Welcome to the fourth meeting in 2015 of the Finance Committee of the Scottish Parliament. Can I please remind everyone present to please turn off all mobile phones, electronic devices, etc? Our first item of business today is to take evidence as part of our inquiry into proposals for further fiscal devolution. This will consist of two separate evidence sessions. Our first evidence session will be here from the right honourable Danny Alexander, Chief Secretary to the Treasury, and Lindsay Fusill, who is Director of Public Services at HM Treasury. I would like to welcome you both warmly to the meeting. We might have to communicate my semaphore, though it seems quite far away. I do not remember you being so far away. Only physically, not in any other way. You know the drill, basically. What will happen is that I will ask you some initial questions, and the committee will then be opened up to the rest of the committee. First, I understand that you have a brief statement for the committee. First, thank you for having me. I think that I was the first Treasury Minister ever to appear before this committee and have made regular appearances since 2010. I hope that that establishes a precedent that, no matter who is in government next time around, you will continue to have access to Treasury Ministers, because I think that it is an important part of the dialogue between the Scottish Parliament and the UK Parliament and the UK Government. Obviously, I am here to talk about the fiscal devolution in the Smith commission, but I am happy to answer questions on some other subjects that you have been looking at lately, so you may want to raise some of those things too. I think that the settlement that is set out in the command paper that follows on from the Smith commission is one that offers huge opportunities for us here in Scotland. It is a settlement that is built to last because it makes the Scottish Parliament, when this is all implemented, one of the most financially powerful devolved institutions anywhere in the developed world. In particular, for the first time, the majority of the Scottish Government's budget will be funded by taxation that is raised in Scotland rather than through a block grant. It also includes significant welfare devolution. I hope that it is something that we can all agree on, and that it is a very significant progress for Scotland within the United Kingdom. The command paper delivers on what the Smith commission recommended, and that was agreed by all five parties around the table. It also delivers on the promises that were made during the referendum campaign. It is very important that we have, within here, without having worked through all the details yet between John Swinney and myself and between the Scottish Government and the UK Government, some very clear principles about how the fiscal framework within which the new system will operate, with the principles by which that is governed, particularly the no detriment principle, which in a sense ensures that there is no gain or loss as a consequence of the fact of devolution to either Scotland or the rest of the UK, but which confer proper responsibility to bear the consequences of actions that are determined here and actions that are determined in the UK Parliament. Obviously, there is some significant further work that needs to be done on the details of that fiscal framework, but I think that the principle set out here and the fact that, for example, we have been able to agree a good fiscal framework already under the 2012 act for the Scottish Rate of Income Tax, shows that, although there is work to be done there, it is perfectly possible to come up with a fiscal framework that delivers on those principles. In a sense, I hope that the debate you have a particular role in scrutinising the detail of this, but I hope that the debate in Scotland will move on to how those powers can be used because they offer a significant suite of powers and responsibilities that can be used for the good of people here in Scotland. Thank you very much for that opening statement, and I will start by asking about the fiscal framework. Paragraph 2.2.7 of the command paper states that the fiscal framework must require Scotland to contribute proportionately to fiscal consolidation at the pace that is set out by the UK Government across devolved and reserved areas. In your view, how does this impact on the flexibility available to the Scottish Government to use its own economic levers and would it not cause some constraint on those levers? I do not think that it offers any constraint on the financial levers that are contained here. So, if the Scottish Government wished, for example, to increase taxis in order to pay for extra investment in a particular area, that has no effect on the overall fiscal balance across the UK because extra spending has been paid for by tax revenues. Likewise, if the Scottish Parliament decided that it wished to, for example, reduce air passenger duty, which is a no being canvassed by some, that would be matched by a reduction in the money that was available for the Scottish Government to spend. Again, that is fiscally neutral. I think that the point that is being made, which is spelled out further in the subsequent paragraph to the one that you quoted, is that in all devolved settings around the world you have fiscal rules to stop, for example, a devolved institution running up massive extra borrowing in an unconstrained way that then exposes the remainder of the country to having to take decisions to deal with those problems in terms of the flexibilities.  For example, if the UK Government of whatever colour decided to make significant cuts in public spending, it would clearly be impacted on the block grant because the block grant is still going to remain, so surely that would indeed have some impact on the ability of the devolved administration to operate as it has done in recent years? Well, in a sense that wouldn't change from the current situation except to the extent that the block grant becomes less important as a portion of the totality of the expenditure. So the moment you have a situation where the block grant I think accounts for about 90% of the expenditure, the remainder comes from business rates, under the 2012 act that would reduce to some extent, but once this is implemented in the early part of the next parliament, the block grant determined by the Barnett formula would be responsible for, I mean the numbers vary, but around a third, 35% or so, of the expenditure undertaken by the Scottish Government. So, of course, you're right to say that that continues to be determined by the Barnett formula, that's been agreed by everybody, and the Barnett formula operates by allocating to Scotland, Wales and Northern Ireland a block grant in proportion to the overall expenditure that's determined in departments for England by the UK Government. That bit would continue. Actually, with the much more substantial tax powers, Scotland has much more, the Scottish Parliament has much more choice about does it want to maintain expenditure by asking people to contribute more? Does it want to, would it wish to stimulate the economy by cutting taxis and bearing the cost? You're right, but it will become a less significant factor in the overall determination of the resources that are spent by the Scottish Government than it is now. We've got a lot of areas to cover and I want to ensure that members of the committee get an opportunity to question you, so I'm going to try to move on and talk about the block grant and the Barnett formula, which you've already touched on, of course. We took evidence, as you probably know, from a huge range of academics with a variety of views on the entire process. One of them was Professor Trench, who you will be familiar with. He talked about the block grant and the formula system and the Barnett formula. He said that all key decisions regarding the working of the block grant and formula system are taken by HM Treasury. There are real issues in terms of transparency on that. Professor Heald suggested to the committee that there is a transparency death that is undesirable now, and unless removed, we would make major devolved taxes unworkable. Professor Trench said that there are very strong reasons to change away the grant that is administered and organised, so fewer decisions are taken unilaterally by HM Treasury about the working of the formula and the funds allocated to it in greater scope for impartial intervention. That theme was continued by Professor McLean, who said that how the Barnett formula works is entirely in the hands of HM Treasury. It's not a statutory matter for the Scottish Parliament or the Scottish Government. I could go on and on and on with this kind of comment. We'll just finish on one before I lie to answer. Professor Trench said questions why, and I quote, our financing system essentially depends on an informal Treasury document that the Treasury drafts on its own. The Treasury was not merely judging its own case with a jury from its side of the fence, but it wrote the rules as well. He suggests that at the very least there needs to be an impartial mediator and that the devolved administration should have a role in drafting and agreeing on your advice statement. In terms of Barnett and its whole area, there seems to be from a whole variety of economists of different political persuasions a real concern about transparency in terms of how this is going to work, how the Treasury operates and the murky Byzantine process that is the Barnett formula. I wonder if you can enlighten us a wee bit on, sorry, to be too verbose in this, but I think it's a key aspect of it. No, I understand the question. I haven't had a chance to study all the evidence that you've described, but from the quotes you've given I'd say that I disagree with it. I have been chief secretary for nearly five years now. I think I'm the longest serving chief secretary not to have a formula named after them, so maybe we can change that in the last few months of this government, but I've been responsible for this. I can honestly say that I can't recall a single occasion except once when there was a mathematical error made on a spreadsheet where there has been a disagreement about the way the formula has been operated by any of the devolved government. There are, of course, political arguments about the policy decisions that are being made about public expenditure. You hinted at that in your earlier question. In terms of how the Barnett formula operates, it's all set out in a document called the statement of funding policy, which I'm sure you're familiar with. The statement of funding policy sets out a whole range of ways in which this works, including the comparability factors for different areas of policy and how they apply to when you make a spending adjustment, let's say, in the budget of the department for communities and local government in England. How does that then get reflected in the overall allocations? That is complicated because there are lots and lots of funding streams. In many cases, they have slightly different comparability factors and so on. The population figures that get put in are a matter of public record put together by the independent statistics authority. All of the details of Barnett consequentials for any budget or spending review are, of course, shared between the UK Government and the Scottish Government. If there's ever any wish to update the statement of funding policy, as we did in the 2010 spending round, as has happened occasionally, when a new area of responsibility is devolved, clearly you have to establish what are the Barnett comparability factors for that area and add that to the statement of funding policy. That has to be done in consultation with all of the devolved Administrations in Scotland, Wales and Northern Ireland. The way that it operates is not simple because there are so many different elements that it is complicated. I do not think that there is any lack of transparency in terms of the way the formula works. I think that the fact that there is a widespread political consensus amongst all parties in this Parliament and the Westminster Parliament, with the exception of the UK Independence Party, about the Barnett formula and wanting to continue with the Barnett formula suggests that there is widespread support for continuing to operate it long into the future. That would certainly be my view. Professor McLean-Vauxford says that if the Scottish Parliament and the Scottish Government does not like what HM Treasures is doing, there are no mechanisms to pursue that, except perhaps a joint ministerial committee. He suggests that the block grant should be determined by a public body under joint control of devolved and UK parliaments, which is, for example, what happens in Australia. There is a real issue about the fact that there doesn't seem to be any democratic accountability in terms of that. That is certainly what our academic colleagues are saying, and the issue of transparency seems to be, as I said, regardless of the political views of our witnesses. There seems to be real concerns about it. Professor Heal, for example, talks about treasury gaming and so on. How do you deal with that kind of issue? I am not sure that I have much to add to what I said before. For the reasons that I have set out, I do not agree with the points that are being made. I would say that there are a number of institutional structures that enable that sort of thing to be discussed and raised. In addition to the joint ministerial committee that you referred to, under the 2012 act, we also established the Joint Exchequer Committee, which I know that you are familiar with, which looks at a range of issues there and provides a forum. In addition, we have regular so-called finance ministers quadrilaterals, which are a meeting with myself and the finance ministers of whoever holds the office of chief secretary and the finance ministers of the three devolved administrations. That meets a couple of times a year and has made decisions on some aspects, for example, on how budget exchange works in respect of devolved administrations, which is not part of the Barnett formula but is part of the financial framework. I think that there are plenty of mechanisms for those things to be dealt with. Of course, I am accountable to the House of Commons, which is one of Scotland's parliaments. John Swinney is accountable to this Parliament, so there is democratic scrutiny through both those channels. We both have the opportunity, should we ever wish to, to raise complaints or issues about how the thing is operated. I would say that the operation of the Barnett formula is a technocratic operation where the outcome of the mathematical calculations can be and is scrutinised by officials in the Scottish Government, the Welsh Government and the Northern Irish Assembly Government. I can recall only one occasion when a mistake was made in a spreadsheet, and that was picked up very quickly and corrected. Apart from that, I cannot recall any occasions when the operation of the Barnett formula, as against a political argument about the policy decisions that provided the inputs, had been an issue that was brought to my attention. There seems to be a lot of cobwebs wrapped around some of those committees. The Joint Exchequer Committee has not met it since February 2013—I mean, that is two years ago—and the Quadral Atlas is November 2013, so I am not really sure how it can provide any effective scrutiny, as you have suggested in terms of this. I think that the Quadral Atlas is a bit more recently than that, but I will check my diary when Balmwine has come back to you. In terms of the Barnett formula, it is also a question of what the Barnett formula means. I mean, for example, it is going to be retained as a population-based