Forreston, De Gael yn gweithio i ddim yn y 9th yma i'r 3500 o Gymraeg Llywodraeth番wyr, maeth na'n fwy yw'r cyflwyllion cîn legitimate amddai cyflwyno unrhyw o'r ffynfyr a'r ddryfau cyflwng rydw i'r cyflwng cyflwyno unrhyw o'r piwcef rhag y ddweud. Wrth hynny mae gennym eu poleg yw andereb Llywodraeth a Llywodraeth Maelchyn Chysm i ddamel i altru i ddefnyddiaeth. Ar hyn ni'n fwy o'r cîn legitimate, wrth g κιd will iddial yn bobl yn ni gybrailiad yr hyn. Sut jachain i balodol i weld bob i'r myfwyr, dysu Sid grooves y orbit ddraithu'r findu. Derydanみたい External Y Seist i gaerfatu hwysiddw i ni, blwyddyn anxiwyr cymoser Should I decide whether State Item's 7, in private, ar mentAre參與? A member have indicated theirいる agreement Zid newid gyda Commentary Is the evidence on the forthcoming UK Budget from Paul Johnson director of the Institute of Fiscal Studies I welcome Paul once again to our meeting. It doesn't seem like a year since he's last here. I invite him to make an opening statement. Paul. Thank you very much. I'll only make a brief opening statement. We start off with where we are in terms of the economy. The economy is growing but in terms of national income per The head, we are barely back where we were pre-recession, till the moment in which people's incomes are roughly back to where they were pre-recession, but still haven't reached their peak in 2009. For everything turning up it is only a 7 or 8 year period, swearing and being unprecedented, in the sense of the slowness of time. Ie ddif Children's Revenue and the Salmon, in particular, I have growth in income and earnings, which results in the difficult position we remain in from a fiscal point of view. Our expectation is that the deficit this year will turn out at around £90 billion, which is roughly where the OBR thought it was going to be back in December, but actually more than they thought at this time last year. a'r cais i ddifirio beth sy'n osud 60 bilion dda i ddigonol, yn y 82,000,000 yn 2010, at gweithio i gwasanaeth i fath o gweith companies. Felly, mae'n gweithio gweithiau yn gweithio gweithiau i gwasanaethu meddwl. Mae gweithio gweithio i gwisio i gynnigio rhaglen o brach o ran unrhyw wneud mewn cyfrifiad eich bod ydy'r gweithio'r cyd-ddiol, mae'n gweithio'r mewn cyllidau i gyd, I can't see where that money would come from. Because inflation is very, very low, he will be spending less on debt interest over the next year than he expected. If he's to behave in a way that is symmetric with how he behaved when things were getting worse, he didn't tighten fiscal numbers in that year. It would be very odd to loosen them in a year in which things look like they may be getting just a little bit better. He could, in terms of the sets of things he could do in the budget, I think they will require some, if he wants to be giving money away, he's going to have to take money away from somewhere. Obviously we're running up to the UK general election, so it's worth thinking about a set of other options into the longer run, something that I'm sure will come on to in a minute is where the various parties' spending plans take them and how that relates to the figures in the autumn statement. The figures in the autumn statement clearly imply some really dramatic spending cuts over the next four or five years. Actually, it's not clear that any of the main parties are properly signed up to those spending cuts, which creates a degree of confusion about where we will actually end up, but clearly if we do go down that road, we have got an awful lot of cuts to come. The numbers in the autumn statement are consistent with cuts of 40 per cent over the period from 2010 to 2020 in unprotected departments. That's the scale of the change that they imply. My guess is that's not what's going to happen, because, as I said, it's not clear that anyone is fully signed up to that. Whichever way we go post-election, it's going to be a difficult few years. All of the parties appear to be signed up to the cuts for 2015-16. Exactly how deep they will be is what we will learn in the budget. Significant cuts were planned for 2015-16 in real terms, but inflation has turned out to be so much lower than expected. The real-terms cuts in the public finances are less dramatic than originally planned. We will look out for whether the Chancellor decides to take some more cash away to achieve those real-terms cuts. If we follow what the minimum set of cuts that appear to be consistent with the Conservative plans look like after 2015-16, that still implies substantial additional cuts for most departments. If you look at what Labour is planning, that's consistent with much—we're really very significantly smaller cuts than is implied by the Conservative plans, because Conservatives are looking for an overall budget balance. Labour is looking for a current budget balance, which gives them £25 billion, or serve additional room for manoeuvre. The flip side of that, of course, is that if you follow the Labour plans, you end up with somewhat more in the way of debt and borrowing at the end of the Parliament. That's where it seems to me that the big fiscal choices and, indeed, the big political and general election choices lie. I'll stop there and I'm happy to follow up on any of that. Thank you very much. You've obviously been to committee before. What I intend to do is start with a few opening questions for myself across a number of areas. Then, no doubt, colleagues will want to explore some of those in greater depth as we progress. The first one that you touched on is obviously the issue of borrowing. You've basically said that only Japan will have higher structural borrowing than the UK in 2015, despite the UK having done the seventh largest fiscal consolidation since the crisis began. Is that because the Government has been unable to reach its growth targets? What's the reason for all that state of affairs? Yes, it is because growth over the Parliament as a whole has been so much less than originally hoped for. The Government has responded to that not by imposing additional spending cuts or additional tax increases. It has essentially kept to the fiscal numbers that they initially kept to the spending and spending rates and tax rates that they originally planned back in 2010, moving things around a bit, but the overall effect has been the same in the face of a much worse fiscal situation. What they've done is kick the problem to some extent down the road, which is why the other thing that we say here is that in terms of planned fiscal consolidations over the next four years, we have the biggest in the OECD, so we've had a relative to the size of our original deficit.  That's all been driven by lower growth, as you say, and then the response of the Government has been not to tighten further in response to that growth but to say that they'll tighten further later on. One thing that we discussed last year was the issue of productivity, and you've said that the key puzzle is over why productivity has fallen so much. I'm just wondering if you've got any further answers to this puzzle of productivity, which does seem to be a great concern, because obviously of productivity increase, that would resolve a lot of these issues to some extent, so I wonder if you've got any answers to the relationship between productivity and pay and why productivity has not improved as one would have expected at this point in the cycle? Probably no more than I had last year. You're quite right to raise that again. That is clearly the very poor productivity performance that's been behind the very poor levels of earnings growth and that, in turn, has been behind the very poor levels of economic growth and the fiscal situation. I don't think that we know more than we did a year ago in terms of what's driving that. There is clearly a role for the financial sector here and the way in which it remains difficult for new businesses to get hold of finance but has been relatively easy for existing businesses to do that. It's clearly related to some extent to the very high levels of employment growth. A lot of that employment growth has been in relatively low paid or low productivity work. If you look at the labour force itself, it's much more, it's really significantly better educated than it was seven or eight years ago. The proportion of the labour force that is graduate has grown quite significant. If you look at the overall distribution of where people are working there, there hasn't been a shift to a less high-skilled or obviously less productive industry. Most of this appears to be happening within industries. Lack of investment has certainly been a fall-off in investment in machinery and technology and so on, which impacts on productivity. You've got a lot of new people moving into the labour market, which impacts on productivity. You've got the effect of what's happening in the financial services sector. It's probably bits of all of those things, but there remains quite a puzzle on top. You talk about a widespread retreat from risk by investors, resulting in considerable decline in its asset prices. That's in terms of your analysis of the global economy. When looking at the UK, you also say that the biggest threat by the widespread retreat from risk pushed the UK back into recession in late 2015. How big a threat is this reduction and people want to take risks in terms of going forward with investment plans to the UK economy? Worth saying those are the words of Oxford Economics rather than us at the IFS. I think that Oxford Economics' view is that that's a relatively small risk. I don't think that they see that as the most likely outcome. Indeed, if you look at revised O&S figures, it looks like investment has been picking up over the last year or two. We remain in this extraordinary world where interest rates have been at their lowest level ever now for five or six years. We've got hundreds of billions of worth of quantitative easing. We have a very big deficit in this country and most other countries, yet the return on that debt is extraordinarily low, which is itself an indication of the desire of investors to invest in relatively low risk. Even given the debt, they see government guilts as low risk and worth investing in despite the very low returns, which is telling you something about the extent to which they are not confident in what's happening in the rest of the economy. In a kind of odd way, it will only be really when we start to see the return on some of that debt growing that we'll know that investors are beginning to be more confident in investing in the real economy. The fact that so much money is pouring into government debt, even when you'd think returns ought to be high but aren't, is itself an indication of the difficult position we remain in. How much money do a lot of businesses actually have in terms of cash stockpiles? I know that's again something that you touched on over the years about a lot of businesses that have money but they don't necessarily want to risk spending it or investing it because of the concerns about the long-term economic future. There remains a lot of money in the corporate sector. I think it's worth saying that some of the numbers that were being talked about a couple of years ago have been revised down a lot because of problems with the ONS figures. Nevertheless, it's in the hundreds of billions of pounds. Again, with respect to your previous question, it's evidence of the relatively continuing lack of confidence in being able to invest that effectively. The situation is not as dramatic as was thought a couple of years ago because the ONS has pretty substantially changed their view of history, both in terms of the amount of money that companies had and indeed in a positive direction in terms of the amount of investment they've been doing over the last few years. Of course, confidence is critical because you need people to invest to stimulate growth, but if people think there's not going to be growth, they don't necessarily invest to end up with that kind of non-virtuous cycle one could say. In terms of confidence, there is a remarkable, who knows whether they'll be right, but there's a remarkable degree of agreement among the economic forecasters that the UK will grow at two to a half per cent over the next several years. That makes two things that's worth saying about that. First, the consensus is that that means that we've essentially lost pretty much everything that was lost in the crisis and the years following it forever. I mean, there's no sense. Nobody is really predicting three, three and a half per cent growth over several years to catch up on what we lost pre-crisis. Secondly, there is clearly a lot of concern about what may be happening particularly in the international markets, particularly in the Eurozone, and the effect that that may have on the UK in the short run if things start to go wrong there. So, there remains a lot of risk out there in terms of the UK economy itself. There is my perception of the forecasters that there's a remarkable degree of consensus about a reasonable steady recovery over the next few years. I was quite interested in your comments about the issue of chartered accountants of Ingalls and Wales and their perspective in terms of whole of Government accounts. I know that John here is an accountant, but I'm particularly excited about this particular issue. In 2012-13, the accounting deficit £179 billion was £94 billion, more than the current deficit of £85 billion reported in the national accounts. I'm just wondering if you can talk us through what the implications of this change could be. What the ICAW have looked at is looking at the financial figures in a different way to the standard national accounting framework. If you do that, you do learn some interesting additional things about both the level of commitments and the change in those commitments. By far, the biggest of these is commitments to public service pension payments. Certainly if you look at the overall debt in terms of the balance sheet, you see a very large number in there for future commitments to public service pensions. These are legally binding commitments in some sense and therefore ought to appear on the balance sheet. There are other things in there like private finance initiative commitments and contracts, decommissioning for nuclear and so on. There's a set of things in there which we ought to be thinking about and worrying about. Those numbers change year by year, particularly on the pension side, because of changes in expected longevity or changes in the discount rate. One ought to be taking into account in some sense how that level of future commitment changes. One of the difficulties in interpreting those figures is that you have to put a break somewhere on what you consider to be absolute commitments going forward. Public service pensions are in those numbers, but state pensions aren't. That's because there is a different kind of legal commitment to state pensions to the commitment to public service pensions. PFI contracts are in there in full, although in some sense you could probably renegotiate some of those or chop them and pay people earlier. Things like the education budget and so on, or the NHS aren't in there at all and yet actually the implicit commitment is so strong that perhaps you think they ought to be. On the other hand, the Government is different from any company in the sense that it has a permanent capacity to tax its citizens as much as they'll allow them to be taxed. On the positive side of the balance sheet, you might want to put it in, but that's not how those rules work. I think that so long as one understands the limitations of this and is clear where the line is drawn between things that you put into the balance sheet on that and where you don't, it's a helpful way, an additional bit of information. The last thing I'd say