Finance and Public Administration Committee

Good morning and welcome to what what's our fourth uh meeting of the finance and public administration committee and session seven. Um I've got one apology for today's meeting which is uh normal convenor CLA hawk. So um panel's got the joys of me convening uh the meeting. So the first item of business is to decide whether to take agenda item three in private and to take future items to consider evidence heard during the pre pre-budget scrutiny 2720 in private. So uh do we have agreement from the committee? >> Thank you. Okay. So the next item on our agenda is to take evidence from the committee's pre-budget scrutiny 2728 which is about affordability and sustainability of Scotland's tax and spending plans. Um can I welcome the two witnesses uh this morning from panel one. Um we've got Professor David Bell, professor of economics at the University of Sterling and uh Dr. Sha Souza, senior research economist at the Institute for Fiscal Studies. Um, so just a reminder, I think these are well seasoned being before the committee, but um, not to worry about turning on your microphones during the the session because these are controlled automatically by broadcasting. If you do want to come in during a discussion, please raise your hand or indicate the clocks and we'll try and facilitate that as best we can. So, if we just quickly move on to questions um, and I'll call Michael Mara to do opening question, please. Thank you, Camina. Um, thanks nice to see you both this morning on I'm going to start with issues of sustainability, fiscal sustainability and thank you to you both for your submissions. Um, Professor Bell, you say in your submission that the the savings that the government has identified remains and I quote targets or plans rather than demonstrated recurring reductions and expenditure. Um, would you perhaps like to set out a little bit of context for us as to why that's your view? Well, so I think that the um sorry the the the program for government as has set out thus far is uh identifies in general a number of areas in which savings might be made. But I think we're now at the stage where we need to be much more precise about where savings can be made. And there are there are acknowledged serious uh dangers that we will exceed the um current plans around issues such as public sector pay and also spending on uh on welfare. uh and these may may jeopardize the the achievement of of the savings that are that are currently proposed and without a very a more precise uh explanation of how these savings are going to be achieved. There is a danger that we kind of drift into situation where uh savings are are made uh in a in a way that is not beneficial in terms of service provision because uh they're they're effectively being made uh at the last minute to achieve um budget balance which the Scottish government has to achieve. >> Dr. exerciser. Would you generally agree on the issue of sustainability and lack of clarity? >> I agree with with what um Professor Bell said regarding the the lack of detail. Um we have noted in our submission that um two about twothirds of of um savings in terms of efficiencies are meant to come from the health and social care portfolio, but lots of that come is meant to come from NHS boards. Now I understand that there there is a um [clears throat] there's some uh discussion as to what form reorganization of the NHS might take. It's it's still very stretching um set of targets if those don't materialize and and audit Scotland highlighted that um B NHS boards have actually mostly failed to meet what were less stretching targets than these um and so that's not guarantee of of what will happen but you might think that that informs what you might expect to happen in the next few years. Then the real um problem is that you end up in a situation where you might have to live with a a unless you can find funding from other areas which is possible. You might live in in a situation where you just can't do as much as you would otherwise want to do. Um and obviously you know that's that's not an ideal situation. So so that's something that that that is important. And the other thing is that say you know just becoming more productive um in in in some things doesn't necessarily mean that that actually releases cash to be saved. Uh and that's another thing that we highlighted. Uh so you might think that for example the NHS might be become more productive um at doing some sort of of of elective surgery for example but unless you then have control on top of that to ensure that you're not then filling that with additional activity which might be demanded by by the population and therefore you know you might assume that that's a good thing but from a financial sustainability point of view those have to be bankable savings for for the suns to end And if I can come on that point, you you mentioned the NHS savings and one thing that I think committee in the last session found difficult to get clarity on was the status of those savings as it pertained to the deficit. Um because there was talk that this these savings could be reinvested within boards in inance most likely to try and meet a 26 waiting 26 week waiting time guarantee or others there'll be returns to the front line. Do you think there's clarity in terms of the whether that saving should contribute to the overall5 billion pound deficit or whether actually it's about funding expansion of provision? >> I I guess I would say there's the the health and social care area in particular are where there is least clarity in terms of of where the the savings will come from. Um it's it it's you know it depends what the priorities of the government are going to be. So the government is perfectly within its within its per can decide that it wants to do that. But these are not easy decisions. None of these come without tradeoffs. Um and if you want to spend more on health to meet particular targets. Um then the funding has to come from somewhere. um you know it's so so just just spending