adjustment mechanism in combination with needs assessment. Will Scotland's relative per capita public expenditure share be maintained? The Barnett formula is a name, but what it means on the ground is what people are really wanting to know. I would not propose—there are no proposals from the UK Government or I am not aware of any from any political party—to change anything at all about how the Barnett formula operates. What changes under the proposals that the Smith commission has set out in the command paper is that the block grant itself becomes relatively less important in the totality of Scottish Government funding. Effectively, what you would then have is the amount of money available for the Scottish Government to spend being the sum of the block grant that comes out of the Barnett formula. Less adjustments for taxation, so block grant deductions that would be agreed, as we have, for example, on stamp duty and on income tax under the 2012 act, plus allocations in respect of the welfare provisions under the new fiscal framework. That is what would add up to the total amount of funding that is available. The way in which the block grant part of that equation is calculated, there are no proposals to make any changes to it, but because of the much greater degree of financial responsibility, devolution of tax powers and, indeed, welfare powers that are proposed here, and that will happen in the next Parliament, you will see the block grant moving from the current situation, where it is responsible for about 90 per cent of the money that is spent in Scotland, to a situation in which it is more like 35 per cent or so of the total amount of money that is spent in Scotland, and the rest of it comes from taxis that are raised directly, and so on. Let's move on to the issue of borrowing. I have quoted a host of professors to your resume. You have. A couple more, I'm afraid. Professor MacDonald argues that, in terms of borrowing, if the Scottish Government has been asked to take on more fiscal risk, it really needs more borrowing powers. His view is that borrowing should be done in the open market, as this is the only clean and effective way to bring market discipline in. Professor Muscatelli suggests that borrowing powers should be extended to allow each devolved part of the UK to smooth out asymmetric macroeconomic shocks, which temporarily affect tax revenues, and, indeed, the Smith commission recommended that the Scottish Government should, I quote, have sufficient additional borrowing powers to ensure budgetary stability and provide safeguards to smooth Scottish public spending in the event of economic shocks consistent with a sustainable overall UK fiscal framework. What is your view on the issue of borrowing that you touched on earlier in your statement? Is it something that you believe and are keen to implement, or would you like to see the existing framework retained? It would be right that, as part of the discussions that we have about the fiscal framework, it is precisely as Smith recommended that borrowing should be part of that discussion, and that where the Scottish Parliament is taking on greater responsibility for tax-raising, that, I am not sure which one of the professors you quoted talked about the need to use borrowing as a way of smoothing out fluctuations in tax receipts, that is an area where, when you have more tax receipts, you potentially need more borrowing for smoothing purposes. I can see that that is absolutely something that would be very much part of the fiscal framework that we were put in place. As you know at the moment, under the 2012 act, there is a borrowing framework that includes both borrowing for that smoothing purpose and borrowing for capital expenditure, both within limits. I can certainly see that, with greater tax powers, you would want to see greater borrowing powers to help with that smoothing. As to whether that borrowing takes place from the markets or from within the UK, from the public work loan board or the national loans fund or whatever, as you know, we have already taken steps to devolve the power to issue bonds to the Scottish Government, so that then becomes a value for money judgment for the Scottish Government to make. Where does it want to borrow funds from? What are the issues around that? Provided that borrowing takes place within the overall framework that governs the way that borrowing takes place, I can very much see Professor MacDonald's argument that a bit of market discipline is helpful. Equally, if that ends up being more expensive than, for example, UK guilt rates, you might have questions to ask as to why the Scottish Government was choosing to pay higher interest rates. That is the judgment that would have to be made. I have no wish to influence that choice. That choice is already available under the current framework. I will ask one question and one more area, which is the block grant adjustment, before opening out to colleagues around the table. One of the issues in terms of the block grant adjustment has been transparency, and I am sure others will explore that in depth. The one that I always want to ask about was the constraining factor. The cabinet secretary for finance and constitution economy said that the Treasury had sought to include a constraining factor in the block grant adjustment, which means that attempting to calculate up to 2029 or 230 what the devolved tax would generate and adjust the block grant on this basis so that neither the UK nor Scotland would be worse off. The committee agreed that, with the cabinet secretary, this defeats the point of devolving the taxes. Obviously, we are raising this with you. The point about having the powers is that we make standard fall by the decisions that we make, because that is within the framework of powers or whatever those powers are that we are allocated. There is a real concern that if there is, say for example, the Scottish economy does better than the UK average, then obviously the block grant is clogged back. If we do worse, that is our fault. The UK should not really have to subsidise that. Everyone, if you can clarify the position on that, because that is a real concern that we can enact whatever policies, but at the end of the day it is not going to make a blind bit of a difference if there is a constraining factor that is implemented. I agree with you on that. The whole framework is designed precisely to ensure that, exactly as you say, if the Scottish Parliament makes decisions that are beneficial and lead to higher tax revenues over time, that is something that should benefit the resources available to the Scottish Government. Likewise, if mistakes are made that lead to the economy growing less well or whatever, those consequences should be borne. That is the whole point of devolution. It is about devolving those responsibilities. That is why we need to do and what Smith recommended was put in place a fiscal framework that ensures no detriment at the starting point, which is indexed in a way that is appropriate so that the fact of devolution itself—I would hope that you would not argue that the simple fact of devolution should lead to a financial gain or loss—what you are arguing for is that the effect of policy should be something that is felt either by the Scottish Government in respect of its policies or by the UK Government in respect of its policies, but there is a degree of insulation between the two. In that context, it is also quite important to have an adjustment mechanism that is transparent and which is able to operate as automatically as possible. One of the strengths of the Barnett formula is that it operates on an automatic basis. You feed the numbers in and you get the outcome. It is not a matter for negotiation or haggling. Likewise, when we agreed—John Swinney and I agreed it between us—the financial framework for the devolution of the Scottish Rate of Income Tax under the 2012 act—we agreed a system of indexation there in respect of that, which we both agreed was an appropriate mechanism that would ensure no detriment but also enable benefits or losses from policy choices to be felt here. That is what we need to do with the wider fiscal framework and, in a sense, with a bigger amount of taxation involved—a bigger basket of taxes, if you like. Getting that right is, of course, important, but because there is a bigger basket of taxes, I think that, in some ways, it makes it more straightforward. Okay, thank you for that. Thank you very much and good morning. Just to follow on in terms of transparency and block grant adjustment, obviously we have just gone through the process in regard to the land and buildings transaction tax. The Scottish Government had to set out its rates in October and there was a consultation period that took place in relation to that, but the final impact on the block grant was not known at the time and, indeed, was not a conclusion on that. That was not reached until quite close to the actual budget stage 1 process. Do you think that that is acceptable and do you think that it is something that needs to be addressed, particularly in relation to future devolution of taxation? I think that it was necessary in this case. In fact, Stamp duty is a particular example because you are dealing with a tax that is quite volatile and where a lot of work had to be done both here and by the OBR to look at the forecasting of revenues and so on. Also in the context where we knew, but because of budget secrecy, we could not reveal that we were planning also to make a reform of Stamp duty, something that I personally argued for for very many years. It made more sense for John and I to agree the adjustment in that context. Also, of course, with that happening in the context of the wider fiscal discussion off the back of Smith and the command paper and so on, we felt that it was sensible to agree a deduction, which we agreed very amicably, by the way, in the numbers for 2015-16. That allows us a little bit more time to look at the evidence to see how we can incorporate that in a wider fiscal framework for the future. I think that it was handled appropriately. Of course, if I make one other point, Chair, on this, in case it doesn't come up, we've obviously agreed the headline deduction, the 494 in 2015-16, but I've also agreed that there's some forstalling going on because John had to announce his rates well before they were implemented, which has caused some behavioural consequences. A sort of early application of the no detriment principle will mean that, to the extent that there is forstalling—in other words, people bringing forward transactions, selling houses before the deadline, which wouldn't otherwise have happened, that causes extra stamp duty revenue to flow to the exchequer—it wouldn't be appropriate for the exchequer to be the beneficiary of forstalling against the policy made here. We don't know the amounts yet, but given that forstalling has taken place as a consequence of decisions made here, that money should in due course be paid back. In addition to the 494, there will be some money coming back on the forstalling and, quite reasonably, with this being a new power and there potentially being small time lags between the power being implemented and money coming in, we'll look at whether there's any cash support that's needed through the year, just to move—in the first year—to smooth those fluctuations. In fact, I know that John Swinney has written to me this morning saying that—and I think he's sent this to you as well, chair—to say that the Scottish Government is now content that it's ready to switch on the power in the beginning of April. There's a formal process that we have to go through. I can confirm to you that HMRC is also ready, so that will all happen. I don't have a view on whether the Scottish Government's ready. That's for John to decide. HMRC is also ready, so we'll have that exchange of letters very soon and the formal switching on of the powers, which enables that devolution to happen precisely as planned. I just want to come back. You used the term budget secrecy, which I think is quite important in the context of what we're discussing. Obviously, in relation to land buildings transaction tax, there was a requirement on the Scottish Government to consult on its rates ahead of implementation. The same is true in the sense that under SRIT there will be a requirement to notify Treasury in November of the plans in relation to those rates. Professor Heald, in his evidence, has suggested that these are areas that could leave the Scottish Government vulnerable to what he terms gaming. That would apply irrespective of who was occupying the keys to the Treasury at the time. The UK budgetary timetable must be pulled forward. There has to be less opportunity for political theatre on the part of UK Chancellor's of the Exchequer, which refers to announcements in the budget that have not been given any warning of in advance, particularly when they relate to taxation that is being dealt with at a devolved level. Do you see the need for there to be some changes to the internal fiscal rules? For example, the Law Society of Scotland has spoken to this committee about the need for there to be some form of fair play clause or agreement around financial fair play in relation to how Treasury rules operate in relation to taxes that are devolved. There are quite a lot of different things in there. First, I do not think that there is any need to change the way in which budget decisions are made UK-wide. How those decisions are made in Scotland is a matter for the Scottish Government. Naturally enough, John Swinney did not consult me on which rates he was going to set for land and billions transaction tax or how he was going to announce them or whatever. That is his business. He came out and announced it. That was devised by the Scottish Government, his officials and him and his ministerial colleagues. That is entirely appropriate. Likewise, we spent time considering how we wanted to reform stamp duty at a UK level. We made those decisions and we announced them in the normal way. We took the view, which the Scottish Government may wish to take in the future, but, in this first instance, it was not able to for the reasons that you say. We took the view that changes to the rates should apply immediately, precisely to avoid the sort of forestalling that you might otherwise see. In terms of fair play here, that is one of the reasons why the fiscal framework and the no detriment clause is so important. Clearly, if, for example, the UK Government decides to cut taxes in areas that are devolved, that would naturally result in a reduction in expenditure on devolved services in other parts of the UK. However, the framework needs to ensure that that does not result in a reduction in expenditure here in Scotland. That is one of the things that we set out in the command paper that needs to be looked at. In respect of income tax, where we are using the same mechanisms, there are time lags that administratively take place in order to ensure that the collection can take place. For example, we have made something that I have pushed as the Liberal Democrat minister in the Treasury, which has made significant increases to the income tax parcel allowance over the course of this Parliament. Those have all been announced either in the budget a year before the decision or, on some occasions, in the autumn statement, four months before implementation and not at the budget implemented in 10 days later, precisely because the practical mechanisms do not allow some of those decisions to be implemented that quickly. HMRC needs that time to put its systems in place to have, for example, a higher personal allowance. It is not something that you can do overnight. There are some other things that you can do overnight, such as the stamp duty reform, where we