on that is that it draws the Office of Budget Responsibility long-term finance forecast, which looks at pension commitments, health service commitments and tax receipts going down the road. Essentially, it looks at that same kind of information but in a cash flow year by year way, which is another useful way of thinking of the scale of commitments that we've got into the future and our capacity to fund them. That's fascinating stuff, I must say. Of course, one of the things that forms the meat politically, of course, in terms of the green budget is the issue of options for fuller departmental spending cuts. You point out that the Government plans imply real departmental spending cuts of 9.5 per cent between 2010-11 and 2015-16, but you then add that 2014 autumn statement plans imply real cuts to departmental spending between 2015-16 and 2020-14.1 per cent. That's deeper cuts over a shorter period of time. What are the implications for Scotland in those cuts, assuming that those are rolled forward? Most of those cuts flow directly to Scotland through the Barnett formula. It's worth saying that the scale, because of the way that the Barnett formula interacts with revenues from business rates, up till now the impact on Scotland has been a bit less than the impact on England. We haven't worked through the exact Barnett consequentials of those changes, but you broadly speaking one would expect that they would have a similar effect on Scotland to the effect that they have on the rest of the UK. The office of budget responsibilities forecast that the cuts to departmental spending could lead to some 900,000 job losses in the public sector to 2020. There are a number of scenarios that could be painted in relation to the autumn statement. What is your view on those figures? Our calculations on the same basis as what the OBR has done come up with similar results. It's very hard to see how you can make cuts of that scale in public spending and public service spending at that without making big cuts in the numbers of people employed. After all, the workforce is something like 60% or 70% of spending on public services, so you can't make big cuts in public service spending without making cuts in the workforce unless you hold pay down to a remarkable extent. There's obviously a trade-off. If you've got a certain amount of money, you can spend a certain amount on the pay bill and that can be more people at less pay or fewer people at more pay. One of the things that I think will make all of these figures even more difficult to achieve over the next five years than they have over the last five years is that over the last five years we've seen pay in the private sector do really extraordinarily badly, which has made it relatively easy to hold pay down in the public sector. Indeed, pay in the public sector is only just—so the first few years of this Parliament pay in the public sector was high relative to the private sector, because private sector pay fell so quickly at the beginning of the recession. Public sector pay has fallen much more gradually. They're pretty much now back to their relativity pre-recession public and private sector pay. If private sector pay continues to grow, as we expect and hope that it will, it's going to be quite hard for public sector pay to be held back indefinitely, another year or two possibly, but not indefinitely, because then you start paying public sector workers significantly less than what's available in the private sector, and that's not something that's easy to maintain in the long run. Then you are left with a world in which the only option is to, if you're going to meet those kinds of spending cuts, is to reduce the number of public sector workers. Large numbers of public sector job losses are certainly the most likely consistent outcome or outcome consistent with the scale of the cuts that are suggested in the autumn statement. I'm sure that we'll come on to that. Are those cuts likely to happen? I suspect that they're less than 50 per cent likely to happen even under a Conservative Government. For two reasons. First, it's just extraordinarily hard to achieve, but secondly, because it's not clear actually that the Conservatives are fully signed up to the numbers in the autumn statement in the sense that they have said that what they want to achieve in terms of their fiscal targets is a budget balance, not a 1 per cent of national income surplus. Indeed, the Chancellor has said in front of the Treasury Select Committee words to the effect that he felt that he could use some of that planned surplus as a buffer for tax cuts or easing some of the spending cuts that they imply. I don't know, and I think it's one of the difficulties of looking forward. I don't know exactly where the Conservatives are on that. I don't know exactly where Labour is on the speed at which they want to get to their current budget balance. What we do now is that there is a difference between them. One of the things that you talked about—we touched on productivity of earlier on—we talked about the impact on pay in terms of the NHS, specifically because you're talking about the need for the NHS. I think that the figures worth something like £30 billion is required in terms of enhanced NHS productivity. If we're going to continue to deliver the kind of services that are required going forward because of additional pressures, what you're saying is that in terms of the NHS, specifically in England and Wales, there's a real issue that if salaries are not kept relatively close to private sector growth, we'd have real difficulties in terms of attracting retaining staff who are well-trained, well-educated and are able to deliver. Is that correct? Yes, I think that's true across the public services. You can't get significantly out of line in terms of the paying conditions with what's in the private sector and expect to continue to be able to recruit people and retain people of the quality that you want. That's one of the difficulties about funding public services like the NHS into the long run, where we know that measured productivity at least doesn't grow as quickly as measured productivity in the private sector, but you have to increase earnings constant with earnings in the private sector if you want to continue to attract people of a similar quality. One of the things that you're looking at as well is the options for just spending on social security, all of which appear to be fairly unpalatable, as I'm sure most people would suggest. There is an implied concern that the protection of pensioners in terms of social security spending means a particularly disproportionate impact on people of working age. I'm just wondering if you can talk us through some of your thoughts on that particular issue. The Conservative Government or the Conservatives have said that they're looking for £12 billion of cuts on the social security budget. You could think of that as £12 billion out of £220 billion, which is the entire social security budget, but they've also said that they want to protect fully pensioner spending, so it's actually £12 billion out of the £90 billion or £100 billion that goes to non-pensioners. That's a more than double proportionate effect on that group, so there's a kind of arithmetic effect, which is if you're going to take £12 billion from £120 billion, that's 5 per cent, but if you're going to take £12 billion from £90 billion, that's 13 or 14 per cent. Arithmetically, it's just more difficult to achieve if you're going to take it only from one part of the budget. Clearly, in addition, the non-pensioner social security budget is more focused on those towards the bottom of the income distribution. The large majority of it means tested, or it's going to people who are sick and disabled. It's pretty difficult to take money away from anyone else through the social security budget other than what's left of child benefit. What do you think the logic is for the Government's view on that, other than electoral reasons? Why do you think that the Government is deciding to focus on one specific group for the receipt of social security payments? I couldn't comment on the political element of that. There are two things, you might think. One is that with respect to pensioners, once you're significantly past pension age, you're retired, there's not much you can do to change your income, so to impose cuts at short notice is not something that you can respond to very easily once you've hit pension age. There is certainly a strong reason for not doing anything dramatic to the incomes of people who can't do very much to respond to that, particularly if you think that they've arranged their affairs over a long period in order to meet what they're expecting from the state. That said, policy has changed quite a lot in that area. If you wanted a rational reason for protecting pension benefits, I think that would be the one that you would use. With respect to those below pension age, two things are worth noting. Whilst there have been significant cuts under this Government for significant groups of the population, the system is still much more generous than it was at the end of the 1990s. We still have a significant tax credit system, which is still significantly, you're very significantly more generous, for example to low-income families with children, than was the case even back in 2001 or 2002. It's always important to be clear about the baseline that you're comparing those things against. Then you've got the difficulty of controlling budgets like the housing benefit budget, where, despite significant discretionary cuts in the generosity of housing benefit, real spending has continued to rise. That has continued to rise because rents have risen and because incomes have been so low. The truth is that the Government has found very difficult to reduce spending on social security over this period because there are continued upward pressures. You've said that giving exemptions from cuts for groups deemed more vulnerable can weaken work incentives and strengthen incentives for people to have children or claim disability benefits. That flows from the nature of the system. Clearly, if you have a means-tested benefit system, you increase the incentive for people to take those benefits and not to work. Now, how important those incentives are is open to some considerable dispute. For most groups, they're probably not terribly important, but they're clearly there in the system. You've said that many of the policies that are suggested by concerned Labour parties with drawing water fuel payments from higher and additional rate tax payers, cutting housing benefit for young people, reducing the benefit pattern, increasing child benefit by 1 per cent for the year, and reducing spending by relatively little. How much are we talking about in terms of the overall picture of the social security... I think that this is an important part of the debate about cuts in social security spending. If, for example, you take some of the things that this Government has done—the so-called bedroom tax or the getting rid of the spare room subsidy for social tenants—that's saved a small number of hundreds of millions of pounds, the capping benefits at whatever it is, £24,000 per household is saved, maybe £100 million, when actually there have been £17 billion worth of savings, most of which have come through freezing benefits and reducing the rate at which they go up, first from RPI to CPI, and then to 1 per cent. I think that one part of the political debate here, which is very important, is that those things which have got the headlines—things like the bedroom tax and the cap—have saved very little compared with the total savings that have been spread across much broader sets of people and have been slightly more hidden. Going forward, again, in terms of having a sensible debate, to suggest that you would save a measurable amount of money by taking winter fuel payment from higher-rate tax-paying pensioners is odd, because you wouldn't. You would save maybe at most £100 million or so, which is almost lost in the roundings when you're looking at £220 billion budget. Increasing things at 1 per cent when inflation last September was 1.2 per cent clearly doesn't save very much. Obviously, if you increased it at 1 per cent when inflation is 3 per cent, it saves a great deal more. It's important to get a sense of scale here. If you really want to save—as the Conservatives say—if you want to save £12 billion, they've told us about one and a half billion of how they'll do that. They haven't told which is by the 1 per cent indexation. They haven't told us where they're going to get the other £10 billion from. I'm interested in what you knew. You also say that introducing a separate mansion tax is a bit unnecessarily complicated when council tax could be brought up to date and refocused on higher-value properties. Yes. There is a significant problem with the way that council tax works, both in the sense that it's based on values back in 1991 and in the sense that it is regressive. In other words, the amount that you pay goes up less than proportionately to the value of your house and it's capped. What the proposed mansion tax does in a sense will be to layer on top of that something that got rid of some of that regressivity for a group of houses at the very top end of the distribution and therefore helps a bit. A more complete reform would say, well, let's re-value all properties and charge council tax at a flat rate proportion of the value of the house rather than at a proportion of the value of the house that falls as the house becomes more expensive. I can do that in all sorts of different ways and clearly that would have a rather different distributional effect to simply sticking a mansion tax on top. In a sense, you can think of a mansion tax as sticking additional bans on top of the current council tax system. I'm just going to ask one question, one other area, and I'm going to look colleagues in, which is about, and you've basically talked about sensible ways to raise more revenue from the taxation of pension savings, but the widespread proposal to restrict the income tax relief from pension contributions to the basic rate is misguided. I'm just wondering if you can tell us why you feel that. There are significant problems with the taxation of pensions and there are elements of the taxation of pensions which are extremely generous relative to what you might think of as a neutral system, but the income tax treatment of contributions to pensions are not part of that. It's a long-standing view of most economists, but an appropriate way of taxing saving is to tax it once. You save out of pre-tax income, and when you take the income later on in retirement, you pay tax on it at that point. Your taxing saving once to tax saving twice is to disincentivise saving and create quite a lot of complexity. The way that the income tax system treats pensions at the moment is pretty sensible from that point of view. A lot of the numbers that are bandied around about the costs of doing this are somewhat misguided because if you start to tax money that's going in now, then you lose some tax revenue in the future. It also depends what is the thing that you're comparing your system to. That said, there are at least two very big elements of the pension tax system which are extraordinarily generous. One is that you can currently take a tax-free sum of more than £300,000 if you've got enough money in your pension, and that's money on which no tax has ever been paid, particularly now that you don't have to buy an annuity. It's hard to know why you would incentivise like that. The other bit which is extraordinarily generous is the treatment of employer contributions in the sense that they don't attract any national insurance contributions either at the point at which they go in or the