more without finding the the tradeoff of to where it comes from um doesn't necessarily answer the the question of financial sustainability. Could it could I I just add to that? I mean um the one point that I make in my paper is is around services that are demandled uh and and those include uh health and social care to a certain extent uh and also the welfare budget and it is very difficult to um a manage a budget that is more or less fixed with uh elements that are effectively demandled and you you it's eligibility that that determines how much you're going to spend and the consequence of course is that if the demandled uh elements of the budget increase other parts of the budget have to decline. >> Okay. And and you've both mentioned the program for government last week and the first minister's presentation of that to parliament. Uh there was a lot of discussion about change in the public services. So particularly um around the NHS reform to boards and councils. Just focusing on the NHS issue again, you you've both um raised that. I mean, is it clear to you whether these plans are devised to deliver savings to the overall budget or whether they will are about delivering better services because the actual discussion of the 5 billion pounds uh deficit was was pretty absent from the presentation to parliament. >> Professor Bell. Well, I I've got to agree that that there isn't sufficient detail as yet about how these plans might be carried forward. You know, what will actually be the geography of uh of the new boards? >> Can I push you on on one point in there though, the whether given your previous experience, a long-term observer of these processes, um is there a risk around upfront costs to reorganization? So you know for instance the uh changes to the police single police service there's significant upfront cost over a period of years and whether we might see a reorganization costing money rather than saving money. I mean my my view certainly is that is that in the short term yes you it could increase costs because uh you don't um reorganize a workforce uh very significantly without incurring costs what whatever I mean these may come in different forms but but major reorganization always involves some upfront cost >> that's not necessarily a reason not to do it uh because if you if you think that the the benefits of running it further down the line in a more streamlined way are going to outweigh that then then that's a reason for going for it but it I think it naturally does take up both cost but also time. Uh one of the things that that that is important to note is that we are you know in year we're partway through the the the public sector reform program already. Um and so It's it's unlikely that this is going to happen overnight. Well, it's not possible that it will happen overnight. So, it's unlikely that it's going to deliver savings immediately. Again, that's not necessarily a reason not to do it. Uh but it's something to to bear in mind as to um when those savings will be delivered because the the the the budget balancing has to happen across the piece. Um, I would say that I I wouldn't focus necessarily too much on on the 5 billion pounds that from the MTFS because clearly there's been plans subsequent to that that have reduced the the spending plans. Um, there are still pressures on top of that. Um but there has been a kind of a a recognition of you know the the MTFS was in some sense the medium-term financial strategy was a pre- prioritization document um in my view so it was listing all the things all the pressures that might happen and then the the spending review was kind of saying well actually the funding isn't going to be there to to match that so this is how much we actually plan to spend which is significantly less per year uh which would would have to have been the case in all situations because uh the deficit cannot materialize. So on that issue of path to savings and we have do you feel what you've heard in the last week is commensurate to the scale of the challenge on pace because we have you know we know that in the coming couple of years we've got a significant block grant adjustment really constrained uh fiscal settlement. We so we know the shape of that. We also know the shape to some extent through the fiscal sustainability delivery plan of where we have to get to. So last week we heard two essential parts of uh the conversation about significant change, health board reform and a pretty broad woolly conversation about local authority reform. Um I'm not one to judge either of those things. My question is about the path to sustainability and whether actually it will give us the pace required to meet the outcomes that that to meet the the budget deficit. I don't [clears throat] the signals that that I've been able to detect thus far don't really indicate that at the moment we're we're we're on that path. I mean I I did um highlight already the issue of public sector pay but that's going to be a very difficult issue uh a forthcoming uh given given the way that uh settlements have already been made and the commitments associated with those settlements seem to me that uh in terms of the of the uh trajectory that we might expect public sector pay to take. it's not commensurate with the kind of savings that we're also thinking about. >> I uh I think that there's a there's to to your comment about path 202728 looks like a really really tough budget. Um there's the the reconciliation uh next year. There's also the fact that the the block grant is falling in in real terms. Um there's the the public public sector pay uh policy pressures already that that were built into the existing paid policy plus the inflation pressures that we are seeing um that will erode the value of of the settlement that were already made. Um now there might yet be additional funding from from decisions taken uh at UK government level. We can't know that uh for certain, but next year looks really really difficult. Um and if if costs of reorganization come at a time when the budgets being