quite as sceptical as shallot barber who kind of said we you know really it would be horrendous to devolve it i mean clearly other small countries not just sub nations but you know norway sweeten netherlands denmark all operate their own systems i assume even though they're within a single market so it should be possible to devolve it and if we become as and when we become independent then we will have our own v at system so that is not unmanageable but i kind of accept at the moment that the costs are probably outweighing the advantages any further comments from anyone charlotte i think one of the other interesting things in the talk leading up to brexit was the kind of requests that people across the uk looked for once during the uk had control of v at and could do what it wanted with it everybody was asking for reliefs and they didn't seem to be anything other than reliefs on lots of different things and so i guess we would also need to if we were wanting to think about whether you might or might not devolve and whether it's worth the bother if as david says you need to do something quite different with it you'd need to think what the different is and if it's reliefs you're going to have less income maybe that will generate more businesses coming in here that would have then a flush through in the barnett formula wouldn't it because you'd be depriving it from somewhere else i guess there's quite a lot of intricacies in there and if we're going to do something different by charging more that too is interesting is issue sorry for you charlotte about perhaps it would skew economic activities well for example you know foods vat zero rate a dollar areas of the economy it'll be 20% that would perhaps skew government policy and decision making if it would devolve into areas where vat it would later do a vat return well i think if you were collecting your own vat you might be driven in part might engine by the types of things that attract vat and perhaps take your eye off other things that don't and whether one i mean that would all be part of the mix wouldn't it as to whether you did want to devolve it and then do something radically different uh the other thing i think we've learned over the last 10 years is how inextricably interlinked all the taxes are across the UK there's the different taxes and there's across the UK and it's quite difficult actually to do something distinctly different and the way the economies come structured and i'd say that's one of the learning lessons out the last 10 years so i can kind of make a two set of points first on the assignment um i said i'm not saying we should go ahead with this but i think it is maybe worth doing a little bit more look maybe this has been done already but it's something i've struggled to do looking at how other countries do this so for example Belgium Italy Portugal Spain Germany do have vat assignments i tried to find information about exactly exactly how it works how do they estimate the assignment shares unfortunately the information i found was nearly all in in in the languages of the country and it's quite hard to translate i tried to get um chat gpd to do it for me um but it didn't quite do it correctly but i think actually it it might be kind of maybe it's already been done but if it hasn't been done just just looking exactly how they how they do it not not the highlight of information that you often can kind of find on the OECD website but exactly the methodology they use could be could be worthwhile um because i think in Germany it's not just down to the regional level it's actually down to the local level it's really quite detailed there do they go through the rigmarole of actually making companies split the tax base up in order to do it if they thought it's worthwhile in their sort of you know more decentralized systems to to do that or do they use these statistical approaches um and the second part to make it we sort of echo what Charlotte was saying that um what you do tend to find actually is that yeah post vex that there was a lot of sort of discussion about further tax reliefs i think um in the context of an independent Scotland i would imagine that the reference point of what's being happening in the rest of the UK would not be quite such a strong reference point as it is currently so you might not see kind of the same pressures to just do things a bit different to the UK that you might see currently in the independent scotland um but yeah i think kind of being mindful that uh there would be risks to the tax base associated with political lobbying i think would be particularly important that's what we see a lot of with vat okay thanks for that there'll be no fact finding visits to Italy, Belgium or Germany but i make that clear mary yeah my understanding is that that that was half that is what happened at the start of this process and you know that um you know i think it was particularly the canadian model of a assignment that was you know our similar taxes assignment that was looked at um the canadian statistics is much more bottom up and they have much better data at a local level but my understanding is that the the vat assignment model is broadly based on what they do in in canada is my understanding so that hmrc have looked and and scotland together have looked at other jurisdictions to try and and and that this this was one of the reasons that they looked at doing it this way um also because they had the the vttl in existence already to try and estimate the vat gap for the UK um my concern is really about you know it's been eight years i don't know how much money has been spent on trying to develop this i would say not an insignificant amount of money including the boost to the lcfs which is good for other reasons don't get me wrong but you know there has been a lot of money spent and and the you know the improvements in precision have have have not come there's been issues about the 2020 data which are specific to that year but um i think as uh i think it was you said michael they've given it a good go but i just think we're at the point where it can't be done to a significant the precision that's required and therefore everybody should just agree that it's not going to be because my understanding also was that you know it was kind of a bit about um you know half the scotland scotland's budget being determined by revenues that you know not that they had control over but you know we're in this in smith and previous devolution settlements and it was kind of about getting to that 50 per cent mark you know rather than about the taxes themselves being sensible for assignment yeah i think i think there's an element of that i think there was a lot of politics in that i mean i think you know i suppose that um the scottish government felt a duty upon itself to follow the recommendations of smith and to look at them in detail and i think it has done that but but how long can you flog a dead horse i think it's probably the issue here so i think certainly there's no enthusiasm certainly for assignment anyway devolution i don't think there's a many people who are right shouting for the rooftops for that either at this present time unless i'm mistaken nope okay anyone else want to comment on this it's a nice cheery session isn't it i think it's been actually been a very constructive session because i think we've had it this has just been said we've had eight years talking about this and if we as a finance committee and with the unanimous support of our witnesses across the political parties are saying that this that the assignment should no longer be looked at i think that's a very strong message that we're actually sending to the scottish government on this so unless anyone's got any further points they want to make i'm going to actually wind up with this quite short round table i expected it to go on a bit longer but i think because of the unanimity of views which has been expressed through very detailed and high quality submissions i think that we've come to a very strong and unanimous conclusion anyone else get anything else to say going once okay well thank you very much to everyone for attending and indeed participating in today's discussion it was very useful and that concludes the public part of our meeting we'll continue to take evidence on the fiscal framework and we'll certainly convey our views to the scottish government with regard to vat assignment we have the deputy first minister in next week and no doubt we'll put these issues directly to her the next item on the agenda will be discussed in private and it's a discussion on a work programme so we now move into private session and we'll just have a five minute break into enabler witnesses and the official report to the part thank you all