point at which they come out. They're exempt from national insurance contributions entirely. Employee contributions to pensions aren't exempt from national insurance, but employer contributions are. That's probably why about 70 per cent of contributions come from employers. You might well want to change that, for example by gradually putting an additional national insurance surcharge on pensions in payment, which you might want to increase over a long period or by charging that up front. I think that our main point there is that if you think that there's a problem with the taxation of pensions, it's probably not the income tax treatment up front. It is probably the income tax treatment of lump sums and the national insurance treatment for employer contributions. I did sit with the last question, but I'm going to ask one more, I should say, if we're letting colleagues in. I'm exploiting my position in the chair. In terms of additional fiscal consolidation, you talked about the proposals that 2 per cent would be from the tax rises, 98 per cent from spending cuts, whereas in the current Parliament it's been an 1882 split. Obviously, I know that you don't want to get into the politics of it too much, but does that seem to you a reasonable balance to be struck or a sensible balance from an economic point of view? You've obviously got a choice there. Up to a point, you can see why a significant majority would come from spending cuts, because if, for example, you'd taken 60 spending cut, 40 tax increase, you would have ratcheted up the spending as a proportion of national income. If you wanted to get back to pre-crisis levels of spending as a proportion of national income, you would always going to be doing a majority of this from spending cuts. If you look at the autumn statement plans, and if all of that comes from spending cuts, then you don't just get back to pre-crisis levels of spending as a proportion of national income, you get back to very low levels of spending as a proportion of national income, probably the lowest since the last war. That's clearly a big choice about the size of the state. If you wanted to get to the same level of 1% of national income surplus as the autumn statement numbers suggest and return the state to roughly the size that it was over the 2000s, or in the 1990s and 2000s, then you would do more of it through tax and less of it through spending than is suggested in the numbers in the autumn statement. Do you believe that the Chancellor is planning a fundamental reimagining of the role of the state? I don't know. I genuinely think that to impose an additional £50 billion of spending cuts, which is what the autumn statement numbers imply, will be extraordinarily difficult, particularly if you are going to protect health pensions and schools and so on. That would imply that, for unprotected departments between 2010 and 2020, cuts of 40 per cent, on average, 40 per cent cuts for defence, transport, environment, police, justice and so on. That just feels like a set of very big cuts. The first person to ask questions from the committee will be Jeane to be followed by Gavin. Good morning. I wanted to ask you a couple of statements. I think that there is a general feeling that we would like to get to a place where there is a more fair society. Reading the paper does not seem that that kind of discussion has driven anything in the budget. You have just said just now that it was extraordinary generous to allow people who have over 300,000 in a pension fund and that there seems to have been generosity given to those who could afford and yet the hardest cuts falling. We know on savings that 20 per cent of the poorest people in the country have less than a week's income in savings or ability to spend. Just on that theme, you say that on the idea of increasing tax, either on income tax or national insurance or VAT by 1 per cent, increase any of these would weaken work incentives. I would say that work incentives currently, if you would agree, are weakened for people who are on the lowest earnings. Yet we see no concentration on any suggestion of increasing a minimum wage and to compensate for the fact that we may raise tax. Indeed, the people at the lowest then should be exempt from paying tax in any case. There is quite a lot in that. In terms of work incentives, you are right. The biggest issues in terms of work incentives are for those on the lowest wages and those on the lowest incomes because of the way in which the mean excessive benefit system treats people. It is very hard to avoid something like that. If you are going to give money to people when they are out of work, you can either take it away very quickly when they move into work so that you are having a significant work disincentive effect on a relatively small group or you can take it away much more slowly and then you get big marginal tax rates much further up the distribution. We have shifted that quite a lot in the last 15 years with the introduction of in-work tax credits. In-work tax credits gave people a significantly additional incentive to move into work, but then when the tax credits are taken away as your earnings rise gives you a significantly really small incentive very often to increase hours of work, which is why we have seen lots of people working exactly 16 and then exactly 24 hours because that is exactly where the incentives bite. You can see that very clearly that that is what people do. If you look at the plans for universal credit, whether that comes in or not eventually, I don't know, but universal credit takes a slightly different view of this. It doesn't give people a very clear incentive to move to 16 or 24 hours of work, but it does give some incentive to work at 5, 10, 15 hours because it gives you an amount that you can earn before anything is taken away and then it is taken away slightly more gradually than you get under the income support system. That is a judgment about whether that is the most effective way in terms of working centres. If you look at the fiscal consolidation overall and thinking about the fairness issue that you raised at the beginning, I think that there is a very particular pattern that you see in terms of if you are just looking at taxes and benefits, who has been affected by the changes since the recession of 2008. You have clearly had cuts in working-age social security benefits, so people at the bottom end of the working-age distribution have lost. The people in the middle to upper middle of the distribution have actually lost remarkably little, being really protected from tax and benefit changes on the whole, largely because such a huge amount of money has been spent on increasing the personal allowance, and that has largely helped people in the middle and upper middle part of the income distribution. Then you look right at the top, and then there have been a series of really quite big tax increases that have hit people at the top of the distribution. They have lost not just most in cash terms, but most as a proportion of their income as well. At the top, I am talking about the top 5 per cent or so of the distribution. You have hit the bottom through the social security cuts, largely protected people in the middle and upper middle, and then you have taken a very large amount away from people right at the top. Just to continue that for a second, would you agree with the understanding society policy unit at the Institute of Social and Economic Research, and they revealed that the top 20 per cent in fact have an average of improved their wealth by 64 per cent? That is extraordinary at the bottom. It is really rather more dramatic than you are suggesting might be the case that they are actually being taxed. They are currently much better off in terms of savings, job security, pay rises, and really every aspect. They may be paying slightly more, but they are still gaining at an extraordinary rate since before the recession, in fact. I do not know all that 64 per cent. What period does that refer to? This is from 2005 to 2013. Right. My guess of that is largely driven by house prices over that period. I am not familiar with that particular piece of work, but certainly over that period, if you go back to 2005, there has been an increase in asset prices, there has been an increase in house prices, and those therefore that are owner occupiers and are holding assets will have seen significant increases in their wealth over that period. To the extent that owner occupiers and those who have wealth in isas or pensions or what have you have gained from increases in asset prices, that does not particularly surprise me. That does mean that that group will have been getting better off, and clearly if you are in terms of the wealth distribution, if you are the bottom end of the wealth distribution, the half or so of the population who have very little in the way of assets, then in absolute terms they are not going to have seen the same growth in their wealth. I think that one thing that is worth adding to that is that if you look at particularly wealth but also income, you have seen a real difference by age or generation. The groups who have gained most here are the older groups. If you look at incomes, those over 60, particularly those over 65 have seen their incomes grow since 2008. Everyone else has seen their incomes shrink since 2008. If you look at wealth, clearly that is very much concentrated, as you would expect among people over the age of 50 or 60 as they get towards retirement. Earlier cohorts are not going to end up with the same amount unless through inheritance. Proportion that the numbers who are homeowners in their 20s and 30s is much lower than a generation ago, so we have halved the number of people in their 20s who are homeowners relative to a generation ago. There are no occupational pensions outside of the public sector for people entering the labour market who have entered the labour market in the last 10 years or so. The distribution by generation has changed or is changing quite significantly. Would you agree that there is not much hope in your analysis for changing that? For changing which? That situation. For the different generations? For the people at the top end of the earnings getting richer and the people at the bottom getting poorer. I would not say that there is not much hope. Again, if you look at the period since 2008, inequality has not increased in terms of incomes. Partly because earnings have done so badly and earnings at the top have done quite well. Let's be clear about terms here. When I say the top, we don't know much about the top 1%, but the 9% below that, their earnings have grown less than average over that period, and benefits up until now at least have risen somewhat faster than earnings. That is mostly a reflection of how badly earnings have done over that period. If you look at inequality of income in the UK, it had a massive, massive increase in inequality during the 1980s. Over the period from 1990 to 2008, across most of the distribution, you didn't see much changing in terms of inequality, but you saw the top 1% or 2% continuing to race away. So, actually over the 2000s, if anything, you saw a little bit of reduction in inequality among the bottom 98%, and then the top 2% absolutely racing away even further. In the period since 2008, what you've seen is certainly among the bottom 99%, a slight compression in the distribution, but essentially it's been flat. We don't really know what's happened to the top 1% over that period. Such that inequality now, certainly across the 99%, is roughly where it was at the end of the 1980s. There hasn't been much change in inequality other than that top 1% in the last 25 years. We recognise that you actually said that there were hundreds of billions of pounds resting with business and through lack of confidence of investment and so on. What is the reluctance to have some of that spent in abolishing zero-hours contracts and increasing a minimum wage? Just as business is generating money, there's no obligation to pay those at the bottom end any better salaries in order that it would actually get over this 16-hours curb, if you like, where everything kicks in and they're worse off if they work above that level. The decision over the minimum wage is made by the low-pay commission who take a view about essentially how much they think they can increase the minimum wage without having an impact on employment. It's an incredibly difficult judgment to make about what point do you start to have an impact on employment by raising the minimum wage. It has actually risen over this whole period more quickly than average earnings. Again, a reflection of how badly average earnings have done. There may well be scope for further increases in it, depending on one's view about what impact that might have on levels of employment. Good morning, Mr Johnson. Maybe I should start with something that Gene Urquhart asked about quite late on. In your response to a question about inequality, I've written it down. You said, since 2008 inequality hasn't increased and, if anything, there's been a slight compression, but it's broadly flat. That's obviously slightly different to what one would read in the media on a fairly regular basis. What's your data source and what's your backup for that particular statement? The period from 2008 to 2012-13 comes from households below average income data, which is based on a big survey called the Family Resources Survey. It's produced by the DWP on an annual basis. We have forecasted forward to the current day those numbers from 2012-13 on the basis of what we know from other surveys has been happening to earnings and the distribution of earnings and what we know has happened to the tax and what we know has happened to the benefit system. We can give a pretty good sense of where things have changed over the two years since those most recent official figures. They show, broadly, what I suggested. Certainly over the period of 2012-13, you saw a significant compression in inequality, partly because benefits were rising quite a lot more quickly than earnings, because earnings were falling so much relative to inflation. Over the two years since then, you've seen that opening up a bit because benefits have been doing worse than earnings over that period. If you take the period as a whole, you've got something close to not much change in the overall level of inequality, perhaps a little bit, as I say, of compression. The broader story is, I was saying over 25 years, is that you've had this massive increase in the 80s, small ups and downs since then for most of the population, but the top one or two percent really racing away. I can't really tell you much about what's happened to the top one or two percent, partly because the HMRC have not made data available for the last four or five years, which would allow us to do that. We'll focus on next week then. I mean, if you said that you don't think the Chancellor's got a huge amount of room for manoeuvre in terms of what we will see next week, but if you were a betting man, I wasn't suggesting you were. What are the sort of things that you might expect to see next week and are there particular things that the IFS are looking out for? The first thing, as I said earlier to remember, is that there is an awful lot happening anyway. One thing I would expect is some re-announcements of things that have already been announced. It's worth just recalling some of the main things, which are due to happen in April anyway. One is quite a big increase in the personal allowance to £10,600. One is a penny off the main rate of corporation tax from 21 to 20. One is the introduction of the transferable allowance between husband and wife, where neither is a higher rate taxpayer and one is not using their full allowance.  