squeezed already, then that just makes what was a pretty difficult task even more so. >> Okay. And my last question, Kavina, is that okay? Just Yeah, the last one. Sorry. On the the lack of an MTFS MTFS this year, you mentioned already do size. Um there is you suggest in your paper that what we could be looking for instead is perhaps an update on the fiscal sustainability delivery plan. Um you think that that would give us a better insight into whether these targets have been met? You think that's something the committee should be pursuing? >> I I think I think an update to the FCSDP and um the savings that have been realized and the plan for for the ones that haven't been um realized yet would be helpful in that regard. Yes. Thank you. >> So Tim and Liam would indicator come in. I think I'll let Liam in the back of that and then you can come in and ask your other questions. >> Just just following up. Good morning. Um following up Miss Amara's earlier question around um the upfront cost of that restructuring fairly pointed to the experience in police Scotland. The one that leapt to my mind was um college reorg uh regionalization where consistently the government's argument was was that this would release efficiencies that would pay for the uh for that restructuring but those efficiencies were only ever going to be realized 2 three four five years down the line. Is there a way in which um the government can be clearer about the time frame for for releasing those efficiencies if indeed their expectations are that they will cover in whole or in part that the cost of that reform process? Is there a way that the committee can be um in a sense putting pressure on the government to be clearer about that that timing? No, I I I think the committee uh uh should be trying to get as much information as possible from the government about this, but ne necessarily these kinds of uh reorganizations involve a lot of uh transactions, conversations between the relevant parties to to identify how the savings are going to be achieved and these can't be done overnight. So although one might want to get information as quickly as possible, I think to some extent that won't really be possible. So it yeah, I think the committee should be trying as hard as possible, but but in undoubtedly major reorganization is is is a complex and uh timeconsuming uh exercise. C can I before come in, can I just ask in the back of that? So, as has rightly been pointed out, there's probably going to be upfront costs associated with reorganization and shrinking the workforce. I'll inevitably involve some redundancy payments for some people as well, which is further upfront cost. Does the fiscal framework make that more difficult as well because effectively you're only supposed to be able to borrow for reconciliation and and budget shifts? So it's therefore harder as you said professor Bell much spends demand le so it's therefore much harder to set aside chunks of money that will bring in efficiencies um at the back end as it were. Is that would that be a correct interpretation? Well, I I mean I think having uh significant elements of the budget that are demandled alongside a relatively small borrowing uh a availability is always going to make uh uh uh the the management of budgets difficult. I think I think it's fair to say that the the the the lack of ability to borrow up front um which which is a wider point about the fiscal framework as to whether whether there's there's a case for like any particular pressures that that the the in Scotland that the the Scottish government could be allowed to borrow. You know, you could make a case that have being able to do so would ease that transition. Um and certainly that isn't available. Now that that doesn't mean that the Scottish government doesn't have any powers to smooth things over time. Um you know if you're going to do um reorganization within that kind of framework, it probably means that you have to to leave yourself a a gap that you know cannot be used to deliver other services during that particular year. um otherwise things won't add up. I was aware the other day of um uh the head of audit Scotland making the case that uh we should have whole of government accounts for Scotland which uh would include all the assets as well as the um uh a cash situation of uh of the government and and having all of government accounts uh might help us to identify Y areas in which there cash could possibly be generated through um using as an asset base uh to to uh uh generate income rather than uh having to rely on borrowing exclusively. >> Okay. Thanks. [clears throat] >> So gentlemen, there's two parts to my question. Um the first uh relates to information that I've been given by previous members of this committee that the information that you get in terms of the medium term reports and also the outturn don't give enough clarity because they don't give detail on shifts between departmental budgets um and to what extent do you think that's an issue and what extent do you think we should be pushing Scottish government to have more clarity in that regard and touching on something um that Mr. Mara raised in terms of health. Um I read recently that a lot of the budget in health actually goes out the door to services run by in contracts. So in terms of trying to save money from the health budget, how much flexibility would the Scottish government have immediately given uh that constraint? So in terms of of information um provided in in budgets I guess the because the the the way that of that the the Scottish government is organized um it's in in portfolios which which have I would describe as more porous bound boundaries than the departments would do in in um in white for example. it's easier to transfer things across. Um, and there's a case for some flexibility around that. However, I think in in both my my current role in my previous role, I've I've uh made um quite clear that I think that the the budgeting should be done on the basis of where things are going to end up over the course of