decided that it was necessary to do overnight for wider economic reasons. The point that was being made by Professor Heald and his evidence to the committee was that if the Scottish Government has to advise the Treasury of its intentions in November and the UK budget is not set until April, that is quite a significant period of time between the Scottish Government having to set its position out and the Treasury announcing its position. He is highlighted in a number of instances. I will not go into detail on them, but I commend you to have a look at the evidence that he has provided to the committee, where there could be what he refers to as retaliatory instruments or gaming by the Treasury in response to decisions that are taken by the Scottish Government. It is whether you would agree with his analysis that there needs to be an examination of the framework that is being operated in terms of the fiscal rules. I do not want to say the same thing that I said before. I do not think that the suggestion about gaming is not right. I do not agree with that. I do not think that there is any evidence to support it. However, I would say that the whole purpose of the fiscal framework and the no detriment clause is to enable both the UK Parliament and the Scottish Parliament to take decisions in their own ways and with their own processes and to their own timescales. The convener was saying earlier that each Parliament has to bear the responsibility for its own decisions. The fiscal framework needs to be adaptable so that if there are changes in tax rates at different places, you do not have that having a knock-on effect in the way that you are implying. The burden of the question falls on agreeing on a fiscal framework that meets the terms that are set out in the Smith commission and in the command paper. I am totally confident that we can do that. In terms of the issue around flexibility, you have spoken about flexibility a number of times. Obviously, after the Scottish Parliament will very soon have responsibility for a portion of income tax of Smith commission and the command paper proposed going further, we will see how that process plays out. Beyond those taxes plus land and building transaction tax and landfill tax, the other suite of taxes that are available to Governments as leavers remain reserved competences. Therefore, in terms of the flexibility that a Government has to react to any given situation, for example, you mentioned the impact on the block grant, although it will be a smaller portion of the Scottish budget of continued austerity. The range of taxes that are available to the Scottish Government's disposal are quite limited in terms of where they can be applied and who they would apply to in order to generate potentially additional income, would you accept that? No, I would not, because I would say that where you have a situation where taxes paid by Scottish taxpayers are in future be funding more than half of the expenditure that is determined here and where those are all taxes, mainly taxes that have a broad base, income tax very broad base, the entire population of income tax payers, VAT a very broad base and where I think there is a significant incentive that is created by what Smith is recommending and what we are following through on VAT in the sense that wise economic decisions that lead to more economic activity will lead to higher VAT revenues, which will lead to greater revenue at the disposal of the Scottish Government to use as it pleases. That gives a vast degree of flexibility. Of course, there are some of the taxes that have a narrower base, stamp duty is narrower or land and buildings transaction taxes as it shortly will be, because it is just property transactions, air passenger duty, air travellers and so on. I think that there is a pretty wide choice of tax leavers available and that gives a lot more financial flexibility to be much more for the Scottish Parliament, the Scottish Government, to be much more financially self-sustaining to make those decisions in the round here. If it is the wish to say that we wish to have higher public expenditure, then there are plenty of tax leavers there to achieve that. It was on the supplementary, the previous question. I do not share Professor Heald's view on gaming, but he does raise a fair point in that the situation, as I understand it just now, is that the Scottish Government, as Mark suggested, has to declare its intentions with income tax in the November prior to the start of the financial year. The UK Government, in some cases, has set it out a year in advance or so, but in some cases it might be done at the time of the autumn statement, which in recent years has been early December. You do have a situation where the Scottish Government has to declare its hand effectively a month before the UK Government. In terms of the fiscal framework that you are discussing, is there any logical reason for that being the case, or could you have a situation where both of them effectively declare their hands round about the same time? The constraint is one of practicality, which is the time that it takes for HMRC to implement decisions administratively to make sure that the intention can be affected. For example, if you want to increase the personal allowance or in future change bans or whatever, then HMRC has to make adjustments to their systems and inform taxpayers and so on. That is the constraint. I do not think that there is anything particularly religiously important about November as opposed to December. I think that it would be a perfectly good thing to talk about with HMRC as to whether there is that bit of flexibility. I think that I am right in saying that the budgetary cycle here has always been October-November as opposed to December, so it fits logically with the way that you do business in the Scottish Parliament. However, if there was a suggestion that you wanted to change that to make it co-terminus with the date of the autumn statement, for example, I am not aware of any practical constraints that would prevent that. If you wanted to say, we want to hold back our decisions until 25 March and HMRC could not implement them in time, that would create a serious practical problem that could not be overcome. However, as to whether it is November or December, unless—I am quite happy to investigate it—we were told that there is some particular practical consideration in respect of, for example, the Scottish rate of income tax or the full devolution of income tax in due course. I see no particular problem with that in and of itself. On the issue of borrowing powers—forgive me on this, I may have missed a clarification—there was some suggestion that, while the expectation was that the new borrowing powers that would come post-Smith would be to supplement and augment the capital grant that the Scottish Government receives, there was some indication that the command paper was suggesting that it would replace the capital grant rather than supplement it. Can you clarify what the Treasury's position is on that? So, Smith recommended a number of things in relation to borrowing. The first was the point that we were exploring earlier, which is do you need additional borrowing powers to deal with cash fluctuations, if you like, in receipts? That is something where that will be part of the discussion on the fiscal framework, but I would anticipate that there would need to be an increase in borrowing powers for that, because you have greater tax volatility, so therefore borrowing is necessary to help to manage that volatility. In respect of capital spending, Smith said that we should look at, but did not recommend definitely going ahead with this, but it was one of the options that he said should be examined was introducing a prudential regime for capital expenditure in the Scottish Government. What has been said is that that will be investigated as part of the discussions between the Government. I do not think that anyone has said that that is what they prefer, but that is a debate that we can have. There are clearly positives and downsides to that, obviously having something in which to replace the capital grant that we have at the moment, that could be difficult and therefore I would have misgivings about that. Equally in respect of those already a prudential regime for local authorities, which I think most local authorities would say works reasonably effectively, so there may be some upsides to look at. I do not have a view on that actually at the moment. I think that is something that we should look into. Smith does not recommend it and we do not say that we are going to do it here, we say that we will look at it in the way that Smith said as part of the fiscal discussions. Other options would be to have greater borrowing powers in respect of capital to reflect the greater devolution of taxation. Those are all things that I think can and should be examined. I have a couple of issues that have not been raised before, but just before that, if I could just pick up briefly on what has been discussed already. I tend to agree with you about the operation of the Barnett formula head or two, because in 16 years of this Parliament, I am not aware of any—there might be one of any—but I am not aware of any people objecting in the Parliament to the way that it is operated. However, I suppose that the concern that is looking ahead is the relationship of the Barnett formula to the block grant adjustment. If you could say a bit more, the committee's report expressed concern about the constraining factor. Obviously, we heard a lot about that. I think that some from yourself and from John Swinney about your disagreements about the block grant adjustment for the taxes that we are getting in April. I am sure that we reassured that you accepted the principle that we should benefit if we have economic successes in Scotland from our policies. However, I suppose that it would be helpful if you did explain what the disagreement was and what the constraining factor was. As presented to us by John Swinney, it appeared to be having a detrimental effect on the Barnett formula, which it should not have. Do you mean specifically around stamp duty? Yes, yes. I do not think that there was a disagreement exactly. We were both trying to achieve the same thing, which was to have an initial adjustment that did not operate to the advantage or disadvantage of either Scotland or the rest of the UK. It then does exactly as you say ensure that the financial gains or losses that come from—I am sure that the Scottish Government believes that the new system that it is introducing will have positive economic effects. I dare say that that is one of the reasons that I put it in place. If that is the case and it leads to extra revenue, that extra revenue is fully to the benefit of the Scottish Government. The work that we were doing, which is just complicated because it is not a very good evidence base and we needed to work and build on that evidence base, was actually on trying to understand what the likely level of stamp duty receipts was. Therefore, we had an OBR forecast, which was done from a top-down perspective. The Scottish Government put together its own views, I think, based on registers of Scotland data and so on, which is more of a bottom-up perspective. We were trying to reconcile those two to come to a position that we both agreed was a fair amount. In the end, we were both quite happy to agree on an average of the two as a starting point—a workman-like solution to a question where the data needed to be improved. There is an important point that I hope the committee might take on in this, which is that part of what will be needed as we put in place this new fiscal framework is a much more robust framework of independent scrutiny of assessment of fiscal numbers in Scotland. We have the OBR UK-wide. There is a Scottish Fiscal Commission, which has been established. I hope that there will be agreement that that needs to be robustly independent. That will aid the committee in its scrutiny of the Scottish Government, as well as ensuring that we do not end up arguing between Governments about those numbers because we have independent bodies who are, for example, scrutinising tax receipts and so on. In order to make the fiscal framework robust, having a Scottish Fiscal Commission alongside a fully independent Office of Budget Responsibility would be a Scottish Fiscal Commission that is resourced to carry out what will be more detailed functions in the future. I think that that is something that would be important. I was going to ask you about that, which I will do, but just for further clarity, we were told that the constraining factor involved calculating up to about 2020-29 or 2030 what the devolved taxes would generate. We were a bit puzzled why that was... There was work that was done to look at that, but it was an aid to try and understand which of the sets of numbers was likely to be more accurate because, obviously, that informs how the adjustment works. In the end, what we settled on was this figure for the 2015-16 financial year and agreed that we would do a bit more work and perhaps look at it in the broader context that Smith establishes. What we have agreed is the amount for this year. We haven't agreed on how that thing gets by what methodology that is indexed in the future to be fair, so there is a further discussion to be had about that. Right, so going back to the earlier point, your command paper said that the Scottish Government quoting should bring forward proposals fully consistent with the OECD principles and reflecting the UK experience with the OBR to enhance the Scottish Fiscal Commission as part of agreement to a new fiscal framework for Scotland. Would you like to say a bit more about how, obviously, it is our decision, but, from your point of view, what did you have in mind when the command paper said that? So actually, this is an area in economic policy making where the UK has led the way in the last few years. The officer of budget responsibility is fully independent and, in particular, takes responsibility for economic forecasting and not just assessing and scrutinising numbers. It is no longer the case that I, as a minister, have any say over what the economic forecast says. Clearly, the economic forecast is really important because it then underlines how much revenue you expect to get next year. Take stamp duty, for example. If your forecast is that there is going to be massive economic growth next year, you would expect stamp duty receipts to be stronger. If your forecast is for very weak economic growth, you would expect them to be less. The Scottish Fiscal Commission, as I understand it, does not have those forecasting responsibilities at the moment. As you are moving to a situation where forecasting tax receipts is a much more important determinant of the budgetary decisions and spending decisions for the years ahead, I think that having more robust independent work on that so that it is not ministers determining what the forecast is for the economy in future years and the forecast for tax receipts in future years, I think that my experience in the last five years has sometimes been quite challenging for ministers who might not always agree with the forecast or who might be challenged because the forecast is less good and therefore that has to prompt discussions about whether you have to take decisions in response to that forecast, but it is more open, more transparent because it is independent and everyone has confidence in it. Something similar in Scotland within the scope of the devolution that is going to take place in the next Parliament would really help. The OECD has set out some principles. You would like to see a forecasting role, and would that include forecasting of the income tax receipts? For my answer by analogy, the OBR