The Google tax, the diverted profit tax, all of those things have been announced. Even if the Chancellor said nothing next week, there will be a lot of change in the tax and benefit system in April. What else might he do? Well, he might, as I said, decide to impose greater cash spending cuts on departments for next year, next financial year, than he currently planned, because inflation is so much lower than expected than, therefore, the planned real cuts are less than was initially intended. If he were to do that, he might say, well, I've increased his spending cuts by one or two billion. I'll use that giveaway in one way or another, which may be a further increase in the personal allowance or what have you. If you look at the coalition agreement, it says explicitly that there will be no cutting inheritance tax until the personal allowance reaches £10,000 or the personal allowance has gone through £10,000. It was clearly part of the Conservative manifesto to reduce inheritance tax. The Chancellor might decide that this is the time to make good on that. Though note the public fine, he has previously said that the inheritance tax threshold will stay where it is until 2017, so that will be a bit of a reversal. It's interesting to, as an aside, that inheritance tax has gone up under this Government because the threshold has been held in nominal terms. It was cut very substantially by the last Government, which is a political topsy-turvy in a way. He may decide to do something political in the sense that Labour has announced a £3 billion increase on pension taxation to pay for its cutting student fees. The Chancellor may decide to say, well, I'm going to take that money and use it for an increase in the personal allowance or something.  You talked about, in your early answers to the convener, the borrowing for this financial year being, I think that you said, £60 billion more than was initially planned at the emergency budget back in 2010. Obviously, a number of things happened since then. Some people will say that the borrowing is high because we've had lower growth and it's because, obviously, we've had lower growth. However, some people are saying that that is all driven because they tried to reduce spending too fast, too deep, too quick and all that. Others will talk about the huge spike in commodity prices that happened around about 2011. Others, of course, will talk about the Euro crisis and the six quarters of the retraction that most of our trading partners had. Does the IFS have an official view or analysis of what happened? Do you simply report on the figures or do you have a reasoning why you think that things are different from what was projected and hoped for in 2010? We don't do our own macroeconomic analyses. I think that all the things that you mentioned are part of the story. Clearly, a big reduction in Government spending does have an impact on growth in the short run. Clearly, what was going on in the Euro zone had an impact on growth. Clearly, what happened to commodity prices had an impact on growth. One would hope that that will move in the other direction now that oil prices are so low. All of those things had an effect. One thing I think is pretty clear is that had the Government imposed less austerity and we got a little bit more growth, we would have a bigger deficit than we have at the moment. We might have a slightly bigger economy, but it's implausible that the multiplier would be so big that you could increase spending and reduce borrowing. You probably wouldn't have increased borrowing by as much as you increased spending, but you would have increased borrowing. I think that going back to my initial answer, a series of things created lower than expected growth, including just the sort of overhang from a financial crash, which tends to have longer term consequences than I think people realise back in 2010. The reason why the Government is now borrowing more is that it decided to put off the consequences of that in terms of austerity later rather than further spending cuts earlier. All of those factors played a part. Does the ISS have a view as to what the relative impact of each of those measures was? You are clear that all of them had an impact, but have you done any work to look at what was the relative impact on each of those measures? We haven't, no. I think that the OBR has done that kind of analysis, and in particular it's looked at why it got its forecast wrong back in 2010, which is quite an interesting analysis. I can't remember the relatives, but it does give some sense of which it thinks are the most important, and it raises all of the issues that you raised. Okay, thank you. If we go on to then your green paper or your green budget, I've dealt with the first questions from the first couple of chats. Chapter 4 talks about, I guess, what the prospects are for the UK in the coming year, a couple of years. The pattern of unemployment in the UK is very different from most countries within the Eurozone. I mean, Germany is obviously an exception, but the rate of unemployment, while still higher than anyone I think would like, is a lot lower than most countries within the Eurozone. Why do you think that unemployment is very different in the UK from other countries across Europe? Well, I mean, there are clearly one or two countries which have just had an even bigger demand shock than we have, so that if you look at Spain and Greece, they've just had a bigger economic shock, and that's had a bigger effect on their employment levels. But your question, in a sense, is one of these ones where it gets very difficult to sort out which direction causality is moving in. So the fact that wages have stayed low has made it easier for firms to hire people on relatively low wages, but equally the fact that there's been a big effective supply of labour has made it easier for companies to keep wages low. So which way that causality runs is quite difficult to determine. I mean, we do have, to some extent at least, a labour market which allows these changes more easily than some other countries. So allows firms, particularly for younger workers, to reduce pay relatively significantly, and they clearly that they have reduced pay for younger workers a lot, which is good in the sense that it means there are more in work, is bad in the sense that those in work are doing rather badly. And we have, over the last 20 years, governments of both complexions have changed the benefit system both to push people into work in the sense of, well, to help people into work in the sense of the help that they get at Job Center Plus and so on, to push people into work in the sense that they more easily lose benefits if they don't move into work and to give them incentives to go into work in the sense they go on to tax credits if they if they get into work. And then in addition you've got things like increased numbers of part-time jobs. And one of the things we say in here is that, you know, whilst the employment rate is back to where it was in 2008, the under-employment rate remains higher than it was in the sense that quite a large proportion of people now in part-time jobs say they would like to be in be working more hours, which is different to where we were. And finally you've got increases in, you've got increases in self-employment which appear to be very often at low levels of pay. So as with all these things there are multiple aspects to what's happened here, somewhat to do with long-term rather than short-term government policy, somewhat to do with the structure of the labour market in the UK, somewhat to do with the scale of demand shifts, somewhat to do with the flexibility that individuals have shown in feeling they have to or being willing to take jobs. Okay, thank you. In that same chapter you also talk about business investment and I think there's a desire on the part of all political parties to see more business investment because that's going to lead to a longer-term recovery and a more sustainable recovery instead of relying on consumer spending. What is your prediction or projection to that? Do you think we will see a big increase in business investment because it's been, I guess, one of the areas that's been a little disappointing in the last three or four years? Are you more confident about that for this year? Again, we don't really make forecasts of that. I mean, one thing that is clear is that it hasn't been as bad as it looked. So the ONS has really dramatically changed their view of history the last four or five years and business investment hasn't been quite as bad as was previously expected, as was previously thought. But clearly for the recovery to continue, business investment will have to grow somewhat faster and that will depend on a whole host of things that happen in the economy partly to do with the tax system. Some of the changes of the corporate tax system over the last few years have not improved incentives to invest. Reduction in investment allowances and so on will not help from that point of view. Almost certainly, the most important thing here is this difficult measure thing, confidence and view about what's going to happen to the economy in the future as that builds, then hopefully that will move in the right direction. I don't have a forecast on that, right? Sure. If I go to the next chapter in your paper, and you mentioned it again today, and it's a stat that's been put out there many times, it's one that will reach the lowest level of public spending as a percentage of national income since 1948, which I think is what your paper says. I'm assuming that that's a matter of fact, but I'm just keen to explore. I mean, clear that is a significant statement, but I'm just keen to explore how significant it is and is there a risk of over-dramatising that by couching it in those terms? I'm pretty sure that it might have been one of your graphs or one of your colleagues who had the percentage of spend compared to GDP over time, and while it was the lowest, I think that there was only a one percentage point difference between next year and I think it was 2001, I'm going from memory here. Just in terms of that graph over time, when I read that simple statement, one assumes that it's been a kind of downward trajectory all the way since then, but is it one of those graphs that fluctuates and is it actually as significant as that statement sounds? I think that there's a lot of issues there. One is that you get to the lowest proportion since the war, not next year or the year after, but by 2019 if you impose the kinds of cuts that are implied by the autumn statement. So, there's a big if there. Second thing is that if you're looking at total public spending, it only just dips below its minimum at the end of the 1990s. If you're looking at public service spending, I excluding pensions and welfare, it's more clearly below where it was at the end of the 1990s. One thing is that we're not there. We're still a choice in terms of what happens in the last two years of the next Parliament. As I say, it's not clear to me that anyone's really signed up to that. Secondly, in terms of total spending, it's not very different really to where we are at the end of the 1990s. In terms of public service spending, it's a bit more different. How does one interpret that? One thing that's rather important to think about over this long period is the composition of that spending. If you look back at 1948, something like a quarter of public service spending was on defence and not much of it was on health. That has flipped completely. I can't remember what it is on defence, maybe 5 per cent and 20-25 per cent on health. So, it's completely different stuff that this money is being spent on. It's not obvious that comparing the overall portion is not obvious quite how much that's telling you. The next point to make is that if you're looking into the longer-run future and you're thinking about total public spending, there are clearly big pressures on health and pension spending from a population, which even over this decade is ageing really pretty rapidly. So, to keep spending at relatively historically low levels at a point when the demands on it are actually growing, it's likely to be particularly difficult. You might actually expect spending as a portion of national income to rise out of time when the population is ageing in that way rather than to fall. The last thing to say is that you can look at spending as a proportion of national income, but you can also look at it in real pounds per head terms. My view is that if you're looking at health spending over long periods, you probably want to look at it in as a proportion of national income. Over short periods, real pounds per head probably matter more. Real pounds per head spending on public services grew very fast over the 2000s. Even on the autumn statement numbers fall back to about where it was in 2002-2003 by the end of the next Parliament in real pounds per head. Now, that doesn't mean that's buying you the same stuff because you have to pay more for your nurses and doctors now than you did 20 years ago, but that gives you a different metric for thinking about these things. Last issue, if I may, given that it was chapter 7 of your green budget, what you talked to this day when you made about real capital spending cuts, I think you basically said that they turned out to be lower than planned. Your stats seem to be 13.6% instead of 25.9%. I just wonder if you can expand on that slightly. The initial plans back in 2010, which were inherited directly from the previous chancellor, were to impose really very substantial cuts on capital spending of about 25% compared with about 10% or less on day-to-day spending. Each budget and autumn statement—well, not each, but many of the budgets and autumn statements since then—have unwound that very slightly, and if you put them all together, you've got almost a harving in the rate of cuts that have been planned. I think that it would have been preferable to have had this announced at the beginning because it's clearly not easy to shift investment spending up and down in a relatively unplanned way, but it is quite a dramatic change in the shape of the consolidation over this period. Good morning. Various points have been touched on already. The whole question of the split between tax increases and expenditure reductions—the plan going ahead is that 2% of the savings, if you like, should be made from tax rises in 98 per spending cuts, whereas up till now it's been 18% from tax and 82% from cuts. Is there a right answer to that? There isn't a right answer, no. That is very much a political judgment. As I said earlier, it was always likely that most of this was going to happen through spending cuts if you wanted to avoid the recession resulting in a ratcheting up in the size of the state. What the autumn statement numbers suggest is a reduction in the size of the state, and you achieve that by doing everything through spending cuts and not through tax increases. As my answer, one or two of the previous questions implied, that's going to be hard to achieve and hard to maintain in the long run, particularly given the pressures on demographics and other things on public spending. My expectation is that there will be more tax rises than are implied by those numbers whoever wins because we still have a very large deficit. Every election since at least 1992 has been followed by significant tax increases without us having been told beforehand that they were going to happen or what they were going to be. The numbers in the autumn statement imply the numbers that you suggest. I'd be surprised if that's actually where we end up. Does that impact on the economy or the total amount of money in the economy is whatever it is? Does it matter how it's shared out and where it comes from? If you take that £1 million, if you put a bit more tax on those at the top and have a