the year. And the there should be the transfers between portfolios should be limited to genuine reallocations of money relative to what was uh previously thought would be spent rather than putting for example education spending in the health budget that then gets transferred to the education portfolio to then be transferred to pay for for education of doctors and nurses uh for example or social care allocations. they go in the the health and social care portfolio but actually they then get transferred this general revenue grant from the local government portfolio to actual local authorities. I think that having that um that kind of pattern makes it really really difficult to understand up front um where things are headed. Um, and you know, obviously it's it's our job at the IFS to to look at that, but it shouldn't require us doing all that rebaselining and and and and things out to where we think uh things will eventually land because ultimately the government has better information uh about it. Um, and so we think that it should use that information, make it public and make it easier to compare things. >> I Yeah, I I completely agree with that. I mean, ultimately, you want the budget to reflect where money is being spent on what kind of service. And if uh for and the local government's a good example, a very significant proportion of that is going into social care. Uh and so if you're just looking at the local government uh uh line in the budget, you're not actually uh picking up uh how much uh of of their budget is being allocated to social care and therefore the pressures that are coming through on the services that are provided to Scottish public uh are are being allocated in that in that direct in that particular uh direction. It's it's also the case that that although the the Scottish government um does calculations on the basis of how much he wants to fund in terms of uplifts for pay for example that money just although it might notionally be thought of in that way in reality it's money that go gets transferred as a block grant to local governments who then have their responsibility because they are the ones who are uh who have to respond to pressures and to provide services. They are the ones who have to reallocate things. And so there's no there's no direct link between how much money gets put into the social care budget um on in in the in the Scottish budget and how much actually gets spent in social care in by local authorities because they are the ones who get to decide that and they have to to obviously um respond to local pressures and you know it's their responsibility statutoily. >> Yeah. I mean it it is it it it we have to um be uh cognizant of the of the fact that local government you know is is a democratic institution and therefore it has some ability to uh determine its own budget but an at least an indicative um allocation within you know the bud the the documents provided uh uh by the Scottish government around its around its budget would give a clear indication of of how one would expect the actual uh end users of or how much finance would be would be would be uh allocated towards the the end users of services in in in the Scottish public. So just as a quick followup, um other European countries are much better at doing this than we are. And in some countries, they've actually managed to get a system where they can follow the pound or the euro, if you like, and see exactly where money spent. Do you think that's an ideal scenario we should be pushing for here, or do you think it's just never going to happen? I I think I I won't comment on on on other European countries because I'm not aware of um of detail enough to to to be um to be clear on that. But I think knowing what is spent um is important and that's something that that that obviously I think everyone would agree on. Um I I do think it's um it can be difficult to trace like you know revenue comes in it's obviously fungeible right so a pound that goes in from one source and another one once it goes into into the allocation they're they're indistinguishable so some of the the kind of follow the money um kind of calculations they make actually also rely on some assumptions question about what would happen if if revenues didn't didn't come as as intended. But, you know, it transparency in terms of of expenditure, I think it's probably a good thing. >> Yeah. I mean, I I I'm all for as much transparency as possible, but I I'm also constantly uh remember when when I was the adviser to the committee, we were searching for ever greater levels of detail uh around around uh spending plans. And at the end of the day, I wasn't entirely sure that that information was of huge value to the committee in the sense that that it w it would not manage to effect change based on that very detailed information. I think uh yes, we could do a better job in terms of budgetary information, but I think we could do a wholly better job thinking about outcomes because ultimately what what this budget is aimed to do is to provide the people of Scotland with the kinds of services that they that they wish uh as efficiently as possible um and as effectively as possible. And uh in order to do that, we have to be able to understand what kind of outcomes people want and then to measure them very clearly. And I think we're not all that good at the moment. What we've got at the at the back of this is what's called the national performance framework which is a set of um in a way aspirations as to where um uh where we should be going in in respect of different metrics like um poverty and uh climate and so on. But um the linkage between the activities of this committee and the outcomes that are achieved for people are are um there's a big gap there in my opinion. >> So So just one final point on that. Would you not agree though that with more clarity around spending that might enable opposition parties to draw an alternative budget which then would push the Scottish government towards outcomes? I mean the there there is the power to do