forecasts that each budget and autumn statement have a forecast for the economy. They then work through what that means for a fiscal forecast, so they do forecast tax receipts, they forecast income tax receipts and so on. They scrutinise all the data that is presented to them at a technical level by HMRC and by officials and so on, and they reach a judgment about what they expect to happen to income tax in future years. I think that it is far better that that work is done independently rather than being something that is susceptible to influence by politicians. I agree with that, but in terms of the income tax powers that we are getting next year, that will be done by the OBR, but you are quite comfortable that there would be a Scottish equivalent body doing that for Scottish income tax. Not just comfortable, I would encourage it. My final question relates to VAT. We were slightly alarmed that there seemed to be no agreed way of working out what VAT receipts for Scotland would be. I suppose that the two views, given where it could be determining VAT on consumption by final consumers in Scotland, or it could be on the basis of the VAT accounted for by businesses producing goods or services in Scotland. I wondered whether the UK Government had a view on which of those methodologies it had in mind. I think that that is something that we want to discuss and agree with the Scottish Government. What we want is to have a mechanism that fulfills what we have said we will do in the command paper, which is to make sure that a share of VAT revenues that represents the first 10 percentage points of the standard rate—and we have added to that the first two and a half points of the 5 per cent rate—is allocated to Scotland. That is able to then be responsive to if the Scottish economy is growing better and people are spending more money and paying more VAT, so that Scotland gets the benefit of that. We need to agree the methodology. I would rather not leap in and say that I prefer that methodology or that methodology, because I think that the intention is a simple one, which is to make sure that Scotland genuinely is getting the VAT. How you go about doing it is just quite complicated, and that is something that we need to work through. I wanted to ask you about the paragraph 95 for B, where we say that the changes to taxes in the rest of the UK for which responsibility in Scotland has been devolved should only affect public spending in the rest of the UK. Ergo changes to devolve taxes in Scotland should only affect public spending in Scotland. The Smith commission report 95 for B is understandable. For example, if there was an increase in income tax rates in the rest of the UK, that should not affect a level of public expenditure in Scotland. Also, if the UK Government decided to cut income tax and that led to less receipts, that did not cause a reduction in public spending in Scotland. Likewise, if the Scottish Government chose to increase income tax to get more revenue, that did not have an adverse consequence for the rest of the UK. Achieving that has to be a key part of how the fiscal framework works. The way that we decided to do that in respect of the Scottish rate of income tax and the 2012 act, which of course is not the whole of income tax, is 10 per cent of the 20 per cent rate and so on, was a methodology that was recommended by Professor Jerry Holtham in the Holtham report, which was actually carried out for the Welsh Government a few years back. I am sure that you have had Jerry Holtham here. That has an indexation against the tax base in order to fulfil that sort of idea. We would need to agree what the appropriate indexation would be with the much wider devolution of the whole tax, but the objective is precisely to fulfil that. I am a bit confused. If Westminster decides to spend an increase in UK income tax on reserved services, are we not then faced with a stark choice of either cutting our devolved services or raising the Scottish rate of income tax? The way that I would think about it is that income tax becomes a devolved tax, and so there are UK-wide taxis, there are plenty of them, there are corporation tax, national insurance and so on, which I have spent on in reserved areas. However, given that income tax will be a tax that in future is collected separately in Scotland and in the rest of the UK, and of course there is devolution of income tax on the table as part of the Welsh discussions and so on, you would not want to see the fact that people in England are paying less income tax or to have an effect on the total amount of money available here in Scotland? I understand the tax collection, but if I guess it is the reserved matters, it is how the effect on the Scottish budget of policy on reserved matters, over which we do not have any control but will still affect our budget, and that must have an implication on the Scottish budget. The way that you have to think about it is that, under this, income tax becomes a devolved tax, so revenues from income tax in Scotland are spent in Scotland, revenues from income tax in England are spent in England or England and Wales depending on the solution for Wales, and you want those two systems to operate separately from one another so that the choices that are made in those two systems do not have an adverse or indeed positive for that matter, knock on effect on the other part of the country. It is a big change in income tax, but income tax revenues in England are significantly less than the total amount spent on devolved public services in England, so I do not think that the worry that you have would have any actual substance in practice. The OBR has forecast some of the figures on the impact. The elimination of the UK's public sector deficit occurs mainly through cutting public expenditure, given that it is likely to continue. Do you believe that the Smith commission changes will allow Scotland to follow a different path? Yes. Obviously, the block grant component of the resources available for the Scottish Government to spend continues to be based on the Barnett formula, and that means that expenditure decisions that are taken UK-wide are reflected on the block grant, but a much greater proportion of the money that is spent here will be raised here. That does afford the Scottish Parliament the opportunity that it wishes to do, to say, for example, that we wish to have higher taxes to pay for more public expenditure in whichever areas we wish to spend more money in. That is a decision that is open. It is also a responsibility to think about, because the way that the convener was implying earlier, the Scottish Government would also be thinking through what are the economic consequences of having higher taxes. That would have to be assessed in the forecast. If the consideration has been made to raise taxes in certain areas to fund higher public spending, what effect that would have on economic activity, on business, on incentives to work and so on, all those things would have to be thought about, but it does allow that opportunity. Of course, it does. On the earlier on when we were talking about the stamp duty changes that you made in the autumn budget, you said that, for different economic reasons, you decided that that would be an overnight change. What were the different economic reasons? Is that something that you gave consideration to what was happening in Scotland? Did you think in advance the kind of reaction that would happen here? Of course. The reason for saying that this is a decision that gets implemented overnight, as opposed to one on which there is a significant time lag, is to try to avoid some of the economic distortions that come from, for example, people trying to bring house sales forward in order to avoid higher tax rates, or indeed people delaying transactions to wait for lower rates, which would have an effect that distorts the economy. We chose to implement those provisions overnight to avoid those sorts of distortions. In a devolved framework, those are decisions, UK decisions for the UK Parliament, in a way that Scotland approaches them quite properly for the Scottish Parliament. It is perfectly possible for reasonable people to reach different views on how to handle those things. Having a big change with a delay on our reforms, about 98 per cent of transactions would be seeing the same or lower rate of stamp duty being paid. If you then left a period of months before that was implemented, you potentially would blight the housing market for a period of months. That would have an effect on the construction sector, and that was an economic effect that we wanted to avoid. That was something that the Scottish Parliament wasn't privileged to have itself. The Scottish Parliament is responsible for its own decisions about how to handle the rates of land and building transaction tax and what rates to set them at, and so on. That is a matter for John Swinney. Of course, in the first phase, when the power was not devolved till April, that presented a particular challenge. It is a question about, in future, how would that be handled, but that is a matter for him and for you to scrutinise, not for me. The final question is, given that the Smith commission proposals are not going to be decided before a general election, how confident are you that, in the form presented now, that they will be accepted by Westminster Government? I am 100 per cent confident that those proposals will be implemented. They have the strong support of the Labour Party, the Conservative Party and the Liberal Democrat Party. In my case, it is something that I have campaigned for for many, many years. It is this measure of financial home rule for Scotland, which I believe constitutes that. I think that there is no doubt at all that those commitments will be fulfilled. The only challenge to it comes from Scottish nationalists who either wish to continue to prosecute the case for independence, despite the collapse in oil revenues, or who want to change that. However, one of the strengths of the package is that it was agreed by all five parties in this Parliament. That is as much as anything else with the three main UK parties and the party leaderships and the finance spokespeople. In my case, I am the finance spokesman for the Liberal Democrats as well as the Treasury Minister, all making strong commitments to that. It is not just that it will be delivered in the next Parliament. Everyone has said that this will be one of the first bills introduced in the first session of the next Parliament. People can have 100 per cent confidence that this is not just a settlement that is built to last, but that it will be delivered very quickly. The evidence in the hands-on through the debates that have happened shows that, in fact, there are a lot of people who are not content. You will admit that it is not 100 per cent of people in Westminster who think that it is a great idea. On everything that is noises off, I suspect that you even have that in the Scottish Parliament from time to time. However, the overwhelming majority of MPs and, crucially, the leaderships of all the parties and all the people who might conceivably hold high office in the UK Government in the next Parliament in any combination strongly support this. To return to the issue of borrowing, I sat on a Scotland Bill committee earlier in this Parliament when we discussed the issue and the cross-party agreement that even then the borrowing powers of the Parliament should be increased. Chief Secretary, you said this morning that you agree that, with the new powers through Smith's commission, there will be another look at the borrowing powers for the Scottish Parliament. As you said in the Scotland Bill committee, the idea that we had for the borrowing was, in addition to current capital, borrowing powers rather than being replaced by a prudential regime. However, in terms of ensuring that that can be whatever new limit or new powers can be scrutinised properly by both departments, what sort of timescale you are looking at in terms of establishing what those new powers should be, the extent of them, and what the new borrowing limit should be? It's a very good question. The answer is that the borrowing is part of the discussion about the fiscal framework. Smith recommended, and we've said in the command paper, and I think John Swinney and colleagues agree with this too, that establishing a fiscal framework is something that needs to be agreed between the two Governments, and it needs to be done at the same time as the legislation is advanced through the House of Commons. I would anticipate this being something that would be likely to be concluded by the next UK Government rather than this one, but where those discussions would need to be concluded very early in the next Parliament, not least so that both the House of Commons and the Scottish Parliament, in their consideration of the legislation, were able to have information about what the fiscal framework would be, because obviously it's important that people can see that that has been done fairly and with no detriment, because the no detriment issue is one that's important here, it's also one that's important to members of Parliament and the House of Commons from other parts of the United Kingdom as well as from Scotland. It's one of the things that I get quizzed about down there as well as here, so I would anticipate that it would be done early in the next UK Parliament alongside the introduction and debate on the legislation in the House of Commons. I think it's very helpful further information. Would the principle of Scottish cash reserve also be part of those discussions? On that issue, the committee's previously looked into the proposal that has come from the UK Government that, in terms of the use of funds from such reserve, the priority there must be given for dealing with any potential future deficits or outstanding debt, but the cabinet secretary here has argued that flexibility should be there to spend surplus tax receipts in government spending in other ways, which may sound economic reasons to do. What's your view and what's flexibility that should be for that? Again, how would the discussions take place in establishing such a reserve? We've already established a Scottish cash reserve. That's been agreed as part of the 2012 act. I'm sure that that's why you were debating it previously. There's not currently any money in it, because it comes in to force in April alongside the tax powers that are being devolved. The idea of the cash reserve is as a financial management tool in-year financial management, really to ensure that the Scottish Government can deliver its planned spending even if tax receipts turn out to be a little bit less than they forecast. What you want to make sure is that there's money there so that, let's say that you've built your budget on the basis of x hundred million pounds of stamp duty receipts, and it turns out to be 25 per cent less for whatever reasons. The cash reserve is there to manage that volatility. I think that it's actually quite important to build up the cash reserve to be available for that purpose. In this country, we've had bad experience in recent years of money being spent in good times and then not being available to help with economic problems when they emerge. I'd be reluctant to go down that route, but it's something that can be debated as part of the discussions on the financial framework. I think that we could debate that for some time, but I'll wish to move on to my final question, convene. We've had some discussion today about whether the Smith proposals go far enough. Clearly, we've been talking about the detailed proposal, but as other members have mentioned, there's certainly been in the debates in Westminster in the wider political sphere proposals that the legislation needs to go further and clearly