bit more generous of benefits, does that give you the same result as cutting the benefits by £1 million and leaving the tax at the top? It clearly gives you a different situational result. It may give you a different economic result if you think that those on benefits are more like to spend their money and those at the top are more like to save their money, so you end up with more consumption in the short run but less savings and investment in the long run. Is that proven or is that a theory? It's reasonably well known that those with not very much income are more like to spend it all and those with more income are more like to save it, so you will get that kind of effect. Depending on how far you take it, you will start having work incentive effects at both ends. Clearly, at some point, taxes at the top get high enough that people stop working or paying their tax or benefits at the bottom get generous enough that people don't have the incentive to work, so you need to get that balance as well. Broadly, you are right. You are taking money from one set of people to another set of people and that leaves the economy with the same amount, but the second round effects can be quite important. Following on that theme, you make the point that you talk about reliefs at one stage and that by cutting out some of the reliefs that we have been trying to do with some of our new taxes, you make a simpler system. Does having a simpler system for the tax have an effect on the economy? Well, certainly having an efficient and neutral system can have quite an effect. Not all reliefs, by any means, are bad reliefs. We talked about pension tax relief earlier. My view is that you ought to have some tax relief for putting money into savings, otherwise you disincentivise savings and you end up taxing it twice. Investment relief for corporation tax makes a lot of sense because otherwise, again, you are double taxing companies on investment. R&D tax relief probably makes sense, although in principle it may not be at its best at the moment. Tax relief itself should not be a dirty word. A neutral and effective tax system may well have quite a bunch of reliefs in it, but you do need to look at each one to see whether it is doing the right thing within the tax system. There are clearly a bunch of things in the tax system that do create economic costs. Those include running a national insurance system alongside an income tax system. That is exactly what I was going to ask an expert on. It creates all sorts of unnecessary complexity. The stamp duty system has economic costs beyond what it needs to have. The VAT system is more complex and narrower than in most countries. All of those things create costs and move towards a better structure tax system. It would have hard to put a number on it, but it would have positive effects on the economy. You have already touched on what I was going to ask an expert on, which is the PY in national insurance. A, you have the two systems that you are running. B, the national insurance tends to be a bit regressive at certain stages as compared to income tax, which broadly is more progressive. Playing around, you mentioned that the three main taxes that we could look at increasing would be income tax, NIC and VAT. Do I take it then that you feel that the economy would benefit from if income tax and national insurance were combined and then they jointly became more progressive? I certainly think that it would make life a lot easier if you put the two together. It would also make it more difficult for politicians to hide increases. If you look at the period over the last 40 years, we have not had any increase in the basic rate of tax. Indeed, we have had an awful lot of cuts and we have had consistent increases in national insurance contributions. Now, there is no economic reason for doing it that way around at all. Indeed, given that national insurance hits people in work more than, for the same amount of money, it hits people in work more than income tax, it is a slightly curious way of doing it. We have also got a situation where from next year or the year after, we will have an entirely flat rate pension system in which the self-employed and everyone else will essentially accrue full benefit to that system. There is now essentially no relationship between the amount of national insurance you pay and any benefit that you are entitled to. It really has become just another tax on income. I think you get a significantly more transparency, less capacity for fooling the electorate and simplicity for employers who currently essentially have to deal with two entirely different definitions of income to work out what the taxes of their employees owe is. Finally, we would presumably get away from the odd situation that we have seen over the past several years in which the income tax allowance has risen and risen and risen and the national insurance points at which you start paying national insurance has not risen. You have got this £2,000 or £3,000 chunk now in which you pay national insurance and not income tax. It is pretty hard to think of why you would design it like that. Having actually got to a position in 2009 or 2010 where the two were pretty closely aligned. Do you think that that could have a negative effect on people who are thinking, can I work more because it is just so confusing and people do not know where they are? I do not know. I would not want to speculate on that. The three big taxes that are mentioned, income tax, national insurance and VAT, the point is made that increasing any of those would weaken work incentives and hit the rich harder than the poor, although it then goes on to say that the VAT rise would be less progressive. The idea of hitting the rich harder than the poor is that in absolute terms, because a rich person is going to pay more tax than a poor person, rather than in relative terms. Clearly, as you said, income tax is a directly progressive tax. National insurance, if you put one pence on all the main rates of national insurance, that is directly progressive and hits the rich proportionately more than those on lower incomes. VAT is more complex. If you look at relative to people's incomes, then it looks like people right at the bottom of the income distribution pay a higher proportion of their income in VAT than people towards the top. Now that is curious given that things like food and so on, which take up a bigger portion of the budgets of poorer people, do not have VAT imposed on them. If instead you order people from the lowest spenders to the highest spenders, you get a much flatter distribution and an unique one, which is slightly progressive. Spending gives you a better sense of people's how well-off people are over the longer term. It is often said that VAT, as it is currently constructed, is a regressive tax. It probably is not a regressive tax, but it is certainly less progressive than Nixon's particular income tax. The last area that I was hinted to ask questions about was the whole thing about balance sheets and whole-of-government accounts and so on and so forth. You made a few points already about what is a real liability and what is not a real liability. Was I right in understanding that you are saying that it is not entirely clear? I am not sure that I understand that it is necessarily a pension liability. If it is a pension fund, you have an asset and a liability, so I understand that. Any government pension, be it the basic state pension or any other, is not a liability right now? As I say, I think that there is a continuum of these things. The way that the whole of government accounts works is that what is owed to teachers and civil servants and NHS staff in public service pensions counts as a clear liability in those numbers, although presumably government could decide to renaig on its promises or change its promises. Indeed, it has changed its promises in the past in terms of moving from RPI indexation to CPI indexation. These things are changeable, but the judgment is that on the whole the pension which you promised to a teacher is part of the remuneration package and will be paid pretty much on what may and therefore it is a liability. Whereas the judgment made in these accounts that the promise to pay me a pension of 7,000 a year or whatever it is when I retire is something that could be renaiged upon and therefore isn't a liability in the same way as a teacher's pension. Now as I say, it doesn't strike me that there is an absolutely clear dividing line between those things. That is the convention in the whole of government accounts and I think it is the convention in international accounting standards, which is why I think actually it is useful to look at three things. It is useful to look at the standard national accounts cash flow money that we normally look at. It is useful to look at it in the way that the ICAW chapter in here looks at it using the whole of government accounts and international accounting standards, but it is also useful to look at it on a sort of cash flow basis going forward, which is what the OVR does when it looks at long term financial situation in terms of how much might we be spending on state pensions, public service pensions, the health service and so on in 20 or 30 years time under a set of assumptions about how those things change with the population and with productivity and so on in the health service. I don't think any of these gives you a full picture by themselves. You look at them together and you get a useful picture and the thing that they all show pretty clearly, if you're looking a little bit further forward, is that we will be spending a higher proportion of national income on both on state pensions unless we reduce them. We will be spending a higher proportion of national income on health unless we extraordinarily increase productivity or reduce the quality of what's there. That means, by symbol logic, we will therefore either spend less on other services and presumably be offering people less or will be increasing taxes to pay for that. I have to say that I do like the idea of balance sheets. I think it reassures me that we've taken everything into account. I do wonder if one of the dangers is if we focus on all these liabilities. One of the ways out of that historically has been to encourage inflation or at least to allow inflation because that way you whittle away your liabilities. When I was at university, I spent most of my time studying account and saying how we dealt with inflation and we just lived with quite high inflation at that time. Is that a temptation going forward for any Government to really let inflation get going in order to take away some of these liabilities? A lot of these liabilities are pretty much inflation linked anyway. If you look at the pension liabilities, they are all liabilities assuming indexation, largely with CPI inflation, so higher inflation doesn't reduce those liabilities. Clearly the same is true of spending on the health service. If you want a real level of health spending going forward then it doesn't help to do that. There are other bits of particularly the tax system where high levels of inflation could be used to bring more money in. I think it's rather odd that we've now got significant bits of the tax system which aren't indexed at all. The point at which child benefit starts to be withdrawn £50,000 a year, there's no procedure for indexing that. That's fixed at £50,000 a year of our estimates so that the number of people losing child benefit will double over the next 10 years as a result of that because you're beginning to get into quite a thick bit of the earnings distribution. The point at which the 45p tax rate comes in is fixed at £150,000 a year. This Government said it doesn't like that top rate of tax but it has reduced in real terms quite significantly the point at which you start to pay it. At £100,000 there's a 60% rate of tax over a £20,000 period. That £100,000 has been fixed in cash terms since it was introduced in 2010, bringing more people in and therefore raising more tax. The pension tax system at maximum you could put in a year at £40,000, the maximum you could put in over a lifetime at £1.25 million at the moment reduced under labour plans, again fixed in cash terms. Now inflation helps to bring money in through all of these ways in a slightly hidden and inappropriate way. I think most bits of the tax system are indexed to inflation. Why some bits are not is, I think, rather bizarre. Very naughty. I'm glad we've covered that here because I was going to be asking you about fiscal drag, actually, so that's something less to be asked at the end of the session. Bob, to be followed by Jackie. Thank you very much. Good morning, Mr Johnson. Can I just follow up on a theme that Gennar Cout and Gareth Brown actually asked about in terms of whether they've been great in inequality because of the UK Government's economic strategy and austerity programme? I heard you say that there have been marginal differences in the last few years and you usually express in a slight compression, maybe even suggesting that things weren't as bad as perhaps newspaper reports had suggested, but life isn't a balance sheet. I wouldn't be representing my constituents if I didn't talk about disabled people in Scotland where about 100,000 of them are going to lose about £1,300 a year because of UK welfare reforms or single parents and how the fiscal situation has disadvantaged them or indeed my constituents that I see weekly have been sanctioned by the DWP in Job Centre Plus, so I know there's a balance sheet by which you do a matrix and you work out how things got more equal or more unequal, but would it be reasonable to say that there's a group within society where things have got a lot more difficult and a lot more unequal irrespective of what the economic balance sheet actually says? It's clear that so there's a group who have been sanctioned for benefits and the number of benefit sanctions has grown really substantially over the last four or five years and that group clearly will be significantly worse off as a result of that. That group is in small numbers of hundreds of thousands so its impact on overall measured inequality is relatively small but clearly for that group that is a very significant change in the way that the benefit system has been administered and a significant effect on their experience. There are clearly groups who are losing various kinds of disability benefits as well because largely because of the way in which the system is being administered.  My point really about the overall things is that across the 60 million people in the population the average experience of people in the bottom 10 or 20% hasn't been proportionately any worse than the average experience of the people in the top 10 or 20%. Now the same proportionate hit to people in the bottom 10% may be felt harder of course than the same proportionate hit towards the top and within that bottom 20% there'll be people doing very much worse than the average and obviously within the top 20% there'll be people doing better than the average but if you look at the if you take just the snapshot of incomes in 2008 across the distribution the snapshot of incomes right across the distribution in 2015 then there's not been very much change in the overall level of inequality. I'm grateful for you putting that on the record I hope you will appreciate that the lived experience of many of my constituents is dramatically different from the the average experience if you use certain numbers and to look to see where inequality is within society so I'm glad you put some of that on the record now. Mr Mason spoke about austerity previously being I think it was 18% based on tax rises and 82% based on spending cuts whether that's public service spending or whether that's withdrawal of benefits and going forward that's going to be 2% tax rises and 98% spending cuts is that likely to additional inequalities the fact that that balance has now shifted? Yeah I mean I just say I mean whether that's what the distribution looks like I don't know but I'd say that's that's the numbers implied in the autumn statement and I think the answer is yes in two respects first all of what we've described or what I've talked about in terms of inequality has just been about income inequality but clearly public services the public services you receive are part of your welfare so what we're not measuring when we're looking at inequality for example is the loss of social service of social care for example that some people might experience although in fact the library has closed or whatever that clearly makes people worse off and public services are more you know certainly more important on the whole to people with lower levels of income and therefore actually cutting public services has a real effect on welfare and potentially on inequality if you can measure it in a broader a broader sense secondly if you're not going to do very much more on tax and you're going to cut benefits then clearly cutting benefits on average will hit people towards the bottom of the distribution if you're not raising taxes then then you're not hitting people towards the top of the distribution so all else equal cutting spending without doing anything on taxes will make the overall distribution both of income and sort of more general sense economic welfare less equal okay thank you for that now within chapter nine of your paper that I read ahead of this morning's evidence session you're talking about the social security system and how that can be used as an incentive to work or a or a disincentive to work and my kind of experience of the social security system has been that it's been a little bit of a one trick pony that there seems to be a feeling that if you make benefits if you compress to use your expression the levels of benefits there's been a general attrition in benefit levels that you're talking about earlier and you sanction there's maybe an incentive to move people to be economically active but it's actually a kind of it's a stick policy rather than a carrot policy and I'm just wondering if the social security system is just not sophisticated enough to deal with with some of that if I can give give you a couple examples I've got two constituents in North Glasgow who are now unemployed because to get their tax credits they had to do additional hours and their employers didn't have the hours available for them to do and actually they'd been understanding employers because they said they were no longer available for work so they weren't sanctioned by the benefits agency when when they then went to to make a benefits claim but people who were going to be worse off in work because of tax credit changes and I see things like that all the time now you mentioned how the tax credit system works and whether a cut-off point you can actually focus in where it is worth your while to work and where it's not does that suggest that the tapering level of benefits and you know and more flexibility in the tapering of how long you can keep benefits for and perhaps even more discretion in different parts of the country where the local economic circumstances are very different would be helpful and the second example I would give is when I first came into politics I was told it's something called a 104 week link rule which I'm not an expert on but what used to happen I understand is that if someone was disabled they may not have the confidence to get into work and you're not actually sure if you can hold down a job you're not sure if you want to try because you can try the you might that will actually yard fit for working your benefits will cut whether you get employment or not and the 104 week link rule used to say well actually you've got two years of trying to sustain that job and if your if your job breaks down for certain reasons you'll be put back onto your original level of disability benefits and it was seen as a supportive way of getting people back into work so do you think there has to be more flexibility in the social security system to be more imaginative about how we are supportive in getting people into work rather than the stick effect which I feel is happening at the moment as you would expect myself to say being from the party that I am that that's the kind of thing Scotland could do much more imaginatively to support vulnerable people and to work rather than what I would feel would be a draconian strategy of austerity currently so is there is there benefits going forward and being more flexible with how we operate the social security system well I think you're absolutely right to draw attention to the way that the system is administered and we know for sure that this matters it matters in in all sorts of ways so it matters in the so if you look back in the early 1980s for example it was administered very loosely people were given very little support to get back into work and very little encouragement to get back into work we lots of people ended up on disability benefits lots of people ended up on in in unemployment benefits very long run which didn't actually have very much to do with the financial incentives but had a lot more to do with the way that the system was administered and the way the systems administered has changed a lot over that period to provide both you know certainly stick and some and some carrot as well in terms of the administration in terms of the and that's actually one of the differences between this the UK and a number of other European countries which still you know which which which which actually I mean may be a surprise I think we have a more sophisticated administration of this system than than a number of other countries in terms of the sort of issue about tax credits and the the fact that if you if you're not working the full 24 hours it's not worth being in work that that's clearly you know under the current system that is clearly you know that that's clearly true there will be lots of people of whom there's almost no there's little or no incentive to work anything between zero and 24 hours and if you can't get those 24 hours then then you're in the position that you describe universal credit as I said earlier if it comes in will will be different in that sense it won't have that kind of clear hours point at which things become different it will have a a less severe first of all it will allow you to earn a bit before you lose anything and then a less severe taper after that now very hard for us to model ex ante what effect that will have on people's behaviour because you no longer have this clear point of book 24 hours is that it is the thing to do and you have some incentive to work at five 10 15 20 hours in a world where that's all all that's available then it may be that your constituent would be able and willing to take that kind of work other for other people because you don't have that clear focus point it may be less clear to them that it's worthwhile so I think we've I mean it would have been nice to us that were trialled and evaluated the impact of this but but that's not been but that's not been possible you know beyond that the way in which as I said the way in which these things are administered matters I would like to see more trialling of different ways of providing providing flexibility to local delivery or or trialling different ways of delivering these benefits actually to see which ones do work and I think we are very you know we don't do anywhere near enough actually in this country of of of that kind of testing it is very much you know we will make a big change and and here it is which is what's happening with universal credit without actually really knowing what the effect will be it will be very good to see local areas doing things differently looking at the effect and then learning from each other with the centralised system that we have we we that that that doesn't happen anywhere near enough much could you know two more questions to have time for two more questions thank you thank you um answers possibly the time for one more question you know half a question perhaps I was looking um about pay levels and in real terms pay and I think the OBR said that paying Scotland was down 4.1% in real terms since since 2008 was the figure I'd taken down from other notes notes I had so um average earnings are well below pre-crisis levels and in your paper you spoke about actually some people have done okay because if you've sustained your job and you've moved through pay increments and you get more experience then things kick in to assist you so I'm just wondering is there actually when we look at pay levels being significantly below pre-crisis times is actually masking an even more severe deficiency in real terms pay because of the groups within society have actually done okay in terms of they've held on to their job they've moved through pay increments and that kind of thing yeah I think the um I mean the reason we did that analysis in that chapter was because a number of people have been saying well look if you look at me if you do what we say if you look at people who've stayed in in work over this period then they've not seen real terms cuts they've actually seen their incomes or their earnings rise over this period and that's and that's true and it's one of the reasons why it's sometimes hard to get across the idea about what's happening across the population as a whole so um so take people in their 20s average earnings of people in their 20s now are about 10% less than they were in 2007 but of course most people in their 20s now weren't in the labour market in 2007 most people who were in their 20s in 2007 are now in their 30s so this is not comparing you know the same person over time and actually most people in their 20s will be seeing their pay rise because that's early in their career and their their pay goes goes up um so that's that's a very different sort of thing from looking at the average person in their 20s now to the average person in their 20s in 2007 and we try we succeed we try to be very careful therefore about the way that we describe this um that it is the the average of this cohort relative to the average of um that cohort for um for example but what are so in a similar way some people were suggesting or look um earnings it's not so bad because um if you stayed in work over this period your earnings will have grown well that's true um but that's always true it's always been true that if you stay in work over a five-year period your earnings will have grown more than average earnings because you have people coming in you know young people coming in at the bottom end of the labour market on less than average earnings and you're going through your career you're seeing uh you're you're hopefully seeing some increase in your earnings as you do that what our analysis showed is that that there is that gap but it hasn't really changed over time the gap now sort of post-2008 is essentially the same as it was pre-2008 so uh what you're seeing in terms of the fact that average median earnings have fallen or haven't increased is a real thing and it's not um it's not hiding something different in terms of what's been happening to uh in terms of what's been happening to other people what it does mean um uh is as you say that there are some people seeing increases in their earnings and the big thing that you see is this fall in earnings of bound people in their 20s so obviously most people in their 20s now weren't in the labour market in 2007 they're being offered significantly lower pay than people of a similar age um in in 2007 and they're you know that group therefore is significantly worse off than they might otherwise have expected to have been. My final question which will be very short is um the other committee that I sit on I'm deputy chair of the health and sport committee one of the things we're keen to map out is how other policy decisions actually impact on on for example the national health service and I'm just wondering whether the UK Government in doing its economic strategy and austerity in cuts do some modelling work about increased strains that puts on on a public service sector that is getting significant cuts so so for example whether that's more more mental health issues whether that's carers feeling greater strain whether that's pressure on families and how that manifest itself has is there any social impact assessment done of UK economic strategy because apart from the social justice aspect of it in economic terms if in five years time or 10 years time there's an explosion of mental health issues or even more multimorbidities of older people because of what they went through in this period of time society and the government of the day will have to pick up the cost for that to support those people so has there been a an assessment any modelling work from the UK government in relation to any of this I'm not aware I'm not aware of anything like that having been done I mean I don't know I mean there will within departments there'll be some of that but in terms of the overall strategy in terms of where the cuts come I don't my guess is it's not been informed by by very much of that my experiences that Westminster finds it quite difficult to take decisions in the way that you're describing okay Jackie fall by Richard thank you convener and good morning Mr Johnson we might indeed be the afternoon before we're finished here I suspect I want to explore with you the the UK budget in relation to Scotland particularly you're quoted in this morning's papers as saying two things principally one is that the Conservatives would spend 25 billion pounds a year less over the lifetime of the parliament than Labour would and also that there isn't a huge amount of difference between Labour and SNP spending plans assuming both of those are correct could you talk us through some of the headline numbers in relation to what that would mean for Scotland's budget so let me just try and say precisely what I meant on the very difference between the parties so if you take the Conservatives at face value as saying they want to achieve budget balance by the end of the by the end of the parliament and Labour is saying they want to achieve current budget balance that means there's a difference between them of around 25 billion or so 25 to 30 billion if you take then the SNP at face value of saying they want to increase public service spending by half a percent a year over the parliament that's that means they're looking to be spending something like 7 billion more than presently by the end of the parliament that means a difference of the order of I'm doing this from memory of the order of 10 to 15 billion pounds between Labour and SNP the order of 25 billion pound difference between Labour and the Conservatives that's the sort of orders of magnitude as I suggested earlier the knock-on effects to Scotland would be proportionate to that so you know this will largely flow directly through largely flow directly through the Barnett formula to have a similar set of consequentials for Scotland as it has for the rest of the UK okay I wonder whether I could could just tease that out slightly further because the first minister in major economic speech that was delivered in London suggested 180 billion pounds of investment for the economy would be the SNP's proposals but at the same time would still be reducing debt I think you have apparently said somewhere that the the treasury analysis you believe is right which is that if public spending was increased by 0.5% debt would in fact rise not decrease is that correct yes that is correct the I mean in a sense it's a simple arithmetic point that even