the Scottish Government has also expressed that view. Has there been any official dialogue from the Scottish Government, with the UK Government, about what they see as deficiencies in proposals and their proposals for those areas where Smith's commission should specifically go further than the legislation that has been tabled? Obviously, the SNP representatives at the Smith commission made arguments in some areas that they wanted to go further, but they also signed up to what was agreed. There have been some specific but misconceived comments about the content of some of the closies. I'm not aware of any formal representations that we've received about specific, further powers that would like to be included in this process since the publication of the command paper. Obviously, there's a lot of political rhetoric. I'm not complaining about that with all politicians, but I'm not aware of any representations that have been made for further things that want to be included. In a sense, the whole point of the Smith commission process was to have a cross-party dialogue to hear all those arguments and reach a way forward. I think that this is a really strong and radical plan for Scotland. I just hope that we can all get on with implementing it now and not keep picking away at it. There are one or two elements in Smith that haven't been yet followed through. He made some personal recommendations in the report, as well as what was agreed on a cross-party basis. To my mind, the most important of those is about the devolution of power within Scotland. Naturally enough, the process in the command paper is about the devolution of financial and other powers from the UK level to the Scottish level. To my mind, there's a real danger now for Scotland that we've become one of the most centralised places in the world. There's a lot of power concentrated here in Edinburgh. You may all agree with that. I think that there's a really strong case now, including on the financial powers, to seeing how some of those could be distributed to local authorities, to regions, and to different parts of Scotland. I hope that that's something that this Parliament and potentially this committee would want to take a leading role in pushing through. I think that often we talk about the five political parties being in the room and everybody being and so on, but surely the 17,000 applications to the Smith commission and comments and concerns from ordinary people from everybody else, at what point did you consider those and do you feel that they should be recognised? I mean, there are a lot of concerns about the Smith commission and a lot of issues that were raised by literally thousands of people who were not taken up. How do you address that? No, I understand that, and I also recognise that, as it were, you don't speak for any of the parties that was in that room. You're independent MSP and so in a different status, and I fully respect that. It was for the Smith commission to consider all the representations that it received when it drew up its recommendations, and whilst it had a short timescale—both Lord Smith and the other commissioners—I know spent quite a lot of time in their process engaging with civil society in Scotland, engaging in consultation. That report was presented as being the conclusions that they reached off the back of all the work that they did. What we have done is sought to take this forward, bring forward draft clauses. Of course, we very much welcome engagement and comment on the precise clauses that were put forward. If there are ways in which they can be improved, then that's all to the good. However, it was for the Smith commission itself to really listen to the representations that it received and consider those before making the recommendations that they did. Good morning. Touching probably on a number of issues that have been raised already and building on them, and no detriment has been mentioned once or twice. I think that the LBTT plan with the first stalling sounds very good, because that sounds absolutely common sense and I think that that's positive. There have been some other things in the past, for example, the very fact that SRIT was being introduced, which was a Westminster decision, and yet all of the costs of that fell on the Scottish Parliament. It has been a wee bit patchy. Are you confident that, going forward, we can be clear on those issues of no detriment? Yes, I am. It is helpful that the Smith commission was so clear about what it meant by no detriment, including on the subject of administration costs and how that should be handled. Of course, there's lots of detail that has to be worked on behind that, but the principles that are set down are really clear. I think that we have usefully expanded on those principles and explained how they could work in the command paper. The answer to the question is yes, I am confident that we can achieve that outcome that you are looking for. If we took something like air passenger duty, I think that there is concern in the north of England that some of the passengers might leave from Scotland if air passenger duty was lower. At the moment, we are in a situation where a lot of Scots would go to say Manchester airport and fly from there because there are more flights. If we can get some of them back, there would be a detriment to Manchester airport. Personally, I think that would be a good thing, but they might get less people flying. Would we be expected to compensate them? The whole way that the financial framework works is something that the UK Government and the Scottish Government have to agree. We haven't spent a lot of time debating that particular issue, although I would say that where you have economic consequences of that sort, that's just a feature of the modest degree of tax competition that would be introduced by a lower rate of air passenger duty. That would be for the UK Government and the relevant local authorities and so on in those areas to work through what was done. Of course, a lot of the calculations that have been done on this and HMIC published some work on air passenger duty back in 2012, I think it was. That was based on looking at if stamp duty was reduced to zero in Scotland, what would be the effect on Newcastle and Manchester. I think that then it was forecast to be a 10 per cent reduction in Newcastle and a 3 per cent in Manchester. You will have to decide what you do with the air passenger duty powers once they are devolved, but I haven't heard proposals for reducing it to zero from any party in Scotland so far. I suspect that, in other words, the effects would be much more modest. Equally, if, for example, the Scottish Government put in place some more generous welfare provisions under the powers and people moved to Scotland in order to claim those benefits, then those are payments that would have to be made by the Scottish Government, because that would be a consequence of the decisions that had been made. You are not anticipating loads and loads of payments and counter payments and compensation. I am not. It is a very good point, which I should have said earlier. It is really important that we come up with a framework that is as simple and as automatic as possible, the less need there is for inter-governmental negotiations day by day, week by week, the better. You said that it is a devolved tax. It is not as devolved as landfill tax, so it is kind of hybrid, I guess. We would have control over the bans and the rates, as I understand it, but not over the personal allowance. Some people have said that the personal allowance is effectively a zero-rate band, but would it not be logical to put it in as well? You are right to say that the Scottish... The Smith recommendations on what we were implementing here is full control of the rates and bans and all the revenues that come from that. I would say that that is not a hybrid. That is a very full form of devolution, but you are right that there are certain aspects. The tax base, the reliefs, the personal allowance, which remain at a UK level, and that is for a combination of efficiency in terms of the administration of the tax, which is important for all taxpayers, and the particular role that the personal allowance plays, I believe, in the wider economic incentives in the labour market. However, it would be open to you to decide that you wanted to have a zero-rate band. That is an option that is open to you. What you would not be able to do is to say that we wish to reduce the personal allowance and that people should start paying income tax at a lower rate than you do in Scotland, because the personal allowance is reserved. However, if you decided that you wanted to have a zero-rate band above that, that is a matter that is open to you. What is the underlying logic that we could not reduce the personal allowance or the zero-rate band as it currently is, but we could increase it? In a sense, the logic is that that was what was recommended by the Smith commission, and that is what we are implementing. The overall economic logic is to say that matters relate to the smooth operation of the labour market across the UK and matters that relate to the smooth operation of the economic single market across the UK. Those are both things that are economic assets that being part of the UK brings to Scotland. I personally would not wish to see changes to those things, which then undermine the ability of Scotland to play and fully benefit from being part of a wider UK single market. It is one of the strengths that we get from being part of the United Kingdom. I believe that we might disagree about that, but that would be my take on it. The level of the personal allowance, the starting salary, the amount that you have to earn before you start paying income tax, is part of what determines the incentives to work across the UK. It is one of the reasons that I have advocated the big increases of the personal allowance that was seen in the course of this Parliament, the Lib Dem policy that is being implemented to the benefit of most Scots. The logic is that that starting point is something that gives people a strong incentive to work and helps to create jobs and has helped to cause the very strong job creation performance that we have seen in Scotland and across the UK over the past few years. Reducing that would therefore reduce the incentives to work and reduce the effective operation of the UK labour market, which is part of the Smith commission, so I do not know what the nature of the discussions that they had about that was. From my point of view, I think that that is the argument for keeping the personal allowance as a UK-wide thing. If we accept your argument that the personal allowance is part of the fundamentals of the whole thing along with the allowances and various other things that are being reserved, would it not be logical, as has been mentioned already, that all that has to be decided first and then the rates and the bans get decided second? Whereas we seem to be in danger of being in the situation where the rates and the bans have to be decided first, i.e. here, and then maybe other things get changed to do with income tax later on. The Liberal Democrats have always been quite keen on modern Government, which I respect you for. Is there not any room, in other words, for Westminster to modernise things? As I said in answer to the earlier questions on the subject, timing is something that can be looked at. In practice, the administrative reality is the other way around. For reasons that I cannot claim to understand, I am sure that Lindsay could expound on at length in the remaining three and a half minutes. It is much simpler for HMRC to change rates than it is to change personal allowances. The personal allowance affects your tax code, so in practice you cannot change the personal allowance in a budget to be implemented in 10 days' time or two weeks' time or whatever. You can change income tax rates. What has been devolved is the part of the system upon which there is more flexibility, what are the rates and so on. The personal allowance is something that takes longer to feed through into the system, so I think that the reality is the other way around. VAT has been mentioned by Malcolm Chisholm.  For example, I have got a biscuit factory that makes biscuits in my constituency, but a lot of the biscuits would be going south. On the VAT point, if it is purely based on the final consumer, we would get very little from that, whereas if the added value of making these biscuits in Glasgow, we would get the VAT on that added value, which obviously boosts the economy and reflects how well the Government is doing. Would you at least accept that that is something that is worth looking at? I think that that is something that is worth looking at. You would also say that it might also be worth looking at that there will be lots of biscuits coming from the south of the border, which people in Scotland will be consuming and paying VAT on. You might equally well say that we want to make sure that VAT paid by people in Scotland comes here, in which case that would argue for a system that said that it should be based on some way of assessing the VAT paid as opposed to the added value. There are different ways of looking at it, and I think that we should assess both. I think that the common sense understanding of what Smith recommended was that VAT paid by people living in Scotland ought to fund the expenditure of Scotland's Parliament, but there are a number of different ways of organising that. I certainly think that the point that you have made is worth looking at. It is probably worth saying that there are a number of different countries, as I am sure you are aware, that are signed about Australia, Spain, Germany. They all have slightly different ways of doing it, but we do have some good experience of different methodologies to work with the Scottish Government on that. My final point is to touch again on the question of the Scottish Fiscal Commission and the OBR. You seem to have suggested that it is better to have the forecast done independently, whereas the other model is to have the forecast checked independently, which is a slightly more of the SFC model. Ultimately, as long as somebody is independent looking at them, does it make a huge amount of difference whether it is an independent check or an independent production? Another example would be Audit Scotland to do a lot of checking, but it is quite a strong voice. It does make a difference. Any degree of independence is better than no independence, but I would say that the more fully independent the fiscal assessment is, the better. On your model of the checking, you still have politicians responsible for originating the forecast. That is a discussion that you have to have here. I would strongly recommend to you, particularly to you as a committee, that having forecast generated independently offers you the opportunity to give greater scrutiny to what the Scottish Government is then deciding to do, but you have to decide your view on that. The more you can take politicians out of that economic forecasting business, the more credible it would be. Particularly if you are thinking about, as other questions have implied, borrowing from the markets as opposed to borrowing from within the UK system, the markets will look very carefully at the credibility of the institutions. They will look very carefully at how genuinely robust is the framework that governs all of this. As one of the people responsible for implementing the OBR, one of the advantages of it, apart from improving decision making, has also been the extra market credibility that it is broad. I got the impression from the HMRC that they feel that they are doing the bulk of work anyway, and bringing in the OBR has not made a lot of difference. The HMRC is responsible for collecting taxes, and the OBR would never take that on. The HMRC does an extremely good job in that respect. It brings in hundreds of billions of pounds a year of relatively small costs. It is one of the most cost-effective parts of Government, and it is good on them. However, they produce the raw data, but it is then for the OBR to assess what they think it means. Of course, an economic forecast is looking at what has happened up to now, making judgments about what is likely to happen in the economy in the future, and then applying those judgments to the tax receipts that you expect to receive. HMRC does not do any of that stuff. That is independent. It used to be done by the Treasury, under the direction of ministers. It is now not. It is now done independently by the OBR. I think that that is a big improvement to policymaking. I would respectfully suggest that it would be a big improvement to policymaking here, too. How do we ensure that the block grant adjustment for 2016-17 is agreed before the draft Scottish budget? Are there any practical steps that can be taken? That is a matter for you in terms of how you do it. I would say that there is a strong recognition both in the UK Government and in the Scottish Government that, having started in this sensible workman-like way, we have a responsibility to make the next decisions in a timely way for your budget processes. If you were to recommend that or whatever, I think that that would be helpful, but that is your call not mine. Okay. Secondly, in terms of the block grant adjustment for 2015-16—the one that has been broadly agreed—you mentioned the element of forestalling that is still under discussion, and I think that you said that you are not in a position today to put numbers on it, although the OBR has given broad thoughts for 2014-15 and 2015-16. What is the mechanism for agreeing that? Are you going to wait until the end of the year and then work out what actually happened, or are you going to sit down with the Scottish Government and think that this is our best estimate of the situation and therefore we will take a view now and this is the extra funding that you get? Do you know how it will work out? Not absolutely. I think that the more logical thing to do would be to sit down relatively early in the next financial year and try to look at what has actually happened. Obviously, the Scottish Government is going to want to use this money for whatever purposes it chooses. I think that there is a perfectly good argument to say, let's get this on early in the next financial year, but I think that we would want to have a bit more evidence about the reality of what has happened. We are seeking to make a judgment about how much extra money have we actually received in practice because of this forestalling, and so we need the evidence to make that decision. Lastly, there is a very narrow point, but it is one that the Law Society and ICAS brought in front of us. There is a tax called the annual tax on enveloped dwellings, or ATAID. One of my achievements in the Treasury, I am very proud of it. I will be able to assist in that case. It was brought in to try to cut down on tax avoidance for SDLT. The Law Society raised the question if SDLT is being devolved. Should ATAID remain in Scotland, or has thought been given to how it would work in practice? Obviously, at the moment, with the threshold being £2 million in practice, it has not affected Scotland terribly much. As that threshold drops to £500,000, it is more likely. What is the UK Government view on ATAID? At the moment, we think that it operates pretty effectively as a UK system, because it is an anti-avoidance provision effectively. I saw John Swinney's letter to you, where I think he was implying that he felt that was perfectly acceptable. The issue of enveloped dwellings, in other words, people buying a house through a company, rather than as a person, in order to avoid paying stamp duty, has been particularly an issue in the housing market in London and the south-east. The evidence says that it has been much less of a problem here. Certainly, the revenues that we have received so far have been vastly predominantly from London and the south-east. I am happy to keep it under review and, if the Scottish Government has views about it, to talk to them about it. One of my worries would be that, if you are putting something in place to try and prevent avoidance, you do not then want to have different anti-avoidance systems, because you potentially create loopholes through which people can then choose to manipulate where they put their money, so that trying to keep those things as simple as possible would be better. It operates as an annual charge on properties. As we move down the threshold, we need to keep an eye on where that revenue is coming from. It is effectively a mansion tax for tax avoiders, and I hope to bring in a system of additional taxation on high-value property equivalent to the stamp duty system more generally, should we be successful in the next session. I will not comment on that, convener. I shall leave it at that. I am resisting taxation also. Thank you for that, Gavin. That concludes questions on the committee. I have one or two to wind up the session. You said in response to Gavin's questions about the block grant adjustment. You hoped that this would be resolved in a timely way, but it took about two and a half years for the block grant adjustment that we had just a few days ago to be agreed. Also, in response to Richard, you talked about MVA to be discussed and agreed with the Scottish Government. In terms of the whole fiscal framework, you talked about it being negotiated along with legislation in the next session of Parliament. One of my concerns—I am sure that I am not the only one—is that there seems to be a very open-ended process. I think that there are concerns at one, two or three years down the line that we might be still negotiating some of those issues. Is there any proposals to put some kind of timescale to try and conclude by a certain realistic date? If there is no timescale set, you have a mañana process where we will discuss that next week, resolve it next month. That absolutely cannot happen. It will not happen because there is a timetable that has been set out, because all parties have committed that the legislation to implement this will be passed in the first session of the next UK Parliament, in other words, the one that starts the first kind of year after the election. The legislation will need to be introduced and passed during the course of that session of Parliament. Clearly, both the UK Parliament and the Scottish Parliament want to know in debating that legislation what is the fiscal framework. That creates a very natural timescale, which means that over the course of the next few months we have to make progress on that and agree it. I would look at recent experience as being more encouraging, because although the block ground adjustment on stamp duty land tax, which in the scheme of things is a pretty small tax, took time, the block ground adjustment on income tax, which is a much chunkier part of the system, was agreed very smoothly and very quickly on the methodology that I described before. Because what we are dealing with here is a large basket of taxes, I think that the block ground adjustment methodology will be quite simple to agree. It is only because there is lots of fiddly detail and poor information around stamp duty land tax that it took time to agree. I think that it will be essential that the fiscal framework is agreed between the Governments in time that Parliament, both of the House of Commons and I am sure here too, can hear about it when it is considering the bill to implement this plan. Thank you for that. Just one final point. HM Treasury produced a document called a statement of funding policy funding the Scottish Parliament National Assembly for Wales in Northern Ireland assembly. It states in 2.25 of that document that the Government recognises that this statement of funding policy may need to be revised in response to those proposals in due course. That document has not been updated for five years. I am just wondering if there are any proposals to update it and whether or not the devolved Administrations will be consulted. Yes, there will definitely be consulted. It is generally updated around spending reviews or when there are significant episodes of devolution. It was last updated as part of the 2010 spending round and that was done with consultation and discussion with all the devolved Administrations. I can absolutely undertake that any further revisions will have full consultation around them as they have in the past. I wonder why it was that date in terms of following the Scotland Act. I can check that. From memory, there were not big further areas of expenditure that were devolved under the Scotland Act 2012. The statement of funding policy basically describes how the Barnett formula works, how adjustments get made and so on. I think that there were not new areas of new departments or new areas of policy that had funding attached. Where they have been, they have generally been quite modest since it has not needed the statement of funding policy to be updated. It has just been agreed in a more low-key way. We discussed it with the Scottish Government about the timing of the update and there was a mutual agreement that there was sensible time to do it. It would probably be in advance of the next spending round, partly for the reason that the chief secretary set out, and of course by then to take account of the Scotland Act devolution that will be being implemented at that time. Thank you very much for completing your question. I wonder if there is any further points that you want to make before we finish the session. I think so. We have not talked about the Crown Estate. Maybe that is not part of your remit, so I had a few things I wanted to say about that.  No, I am a strong supporter of the devolution of the Crown Estate. On Monday, I announced allocations from the coastal communities fund to coastal communities around Scotland and other parts of the UK. I think that it has been a good innovation. I have not yet heard from the Scottish Government whether they would continue with the coastal communities fund, and I would hope that they would. When the Crown Estate is devolved, it will continue to be a system that allocates a large chunk of the revenues from the marine resources that the Crown Estate is responsible for directly to coastal communities in Scotland. I think that that fund is administered independently on a bid process. I think that it has really shown some advantages to communities that were previously found it hard to find sources of funding for projects that would make a difference. I hope that the Scottish Government can undertake that this will not be the last round of the coastal communities fund in Scotland, that it will continue, albeit under a devolved framework in the future. You never know, John Swinney is coming to give evidence in a few minutes. No, thank you. I welcome the chance to come here. I doubt that I will come here again before the election. For me, it has been a real advance in the relationship between the Treasury and the Scottish Parliament to have the sessions. I hope that my successors, whoever they are, I do not exclude the possibility that it might be me, but we will continue that, because I think that it is valuable to this committee and it is also valuable to the UK Government to have this sort of engagement. We certainly find it valuable when we really appreciate being able to make the time to come and answer our questions this morning. Thank you very much. That being the end of this session, I am going to call a brief recess until 11.20 to allow an exchange of witnesses and a natural break from members. Malcolm Richard, I am going to restart. We will now continue our consideration of further fiscal devolution by taking evidence from John Swinney, Cabinet Secretary for Finance, Constitution and Economy, Cabinet Secretary for Finance as a Company, followed by Sean Neill, of the Scottish Government's Finance Directorate. I would like to welcome both to the meeting. Before we go to questions, I invite the Cabinet Secretary to make a brief opening statement. Good morning. I thank you for the opportunity to meet the committee this morning to address your questions on further fiscal devolution. I set out to Parliament yesterday the Government's view on the publication of the command paper and the associated clauses last Thursday, We must now look to move forward in developabilic kötü man's broad support. There are four areas of the command paper that i'r will to touch on very briefly. On tax raising powers, Smith presents scope for a total of 29 percent of tax revenues being или partially devolved toこれは rhaeg tnw hefyd. mae'r ystod o'r rhaid i'r drafffau yn y ddafod ar y dyfodol, ac mae'n dweud i'r ddweud i'r ddweud yn y ddweud o'r final. Felly, o'r fawr, o'r 14 per cent o fawr o fawr o'r prifysgwyd ysgolten ysgolten yn ei ddegolod, mae'n lidio i'r ddweud i'r fawr o fawr o fawr i'r ddweud i'r ddweud i'r ddweud i'r ddweud, a mae'n dweud i'r ddweud o'r 15 per cent o fawr o 14, i ffod y coronavirus o ddweud o'r £494 miliwn. Fawr o fawr o fawr o'r fawr o'r ddweud i'r defnyddio gwahanol, i rhaid i'r ddweud i'r ddweud o'r gwrsig, i'r gweithio at yr ogym braucht cael ei plesio. at this stage to confirm when those issues will be resolved. I had to reach a one-year agreement with Hermassie's Treasury as it became ever more important to have certainty for the Scottish budget, and this was the only solution that I could see being available in the timescale provided. That brings me to my final point. The negotiation around the fiscal framework will be more complex than negotiations on block grant adjustment for the Scotland Act 2012, although that experience is one that we can build on. There are new factors such as the no detriment policy, which will seek to identify the relative costs and benefits of different policy decisions and the block grant adjustment approach for the assignment of VT revenues. I welcome the UK Government's acknowledgement that we must move forward by negotiation and agreement in the many important issues that the fiscal framework will cover. There is clearly much to do to construct an agreed new fiscal framework that reflects the needs and interests of people in Scotland. Thank you very much for that very helpful opening statement. In fact, my question is probably centred on that before I go round the table and colleagues have the opportunity to ask their own questions. Let's talk about the fiscal framework. You talked about it being more complex than a block grant adjustment, which, as we know, has been a very long drawn-out process. We spoke to the chief secretary of the Treasury just before you came in. He said that he was of the view and asked about negotiations that he expected in terms of the fiscal framework to be tied up in the first year of the next UK Parliament. Is that a realistic timetable? Is that deliverable? I think that it depends on—I think that it is a realistic timetable, because, frankly, those discussions can take as long or as short as anyone wants to have. On the block grant adjustment, two and a half years of evidence gathering, different discussions, different research processes and blah blah blah, was sorted out in a 15-minute conversation between the chief secretary and I whom we agreed £494 million. I simply illustrate that contrast of timing of two and a half years to 15 minutes to say that if there is a will and a necessity to agree those issues, they can be agreed within a reasonable timescale. What influences the timescale that you have raised, convener, is the wider context within the fiscal framework that is set in terms of other