under the even under this government's plans debt barely falls in 2015-16 and that's with quite big cuts in public spending if you're increasing public spending over that year then debt rises I mean it rises slightly and I think on those numbers debt at the end sorry debt at the end of the parliament is similar to maybe slightly more than debt at the beginning of the parliament now economically whether it's up or down 1% I don't think makes very much difference but the but arathmetically increasing public service spending by 0.5% a year will increase debt the first couple of years and then it will fall slightly the last couple of years okay that's helpful to know can I move on to my second question because in politics timing is everything whilst we've been speaking the jazz figures have been published so I haven't seen them then fish on of excitement around the room they do indeed point to a continuing budget deficit which we actually believe based on the falling price of oil will indeed get worse in the next year that the figures are published for but can I ask what assessment IFS have made of the impact of full fiscal autonomy on the Scottish budget in light of the jazz position which indicates the deficit so I mean presumably by full fiscal autonomy you mean as if all of your spending and taxation were in your own hands and your own leave that that's the proposal advanced by the government which is that you know all of Scotland Scotland reasons all of its taxes for all of its expenditure I mean in a sense this is I mean again a simple piece of arithmetic but outside of north soil tax revenue per head in Scotland is very very similar to average tax revenue per head in the rest of the UK spending per head in Scotland is very substantially higher than spending per head in the rest of the UK oil revenue apart therefore the deficit in Scotland with full autonomy would be significantly higher in years up till last year oil oil money has broadly made that up and indeed in some years more than made it up when oil revenues are falling at the sorts of levels I imagine they're in injures this year and certainly the levels they'll be injures next year then then the deficit in Scotland will be higher than the rest of the UK I mean as I say that I think that's that's simple arithmetic okay that's helpful to know I mean jazz does seem to suggest it's four billion of a gap this year and people are predicting that it will be higher next in that context would you agree that if you are pursuing full fiscal autonomy you can't also have the Barnett formula it is one or the other because it would otherwise be a bit like you know you stop paying into the kitty but you still want the kitty to pay out to you well you couldn't I mean again you can I mean there's a political decision there you can have fiscal autonomy with subsidy from the rest of the UK I mean that is you know that is a choice that the Scottish and UK governments could make about how how we distribute resources and indeed in a sense is how the UK government has chosen to distribute resources over a long period okay you think it would be practical or reasonable to expect a government to say if you're raising your own taxes you're and you're keeping all of them will give you some extra yeah it seems to me a political choice indeed okay I think just to develop that that a little various members of the Scottish government have said in certainly in the past year to my knowledge when the whole question of the Barnett formula was threatened by English MPs that this would result in a full billion cuts in Scotland's budget and something of the order of 70 000 job losses I believe both you know the current First Minister and the Deputy First Minister have both said this is that a reasonable assessment you think of the impact I wouldn't like to comment on the specific numbers but it's it's pretty clear as I said that there is um you know spending of a head in in Scotland is whatever is 17% or so higher than it is in the rest of the UK if you were to unwind that that's a big impact on the Scottish public finances okay that's great and the way of closing that would be to um as the UK government are doing is either to cut services or raise taxes yeah yeah okay there's some suggestion that's my final question um that we could grow our way out of this deficit um and there's economic analysis published by the Scottish government within days of each other two different papers um that look at factor productivity growth that look at an exports increase that look at narrowing gaps in investments so they're more like international standards in total um when you take all of that together it suggests growth over a 12 year period squeezed into four years a growth rate that would be higher than China's was in its heyday um is that realistic on any level I'm not familiar with those numbers but um higher growth than China in its heyday sounds quite optimistic the um I mean clearly you know the I mean the analysis that you described is right in some sense which is that higher economic growth for you know whether it be for Scotland or the UK as a whole um it helps helps you get out of a fiscal whole and indeed one you know if it turns out that for the UK as a whole we've lost less permanently of the economic output that it looks like we've lost then you'll need a lot less austerity over the next part so if it turns out we can grow at 3 per cent a year for the next five years without any inflationary problems then actually a lot of what we've been talking about won't be a problem um the same will be at the same will be true of Scotland I think the truth is that governments whether they be UK governments or Scottish governments find it quite difficult to create growth in the short short run I mean I think I mean there are policies that one can think of which most economists would agree on would be good for growth in the long run but things which are you know at worst neutral in the long run and um and really impact on growth in the very short run are pretty hard to come by okay thank you very much thank you Richard thank you about questions on oil and gas taxation um Gavin Brown earlier asked you Mr Johnson about what you thought was going to be coming up um in the budget and a whole range of areas and there's been a lot of speculation about what might happen in terms of the oil and gas taxation and regime for that um do you have a view of what's likely to happen does the IFS have a view of what should happen and what impact do changes in oil and gas taxation have not only in terms of the industry but in terms of the um the broader picture on government expenditure and revenue um I'm afraid you're taking the off area where areas where I feel terribly expert um uh you know broadly you know broad economic principles for oil and gas taxation is that you ought to be uh first you need a you know a consistent and certain regime which is taxing the economic rents that are being earned um and we certainly you know over along over recent years haven't had that consistent regime and it's not clear that we have a regime which only taxes economic rents if you did have that then um the uh you you would um you would have a system which didn't impact on the incentives that people had to to invest in the oil and gas uh in oil and gas that's clearly not where we are so kind of broad broad principle picture it will be good to move towards um a regime which is more neutral and taxes rents in that kind of um way um in terms of your uh given we don't have that system given we have one that does impact on incentives um it may be that some of that will change um in the budget either in terms of structural rates I don't know I won't speculate any more um on that in terms of its impact on the um on the budget um this clearly has an impact on the overall UK um public finances um these numbers uh in you know in in the context of the um whatever it is six or seven hundred billion that the UK raises in terms of taxes uh matter but they're you know relatively small clearly a much bigger issue for um Scotland by itself were it to have full um full fiscal autonomy um I mean the other the other side of this for the UK of course is that um uh it reduces prices across the economy and particularly um particularly road fuel prices um that may allow the government to for the first time uh certainly since 2010 to raise road fuel duties at least in line um with inflation I would expect and in one of the reasons that um you know economic growth is looking relatively positive over this next year or two is low oil and commodity prices the long run effect of that will be uh ffiscally positive for the UK um as a whole um but presumably um in the short run at least ffiscally negative uh for an autonomous Scotland so the key issue there is that is the size of the UK economy that because of the fact it is that much more diverse the government is able to is more able is it fair to say to look at changes to the taxes to which may reduce income in the short term but also helps to be like the industry yeah I mean the for a you know a net user a net importer of um of oil a fall in the oil price is a good thing economically and in the wrong long run ffiscally it's not really very good news for my region the northeast but I understand that's one of the benefits we've got of being part of that um larger economy that there is more that can be done to address the situation finally though you mentioned um Mr Mason was interested in the issue of whole government accounting we knew he would be um you've mentioned nuclear decommissioning there um just to be be clear I mean presumably offshore decommissioning we're part of those accounts as well because the government's made a commitment of 20 billion pound of funding offshore decommissioning so so that figure will be in there somewhere as well uh I presume so okay thanks thank you thank you thank you and you want to make a point yes sir I guess wanted to um come back in a small way to Jackie Baillie's statement which really would open up a huge political debate of course which Scotland has enjoyed the last couple of years and to challenge some of that but uh to go back to the um very black and white presentation of oil revenues and fiscal autonomy for Scotland it's also uh of course you would have to look at things like VAT which because we're one nation in Europe there would be adjustments on on on VAT returns there would be uh you know services bought and sold and shared that of course may well see a Barnett formula still in place in order to make these adjustments uh I'm not sure I follow the question sorry well I do want to make a point so I'll labour it if if I may um you know every economy will adjust just as the united kingdom Westminster will adjust uh in terms of of a rise or fall of oil prices and oil prices have been as low as this in recent years um and you know everybody expects that they will uh at some point start to increase again and therefore uh you know economies do adjust and I hear what the point that's being made but of course in a much greater economy um that therefore is a is it would be a greater percentage of the Scottish in the Scottish economy as the united kingdom one however the the point is that that industry in fiscal autonomy full fiscal autonomy including the oil would for example have other benefit and there may already there's discussion about the jobs uh surrounding decisions on the oil industry are based in London should be based in the northeast there would be a very you know there would be so many other aspects of that that to declare it as black and white with full fiscal autonomy and a huge deficit in scotland really would be uh quite wrong to give that impression at this committee without much much greater debate and discussion on uh aspects of of scotland's economy would you agree it's clearly the case that you were scotland to have greater autonomy or or independence or what have you a series of different decisions could be made which could have long run effects on the growth of the economy and it may well be that uh an economy which is um control more locally could grow more could make different decisions and in the very long run that could make a very big difference to to growth and therefore the fiscal situation um I think my point really was a sort of a short run arithmetic point which is that you in the in in the short run um the arithmetic would you would dominate in the long run I mean I agree with the general proposition that one doesn't quite know what would happen and it is at least possible uh that um that that behavioural change that um additional growth and so on would dominate thank you um that's exhausted questions to the committee I've just got a couple more just to wind up on one the first one is basically um based on what's um being uh come up in terms of debate which is regarding the lack of information regarding the top 1% of errors you said that uh hmrc you've not made data available for the last five years what's the reason for that so I'm I'm I'm referring there to um the survey of personal incomes which is based on um income tax data um on the base of conversations would they put hmrc it's it's down to a lack of resource to do that um I mean I I mean I slightly exaggerate the lack of information from the annual survey of hours at earnings we've got reasonably decent information on what's been happening to earnings certainly in the top 1% if not the top half um a percent and and looking at some of the tax return data looking at the impact of the 50p tax rate we can see some of that but uh it is disappointing that the survey of personal incomes which is an annual survey based on income tax returns which was uh it's been available for quite a you know large number of years um uh has not been made I I can't remember when the last one is from might might be as far back as 2009 10 it might be 2010 11 but um but we certainly don't have anything for the last three or four years yeah just remarkable given the discussions and debates about top rate of tax etc you know that that kind of the resource isn't doesn't seem to be available from hmrc's point of view you know when we've thought that that would be the case um just an issue that hasn't come up actually from committee but under current government proposals of a um of reducing a government borrowing so there's a 1% surplus by 2020 by reducing debt that would still leave a deficit of about 54% of annual income in terms of the amount of money that would still be outstanding in terms of debt um what's it how assuming all went to plan of course um that 54% how does that stack up in historic terms in terms of the UK's uh debt um so the uh so I think so I think that the boring of where you might end up in 2030 if you ran 10 years of surplus now we've never done anything even approaching 10 years of surplus so I think you know that's uh um that would be a wonderful world to be in um the um we've got debt at around 80% of national income now that's the highest it's been since 1967 so uh but if you look over a much longer period um uh you you have these kind of big cycles so if you look over the 19th century you see debt starting off at I know 100 150% of national income after the Napoleonic wars gradually coming down to really quite low levels of maybe 20% of national income then shooting up to 150 200% over the period covering the first and second world wars and then a fairly sharp decline right through to the 1980s so you've actually got um as I say you passed through 80% to back in 1967 um and then uh you kind of you get down to I can't remember what sorts of numbers 30 40 50% in the 70s 80s um you get down to 20 or 30% at the beginning of the 2000s um it's heading up to 40% in 20 um 08 um which was the cap that the last government said they wanted to put on it and it doubles essentially