changes that are envisaged by the Smith commission proposals and the draft clauses. Certainly, if there is to be any commencement of the provisions arising out of the Smith commission proposals, then at the same time—or certainly by that time—the fiscal framework should be agreed to enable everybody to know where they stand on some of those fiscal judgments. The chief secretary of treasury suggested that, once Smith is fully delivered, the block grant would be only 35 per cent of the Scottish budget. Is that a figure that you agree with? That the block grant would be 35 per cent. I do not recognise that number, convener. No, I do not. I was surprised by it, I must say myself. I thought that that was somewhat… No, I do not recognise that number. What would you put that figure at, cabinet secretary? Well, essentially, in terms of revenues under our control, the devolved taxes as a percentage of total revenues would be 29 per cent post Smith. Devolved and assigned taxes as a percentage of total revenues would be 37 per cent. Devolved and assigned taxes as a percentage of expenditure in Scotland taking into account all the changes under Smith would—the highest number that I could get it to—would be 48 per cent. That would leave the block grant at 52 per cent. What a significant difference. That would be my rough and ready response to your point. If you will allow me, convener, I will look again at what I have said on the official report, but that is how it feels to me. I will be very interested in this, and I think that it would be wise of the committee to write to the chief secretary, to the treasurer, to ask him to explain his figures, because we are not talking more than 2 per cent here. We are talking very significant margins. Let us just move on. Obviously, we have hit the publication of the clauses, etc. The chief secretary said that in terms of Smith and he, he is of the view, obviously, that that is a settled agreement with five parties. He says that no formal representations have yet been made. It is early days, obviously, on the clauses, but I wonder if the Scottish Government plans to make any representations in terms of extending his powers, if that is under consideration. I saw the exchanges with the chief secretary, and I think that it is important that we are very clear about what we are talking about here. There was a process in the Smith commission, which five political parties in Scotland took part in. An agreement was reached there. Without rehearsing all that I have said on behalf of the Scottish Government and the Scottish National Party, a one cent in summary would be to say that although we support what Smith delivers, it does not satisfy our ambitions. The duty of us now in the Scottish Government is to work constructively to translate the Smith commission proposals into legislative form and practical form as a consequence. In that respect, there have been a number of representations made to the UK Government about the design of the clauses. I went through some of that ground yesterday in Parliament, and even before we got to the publication of the command paper, we had given points and comments, some of which had been accepted, some hadn't been accepted to the UK Government of areas where we felt the clauses could be improved to effect the conclusions of the Smith commission. We raised particular issues. If I signal the single out one issue, which was the point about whether there was a veto over our ability to undertake changes on universal credit, the UK ministers have insisted that there is no veto, yet in clause 24 there are two bases upon which consent can be withheld, either on timing and on practicability. To go back to the point that you have just raised with me, convener, about the block grant adjustment, I have lost two years of my life on the block grant adjustment already. When people say, oh, timing cannot be used as an excuse, well bluntly I have lost two years of my life on the block grant adjustment as have numerous of my officials, as have numerous Treasury officials, and it was resolved in a 15-minute conversation with the chief secretary to Treasury prior to Christmas. I simply say that to indicate that people who say, oh, these are not real caveats, they are not difficulties, they are not a veto, I just asked people to look at that experience over the last couple of years and come to their own conclusion. The final point that I am making in your comment, convener, is really on Smith, if I can summarise all that I have said there, convener. The Scottish Government will work to make sure that Smith is translated into clauses that give it practical and legislative effect and we will do so. As to the question of making further representations to the United Kingdom Government about further powers, of course we want further powers beyond the contents of the Smith commission and those issues will be pursued in the normal course of parliamentary and political life. The terms of that debate will be set by, I would imagine, the outcome of the United Kingdom general election of me. I know that the stress and strains of the block grant adjustment because I seem to remember being a fool ahead of here two years ago. I wouldn't go quite that far, convener. In terms of intergovernmental machinery, the Smith commission stated that the current intergovernmental machinery between the Scottish and UK Governments, including the Joint Ministerial Committee, structures must be reformed as a matter of urgency and scaled up significantly to reflect the scope of the agreement that arrived at by the parties. I pointed out to the chief secretary that the Joint Exchequer Committee has not met for two years and the Quad has not met for 15 months. How concerned is the Scottish Government on that and are you pressing for those to be put on a much sounder footing in terms of what is the ability to deliver Smith promptly? My observation on all of this is that this dialogue has to be meaningful. The fact that the Quad has not met for 15 months does not mean that there is no dialogue between ministers on different issues. The chief secretary and I and other UK ministers are in touch on a variety of different issues and on resolving issues by latter. I think that my observation about the Joint Ministerial Committee or the Joint Exchequer Committee or even to an extent the French Minister's Quad, although certainly on one occasion in the French Minister's Quad a very real discussion was resolved involving the four administrations. That was about the establishment of a budget exchange mechanism where the UK Government intended to withdraw such a facility and the three devolved administrations said that we were not prepared to agree to that and we got to an outcome that we considered to be satisfactory. So I can think of at least one thing, one major element of our financial architecture, which was well constructed out of the Finance Minister's Quad. On the whole, the Joint Ministerial Committee, the Joint Exchequer Committee, the Finance Minister's Quad, they are a bit formal, they are a bit mechanical about what they are doing. I am not sure that they are particularly meaningful, other than on that particular example that I have given about the budget exchange mechanism. I think that most of the business is transacted in a bilateral fashion because an issue that affects me and the Scottish Government might not be the same issue that affects my counterpart in Northern Ireland, and we would all obviously reserve our right to pursue the issues about which we are concerned bilaterally. I think that the experience of the Joint Exchequer Committee, for example, which was put into these arrangements post-Kalman, to try to resolve some of the financial issues that has failed, it has proved no useful function in relation to the agreement of the block grant adjustment. I understand what you are saying about some of these formal meetings, but how do you ensure accountability and transparency if things are done on an informal basis? You talked about your 15-minute conversation with regard to the block grant adjustment. Throughout the process of evidence-taking, we have had numerous professors. I quoted about eight different ones to the chief secretary during my exchanges with him, all of whom he stressed the importance of accountability and transparency across this entire process. I am just wondering how you ensure that. I agree with that, convener, and it is essentially what I have tried to do. Of course, I am always prepared to consider carefully what the finance committee says about how that has been handled, but, without compromising the ability to undertake a negotiation with the UK Government, which I think that the chief secretary has confirmed this morning, those issues are actively negotiated by both Governments. Without compromising that necessary requirement for negotiation, I try to ensure that this committee is advised of as much information as I can about the sequence of events that we are taking. I am a fairly frequent attender of the committee. The committee has been able to ask me on different occasions about progress on the block grant adjustment, and I have given accurate assessments of where we are in the process on every occasion and where I had the opportunity to advise the committee about the level of the block grant adjustment that had been agreed. I did that as timid as I could. I think that, however, convener, there is a general point about accountability and transparency given the sensitivity of the issues with which we are now dealing that has to be reflected very strongly by both Governments. Thank you for that. I have just got one further point before I open up to colleagues around the table. When I asked the chief secretary if there was any further points to make to the committee, he was enthusiastic about the devolution of the crown estate, and he asked whether it was a rhetorical question to us, but I am sure that he is quite keen for me, or one of my colleagues, to ask you whether consideration will be given to a continuation of the coastal communities fund. Do you have any thoughts at this stage on that? The Government has taken no detailed decisions about that point, but the coastal communities fund is a very good initiative. We have been supportive of its establishment, and I can see no reason why the Scottish Government would not continue the coastal communities fund. Thank you very much for that clear answer. The first colleague to ask questions will be Richard to be followed by Malcolm. Thank you very much, convener. I just want to follow up with one question after the convener raised the issue of dialogue with the UK Government on powers going beyond what has been proposed by the Smith commission. Reflecting on your response, is it fair to say, represent your view and please tell me if it is not fair, we wish to be unfair to you, that it is in fact the Scottish Government's intention to make representations after the next UK election that should be further devolution of powers through that legislation to the extent of full fiscal autonomy? Let me try to explain again the difference in the context of what I was trying to say to the convener. The Scottish National Party signed up to the Smith commission, and since we have helped the Scottish National Party Government, we have a Government that will implement the terms of the Smith commission and will participate to enable that to happen. The Government's approach will ensure that the terms of the Smith commission agreement are translated into legislative and practical form and within the spirit of what was envisaged by the Smith commission. We will not try to use that process of the Smith dialogue to get extra powers because there was an agreement that we have to see translated into reality. However, the dynamics of the United Kingdom general election will, of itself, create a political scenario that is likely to be very different from the one that we faced just now. In that context, the Scottish Government has made no secret of the fact that we believe that the Scottish Parliament should acquire more powers and we will seek to use the political process to enable us to secure such powers. The Scottish Government's belief is that Scotland will be best served by exercising full fiscal autonomy. Is the Scottish Government at this point in a position to say what those powers should be, or is that something that you are going to leave for me? I think that any reading of what we submitted to the Smith commission as the submission of the Scottish National Party by the nature of the Scottish Government is a summary of that position. In your letter to us, the committee, to Kenny actually, but to us, the committee more generally, of the 19th of January, you said that if stamp duty lang tax had applied in Scotland next year, it would have raised £198 million. That is the revenue foregone by the UK Government next year. In your letter to us of the 22nd of January, you said that land building transaction tax you would raise £235 million from it next year. I am puzzled by the discrepancy between those two figures. If you are pursuing a policy of revenue neutrality, one would have expected those two figures to be the same. If that was the case, we would have had a block grant adjustment of £461 million, but we do not have a block grant adjustment of £461 million. We have a block grant adjustment of £494 million. That is fundamentally the difference between those two figures. The figure that Mr Chisholm quotes to me of £198 million is what we believe would be realised by the application of the UK Government's stamp duty proposals post-autom statement in Scotland in 2015-16. That is part of a total amount of tax that is raised out of stamp duty and landfill tax of £461 million. That was the OBR, a UK Government estimate of what would be raised. Sorry, that was my estimate of what would be raised, but the UK Government's estimate was much higher at £524 million. What the chief secretary and I agreed to do was to split the difference and have a block grant adjustment of £494 million. The tax figures that I have shared with the committee are predicated on revenue neutrality being anchored around about £494 million. Why have you put all that difference on to land-building transaction tax residential? You would have expected that you would have split the difference on all three of the elements of the block grant. The tax is relevant to the block grant adjustment. No, because I have maintained that I have no reason to change my estimate on non-residential transactions. I set out that basis and I have no basis for changing that. I have no basis for changing the landfill tax element of the proposals. The only one that has changed is residential transactions on land and buildings transaction tax. You do not agree with the UK estimates for any of those three, so why have you adjusted it for one? I have confidence in the estimates that I have made around those other factors. The only one of the tax that is changing is the residential element of LBTT. You have not got confidence around your estimate of £198 million for land-building transaction tax. I have confidence in the estimates that I have made and I have set a tax to realise that sum of money. In general, your personal belief is that people will be paying more in land-building transaction tax than they would have done if stamp duty tax had continued in Scotland next year. Your personal belief is that that would have raised £198 million, whereas you are now saying that your taxes will raise £235 million. What I have got to aim against is—the estimates are all very well, but what I have to aim against is what is the block grant adjustment. If I want to maintain revenue neutrality, I have to raise £494 million. If I raise £461 million, I will not be delivering revenue neutrality. I