between 20 08 and this year to um to 80% so um if you look in relatively recent history 80% as I say is the highest in 50 years um if you look over a much longer period um you have these long periods of paying down much high levels of debt following following wars yeah so governments have long experience of having to deal with similar type of deficits over many years yeah okay and just the last question was in terms of the the issue that obviously Jackie Baillie raised uh Jonathan Port said direct of the national institute of economic and social research uh said to and I quote there's quite a lot of room for maneuver in terms of plans to get the deficit down over the next parliament even what Nicola Sturgeon's proposing which involves spending quite a lot more and boring quite a lot more than what the Conservatives are proposing we still result in a falling deficit and falling debt over the parliament so it would be ffiscally sustainable would you share that view given what you've said about the the size of debt has been historically in the UK um I mean I mean I think there are trade-offs with uh you know with all of these things and the I mean and I think the big trade-off is um wherever you get in 2020 um you will have significant but I think the right not um a significant amount of debt not debt that you can't cope with two things then happen first we will get another recession at some point I don't know when but you know we're not gonna we're not gonna get rid of boom and bust um and one of the questions I think you need to ask yourself is had we gone into the last recession with that at 80% of national income it would have then gone up to 120% um I don't know whether that's a sustainable number or not but there is clearly more risk associated with going from 80 to 120 than there is from going from 40 to 80 um and second but you I mean you first of all we would know when or if another recession is going to come out at this extent of it I mean surely I mean I and that's why I think you know I in a way I'm not sure economists can really help I think there's a kind of uh incredibly difficult judgment about risk here um and the second thing is that as I as I was saying the um you know over the next 20 or 30 years the uh pressure on public services is is is only going to grow particularly because of demographic change and it's clearly easier to deal with that if you're starting with a a lower deficit and debt to start with um I'm going to duck with the question I think it's a great that the electorate has these choices because I think these are real choices I don't think any of them are stupid choices um and I think they're taking a different view about where the risks lie okay thank you I mean so and got you mentioned booming boss so I'm going around said he would bring an end to booming boss do you think he was half right no he's ended the boom okay well thank you very much is there any further points you want to make to commit to before we wind up the session I think I've said plenty I have to be honest with you I mean that comes off to you actually I mean Paul you know every come up and give a a selling show for more than two hours answering questions across a huge spectrum of areas so thank you very much once again for coming to committee we very much appreciate it I'm going to call um given the fact that we have been in session one two hours a 10 minute recess um and we'll reconvene um at 11 11 40 11 50 okay thanks haven't go all areas Gavin could remind all members to please switch off all joint devices um now we have 10 minutes before the cabinet secretary is able to come to committee due to other engagements so therefore if with the committee's agreement I'd be happy to go into private session and deal with our item on our report on LBTT subordinate legislation our colleagues happy for us to deal with that okay so we'll take item seven next so therefore if we can just call well not call a recess but just ask the the official report in public to leave just for a few seconds and then we'll go straight on to agenda some seven in private. The next item of business today is the evidence from the cabinet secretary for finance constitution economy on the budget Scotland act 2014 amendment order 2015 draft the cabinet secretary is joined today by Scottish Government officials Joe Welsh and Martin Bolt I'd like to welcome our witnesses to the meeting and invite the cabinet secretary to make an opening statement. Thank you. The spring budget revision provides the final opportunity to formally amend the Scottish budget for 2014-15. This year's spring budget revision deals with three different types of amendments to the budget firstly a number of technical adjustments that have no impact on spending power secondly a small number of whitehall transfers and finally some budget neutral transfers of resources between portfolio budgets including a modest budget redirection to ensure that we maximise our available budget. The net impact on all of these changes is an increase in the approved budget of £475.1 million from £36,431.4 million to £36,906.5 million. Table 1.2 on page 6 of the supporting document shows the approved budgets following the autumn budget revision as realigned to reflect the new portfolio structure announced by the First Minister on 21 November 2014 and the changes sought in the spring budget revision. The supporting document to the spring budget revision and the brief guide prepared by my officials provide background on the net changes. The first set of changes comprises a number of technical adjustments to the budget. The technical adjustments are mainly non-cash and budget neutral and have a positive impact of £452.2 million. It is necessary to reflect those adjustments to ensure that the budget is consistent with the accounting requirements and with the final outturn that will be reported in our annual accounts. In my letter of 2 February to the French Committee, I provided information on the Scottish Government's response to updates to relevant Eurostat technical guidance on accounting applied from September 2014 in relation to NPD hub projects. In the interests of clarity, I should advise members that the contingency arrangements that I have agreed with Her Majesty's Treasury do not impact on the spring budget revision, as those relate to HM Treasury budgeting at a UK level. That should not be confused with the routine Scottish budget adjustments that are made each year in relation to revenue finance projects. The Scottish budget aligns with the accounting requirements under the Government financial reporting manual. Accordingly, budget provision is included within the Scottish budget for the financial year to reflect the recognition of relevant health and transport assets within revenue finance infrastructure schemes in accordance with the accounting requirements. In numerical terms, that is the most significant technical adjustment to budget at this spring budget revision with an adjustment of £253.4 million. With regard to Whitehall transfers and allocations from Her Majesty's Treasury, there is a net positive impact on the budget of £22.9 million. The final part of the budget revision concerns the transfer of funds within and between portfolios to better align the budgets with profile spend. There are a number of internal transfers as part of the revision process. Those have no impact on overall spending power. The main transfers between portfolios are noted in the spring budget revision, supporting document and the guide. In line with past years, there are a number of internal portfolio transfers that have no effect on portfolio totals but ensure that internal budgets are monitored effectively. As previously mentioned, the committee will wish to note that it is part of our robust budget management process and in line with good practice. We have taken the opportunity at the spring budget revision to deploy emerging underspends to ensure that we maximise public expenditure in 2014-15, in particular to support capital investment where possible. The spring budget revision records the deployment of some £115 million of redirected budget, representing around 0.4 per cent of the fiscal Dell budget. Details are provided at annex C, if the brief guide prepared by my officials. The spring budget revision also reflects the proposed transfer of budget from resource to capital in respect of the Scottish budget, noting that the Scottish budget records capital that scores in the Scottish Government's consolidated accounts, or the accounts of our directly funded bodies. In the context of our HM Treasury budget, the planned resource to capital transfer is £190 million. This switching is managed within the total Dell available to the Scottish Government. That takes into account the latest profile of the Government's overall capital programme. As in previous years, it is my intention to write to the committee once we have provisional outturn figures with a table setting out the actual resource to capital transfers by portfolio and programme in a similar format to the table provided in my letter of July last year in respect of financial year 2013-14. As we approach the financial year end, we will continue in line with our normal practice to monitor forecast outturn against budget. Wherever possible, we will seek to utilise any emerging underspends to ensure we make optimum use of the resources available in 2014-15 and to proactively manage the flexibility provided under the budget exchange mechanism agreed between HM Treasury and the devolved administrations. I confirm in line with past years that it is my intention to make a statement to Parliament on the provisional outturn in respect of both our Scottish Parliament budget and HM Treasury budget. The brief guide to the spring budget revision prepared by my officials sets out the background to the details of the main changes proposed, and I look forward to discussing those questions with the committee. Thank you very much Cabinet Secretary, and as you know, I will ask a few questions and then open the session out to members. In the autumn statement 2013 UK budget 2014, there was an additional 158 million allocated in the 2014-15 budget bill, and 90 million of the banach consequentials in the autumn budget revision and another 53.3 million pounds. There are about 15 million pounds in banach consequentials that appear to be unallocated. Can you tell us whether they have been carried over into 2015-16 using the budget exchange mechanism? There are remaining unallocated consequentials from other consequentials that have not been put into budget measures so far, totaling £15 million. That is correct. We intend to carry those forward, and 13 million of that 15 will be allocated to support the delivery of free school meals in 2015-16, which was part of our long-term planning for that policy. There will be 2 million that is unallocated after the provisions are taken into account. Are there any other funds that are being carried over? I would expect there to be a budget underspend of the order of £140 million to £150 million, and that is factored into the spending plans for 2015-16. Thank you very much for that. You have talked a lot about the technical transfers, and you have said that these are essentially budget-neutral and do not provide additional spending power for the Scottish Government. I am just wondering what the word essentially is doing in there. It is essentially budget-neutral and there is an implication that they are not quite. Can you just clarify if that is the case or, in fact, that they are completely budget-neutral? In the overall statement that I have just made to the committee, I made the point that there was essentially a net positive impact on the budget of £22.9 million, but in every other respect, all of the other transfers are budget-neutral. Okay, that is fine. There do not really have any practical significance whatsoever. In terms of capital increases, what resource budgets have fallen in order to accommodate those and what changes have taken place since plans were set out in the draft budget for 2015-16? Our expectation is that the resource-to-capital transfer will be of the order of £190 million this year. Our plan at the stage of the draft budget was £120 million. Essentially, what we are doing here is working the totality of our budget, the budget available to us, to ensure that we can fulfil a broad range of capital investments across the country. Some will be affected by timing where we are able to make more progress on particular projects than we perhaps envisaged at the time of the budget in 2014-15, so we are trying to find the headroom within the budget to enable us to undertake more capital investment work in 2014-15 than we had previously planned. Those will be a product of operational decisions within the capital programme, and where we find those opportunities to undertake more activity, we will then try to establish the funding mechanism to do that, and when the options available to us is to undertake a greater resource-to-capital transfer than was planned. You do not have any specific details of that? I can certainly provide the committee with a range of areas where we will do that. I would also say to the committee that we will formally write to the committee once we have reached the end of the financial year, when it becomes clear as to whether or not we have, in fact, undertaken all of that transfer activity that I have suggested will be the case. Table 3 will have a source of emerging underspends. I am just wondering what some of the reasons are for some of those underspends. It covers quite a significant area of infrastructure investment cities, but education and lifelong learning has a £13.4 million underspend prison service, £12.3 million, and £1.5 million for the Scottish corporate body. I am just wondering if you can talk us through some of those underspends. Will the money be restored to those budgets in the future or not? To go through some of the underspends convener on rail services, for example, we have identified a number of savings through a combination of the reduction in the forecast inflation and the published control period price list that is relevant to the access charges for network rail. We make estimates of what we think they are likely to require in budget provision when we set the draft budget, but, of course, we do not have that detail to hand as to how those costs will crystallise. In a position of play, we can reallocate to support other provisions on Scottish Water. Essentially—we have gone through this territory before in the committee—the infrastructure programme of Scottish Water will change its shape and character depending on particular projects that are taken forward, and there will essentially be a net funding requirement that the Government has to provide. We expect that net funding requirement to reduce in voted loans to £106.6 million, which will remove our requirement for £40 million of borrowing by Scottish Water. On motorways and trunk roads, there are in-year savings from the Queensferry crossing, so, again, the Queensferry crossing is continuing to make good—well, very visible—progress, but it is also delivering savings because of lower inflation. As the project takes its course, and I think that I have gone through this with the committee before, the way that the contract is structured, there is a fixed price for the whole project, but there is then essentially a contingency element that runs alongside that for variables that are out with the control of the contractor, and that contingency is only accessed if there is a proven need to access it, and where it is not needed, it then comes back to the Government, and that is what we are essentially gathering. In the funding council, there are savings because of the changes to the timescale for the deliv