will be delivering a tax reduction of £33 million, which is not my intention. I have never said that to pan. I said that I would deliver revenue neutrality. Essentially, if I have confidence in the component numbers that get to non-residential transactions of £146 million, and if I have confidence in my estimates that land-fill tax will deliver £117 million, and the only one that has changed is residential taxation, then that is the number that I have to achieve to deliver revenue neutrality. You do not really have confidence that you will raise £235 million. It is just the compromise that you have had to arrive at with the UK Treasury. I have had to set a tax rate to deliver revenue neutrality, and revenue neutrality has been specified by my agreement with the United Kingdom Government of £494 million as a block grant adjustment. Of course, the assessment of all the tax estimates that I have made have been certified as reasonable by the Scottish Fiscal Commission, whether that is the estimate on land-fill tax, the estimate on non-residential transactions or the estimate of residential transactions. I think that we will all reflect further on that. You said that you listened to what the chief secretary was saying. Obviously, our report did express concerns about the block grant adjustment based to a large extent on your own evidence, but he said that he very much accepted the principle of if we do things to boost the economy, we get the benefits of that, which is obviously one of the founding principles, if not the founding principle of fiscal devolution. I am still lacking clarity about what the point of difference is, because you were saying that the constraining factor was going to have a negative effect on the Barnett formula, and he was more or less denying that. It is a bit confusing for us still to know exactly what is the fundamental point of dispute still about the block grant adjustment for the land-fill tax and the land-building transaction tax. There are a number of things in this answer. Forgive me if I go through some of the detail. It might take me a little bit of time to do that. In the command paper in 2010, when it came to the issue of what are called the smaller taxes, stamp duty land tax and landfill tax, the command paper said that there would be a one-off cash adjustment to the block grant, and that was it. When the command paper talked about the Scottish rate of income tax, it talked about a one-off adjustment and an indexation factor. The indexation point was clearly put in about the Scottish rate of income tax, but it was omitted when it came to stamp duty land tax and landfill tax. When I started getting into negotiations with the UK Government, suddenly indexation was added in to the smaller taxes. The meeting that the convener talked about of the Joint Exchequer Committee, the entire discussion was me resisting agreement about indexation being applied to the first initial block grant adjustment, because I wanted, and the issue that I was concerned about most was that this Parliament had approved an LCM, or a legislative consent motion on the Scotland Act, on the basis of that command paper statement, that it was a one-off cash adjustment with no indexation. After some time of making no progress, I accepted that there could be an indexation factor. When we started discussing that, we suddenly started having a discussion about yes indexation, and I suggested that we should index to, for example, the GDP deflator, so that it would rise with changes in the economy over time. The Treasury advanced a model that was essentially to be a constrained model, so we would try to predict stamp duty out until 2029-2030, which would specify how much tax we envisage would be raised there, and then would calculate an index mechanism that would enable us Scotland to be no better or no worse off after all that calculation out to 2029-2030. The committee will not be surprised to hear that that was going to happen over my dead body. If the UK Government could not predict the collapse and stamp duty in 2007 that took place in 2009, how on earth could anybody tell us what it was going to be in 2029-2030? It was an absurd proposition. We have not heard much about that for a while, but we have not heard much about that for a while because we have just done a one-year deal. I caution the committee when we get into looking at the wider issues about the fiscal framework and where that all leads, and particularly the design of the no detriment principle, I warn the committee that our friend the constraining factor might actually make a reappearance. In a nutshell, that is a summary of the areas of dispute. I know that sometimes I get accused of being obstructive for the sake of being obstructive. I am putting in place arguments to protect the financial wellbeing of the Parliament and of Scotland. Anyone that signed up to that constraining factor approach would not have been signing up to a deal that was in the best interests of Scotland. I am sure that we will continue to take a close interest on that and may well follow up with the chief secretary, because it is difficult to match what he was saying. I would like to touch on similar subjects to what I did with the chief secretary to the treasury, and the first one being the phrase that he just used, just now, no detriment. It appears in land-building transaction tax the fact that it is willing to talk about forstalling, compensation or whatever in there. That sounds quite positive, but we have had other experiences where it did not seem so positive. For example, they decided about the Scottish rate of income tax. We have to pay the entire HMRC costs, as I understand it, which does not strike me as no detriment. That is in the immediate cost circle. I asked him too about APD and say that Manchester loses passengers. Are we expected to compensate Manchester? Are you confident about this no detriment, what it means, that we are going to go forward and it is not going to be a problem? I think that the best way that I could sum it up is that it is not currently well defined. It is a concept that I think expressed simply that the Scottish Government or the United Kingdom Government should be no better off or no worse off respectively as a consequence of the act of devolution. That is what I think is the headline summary of no detriment. When it is attempted then to turn that principle into reality, I think that we will have a few years like the block grant adjustment, because that will be material to determine some of the issues that Mr Mason has raised with the chief secretary about compensation around APD. I would reject that argument completely. To me, no detriment on APD is that we have a block grant adjustment that makes us no better off or no worse off than the act of devolving APD. Send up to us what we do with it and what we do with the proceeds and the benefits or the challenges. Another subject is the whole question of the timing of changes, the Westminster budget, as compared to our budget. Mr Alexander seemed quite relaxed as to which happened first. He also said that income tax is a devolved tax. First of all, I do not know whether you would agree that income tax is a devolved tax. I mean, it seems to me that a lot of the underlying rules about income tax are being set at Westminster and it would seem to me that it would make more sense if they had fixed the outlying principles before we had to make our decisions about the rates and the bans. I mean, is that an area that you are concerned about or what? First of all, I do not actually have a copy of the actual Smith report in front of me, but my vivid recollection of the—I do have that, thank you—a paragraph 75 of the Smith commission agreement, income tax, will remain a shared tax. That is what the Smith commission said about it. I think that that is the only way that one can consider that. There was a very clear view within the Smith commission, with which I disagreed, that some elements of income tax had to remain shared for there to be a remaining United Kingdom. I think that it might have had something to do with English votes for English laws, but, for me, the Smith commission agreement makes it quite clear that this is a shared tax, so it is not entirely devolved tax. We do not have control of the whole of income tax, so how in earth can it be a devolved tax? On the interaction about budget decisions, we have a budget process in this Parliament, which is fundamentally differently constructed to that in Westminster. It is a product of the openness and the transparency of this institution. It is founded on the need for dialogue. When I publish a budget normally by 20 September, which I am required by the French Committee to do, that is called a draft budget. It is the subject of consultation before Parliament legislates for it in detail as we are currently doing as we are going to come on to do later on this morning at stage 2. We interact on the details and the specifics. The Westminster budget process is a completely different process, as we saw on stamp duty land tax, where, without a government here, sometimes it gets criticised for a lack of adequate consultation on certain issues, while something that you announce at 25 past 12 in the afternoon, which becomes effective at midnight, does not involve much scope for consultation. That is the Westminster system, that is the way it is. That is how Westminster was constructed. We were constructed differently as an institution. No, I do not think that it is a particularly desirable model, because it does not... The other side of the coin is that where we go through our legitimate processes, which are a product of the nature of this institution, inevitably that is a different process to what happens in Westminster. That exposes us to the risks that we faced as a consequence of the Chancellor's actions in December in changing stamp duty when we had undertaken a well-consulted reform that we had been talking about for some considerable time. We completed that process, we announced our proposals and then we found further down the track that the Chancellor was able to use the pantomime of the Westminster system to do something different for it to have effect much quicker than we could bring our proposals into effect. Can that be changed or is that just inevitable going forward? Well, I think that that is a question that is predicated on reform of the United Kingdom Parliament and budget process, which I would be fundamentally pessimistic for all time, given my experience. The third area was VAT. We had different ideas from some of our witnesses as to how the VAT would be split up. One suggestion is that it would be just at the end of the process when the consumer buys something that bit of the vat would either stay in Scotland or stay in England or whatever. There is the other idea that VAT is, by its name, value added at different stages. For example, a factory in Scotland might be very successful and might export a lot of things to England and elsewhere, and there would be VAT added there. Therefore, should we get a share of that? Have you got a view on that question? I do not have a definitive view. Obviously, the Smith commission agreement obliges me in, as part of the fiscal framework discussions, to engage in discussion with the United Kingdom Government on those points. However, I think that the issues that Mr Mason raises are material to ensuring that we end up with what the Smith commission agreement required of us, which was an assessment based on a verified basis that was agreed between the United Kingdom and the Scottish Government. I think that we should be very open to the different elements of academic opinion that are clearly expressed in this debate so that we can reflect that in our discussions. The final area was the OBR and the Scottish Fiscal Commission. Mr Alexander suggested that the OBR is a better model because it is more independent, although we have had different views on that. For example, HMRC does most of the work anyway, so OBR is not that independent. The Scottish Fiscal Commission is independent, although it is not producing the forecasts, commenting on other forecasts. What is your view on that now? We went through most of the issues when Parliament considered the arrangements for the establishment of the fiscal commission and the committee was immersed in that process. We will look again at those when we legislate for the Scottish Fiscal Commission, which will be in the parliamentary year 2015-16. We will have an opportunity to reflect on those points. The arrangements that we have just now are entirely satisfactory. The Scottish Fiscal Commission has a veto over my forecast. If the Scottish Fiscal Commission does not believe my forecast to be valid, it will say so. I have no doubt that it will do that. Therefore, it has a veto on my forecast. Our approach is the more honest and transparent. We do the numbers, we hand them to the Fiscal Commission, they look at them and, if they are satisfied with them, they will say so. If they are not, they will veto them. In the UK, we got all this stuff about all we have got this Uber independent OBR process when, in fact, HMRC is doing most of the legwork. It is not an honest and transparent process. HMRC is doing most of the work behind the scenes and, given the data to the OBR, it is probably doing no different to them than the Scottish Fiscal Commission is doing to our numbers. I dare say that if the OBR said to the Treasury, look at that number, it is ridiculous. You cannot have that. The Treasury would have to respond to it. I accept that the Scottish Fiscal Commission will be provided with our numbers and they will consider them and, if they have confidence in them, they will say so, and if they do not, they will veto them. Cabinet Secretary, we will stick with the Scottish Fiscal Commission then, because we are on that. You have said that you are going to legislate in parliamentary year 15-16, so that will be in September of this year. You would announce that as a formal bill. Can some work not be done in advance of that? Obviously, at the moment, it looks only a little bit of business rates, but primarily at landfill tax and LBTT. Would you envisage them having any role in relation to the Scottish rate of income tax for April 2016, in which case work needs to begin a bit sooner than in September? Again, we have gone through some of this territory before, and I rehearsed it in the speech that I used to close the parliamentary debate on Wednesday last week. I have made clear that the—I may have picked this up wrongly, but I thought that I was operating within the spirit of where the finance committee's line of questioning was to me before we established the fiscal commission. I got the strong sense from the finance committee that it did not want me creating a fiscal commission that would run away with itself and do all sorts of things beyond the existing responsibilities of the Parliament. I set up the fiscal commission on the basis of getting the commission to look at our new responsibility—some of our historic responsibilities are NDRI, some of our new responsibilities are land and buildings, transaction tax and landfill tax. As new powers came along, we would expand the remit of the fiscal commission. That is exactly what I set out to Parliament, that is exactly what we will do. Obviously, as we begin to work towards the emergence of new powers, that will, of course, take its course. Although, as Mr Brown will know, on the Scottish rate of income tax, we are not in a—we are in a shadow period for some time before the full formal responsibility for our element of income tax comes our way. Although, of course, that will now have to interact with what the Smith commission has produced, because the income tax powers are different from the Smith commission to th