that certainly and but it would take a huge amount of work it seems to me to be to be able to do that and and of course another uh um issue that that hasn't come up but which is a recurring issue is the timetable for the budget and that is so short that the ability to produce a detailed alternative budget I think is heavily constrained I'm hoping that in due course I might help with that and I think my colleagues got a question on that later. Thank you. >> Um okay if uh bring in Liam K. >> Good morning panel. Uh Professor Burl, you state in the evidence that you've [snorts] submitted to us that it should be earnings and employment rather than simply higher taxes uh that might drive the economy going forward. and you suggest that we need to evaluate the increasingly large difference between Scotland and the rest of the UK tax according to its behavioral effects on as you say migration hours and location. So a few questions around that. Firstly, the Scottish higher rate threshold is being frozen again uh such that wage growth will pull more middle income earners into the 42% rate. Now the SFC says that over 26% of Scottish taxpayers pay higher rate or above and that compares with about 22% in the rest of the UK. So to what extent is Scotland now relying on fiscal drag rather than genuine growth in earnings in the tax base and is that sustainable? Um I think that's a very difficult question uh uh to answer. I mean there is very noticeable fiscal drag or drag both at the Scottish level and at the UK level um with the decisions that have been made by the chancellor. And the key issue that one needs to address is what are the behavioral effects of those uh uh of of that level of fiscal drag. These are very difficult uh uh to assess and evidence uh well uh the evidence in my opinion is mixed. Um so uh but an important issue which is kind of at the back of of what what you're uh asking is that um Scotland's budget is now uh determined by its performance relative to the rest of the UK and and the biggest element of the budget that is raised uh by the Scottish government is income tax and uh effectively If we are if uh Scotland's uh income tax per head is growing less rapidly than that in the rest of the UK, our net tax position will be negative and therefore there is a uh pressure which wasn't which wasn't there in the pre it wasn't effectively there in pre 2016 when the Scotland Act came in where these additional powers were added. uh around a taxes on the one hand and welfare which we might come to on the other but these powers have uh I I think um perhaps been not it's not been fully appreciated that the relative growth in Scotland is vital uh for the um uh health of the Scottish government's budget >> and and to that because of the progressive nature of of the income tax system, people who earn a lot more um pay a lot more tax and the comparator geography which is uh England and Northern Ireland. This is mostly driven by London and Southeast. he's got a lot more um additional rate taxpayers as it's called um in the rest of the UK or would be top right here which means that even if both earnings in both geographies so Scotland and England Northern Ireland grow at the same rate because you get more income tax per person um that is up at the top rate the the gap between the two widens naturally. So to maintain the same um the same gap, you'd either have to have faster growth in Scotland because of the lower yield per per taxpayer or you'd have to have higher tax rates and effectively we have we have higher tax rates. Um and it kind of makes up in some sense for that actually raises a bit more revenue but but some of that effect has been through freezing [snorts] the the the higher rate threshold which has been done at UK uh level as well but at a lower rate. So this is essentially the pre Philip Hammond reform to to increase it from 43 to 50. It never happened here and now it's frozen in in both geographies. I I guess another thing to add to that is that it is per person. So it's the it's income tax per person. So that's over the whole population including children and including older people. And when you have a a greater proportion of older people who are not uh generally uh um uh adding to the the income tax revenue that that depresses the income tax per person number for Scotland relative to uh England and Northern Ireland >> and it's the per person calculation that goes into the the the the block adjustments. >> Yeah. So that that that determines the block grant adjustment which uh is is what's taken away uh relative to the income tax that we generate. And the difference between these two is called the net tax position. And and that's the the thing that that suddenly had a 700 million pound hit uh a couple of weeks ago because because the income tax data is always delayed by a couple of years because of the u uh the way in which income tax is collected from the self-employed is is at well after the event. And that's why these reconciliations take place uh considerably after uh the end of the fiscal year. I'm grateful. And sticking with the constitution of the tax base that you've just outlined, you talked about the older demographic for example. Uh the ONS has said that 45% of workers earning £50,000 or more uh are hybrid or remote working. um and they contrast that with 8% of those earning under £20,000. So they conclude that managerial prof professorial occupations are most likely to hybrid work. Now, if that's correct, then is there any evidence that or is there any risk that those having a Scottish job and earning more are more likely to live and pay tax elsewhere in the UK? >> I I it's possible, but I don't think there there's uh any um clear evidence that of that being the case. and and I think that's because that uh information hasn't been collected in a in in a systematic way. >> I think I think I don't want to say that it's not a risk. Obviously, it it it is, but I I don't think there is data to suggest that that's happening in a scale that would affect tax revenues in in in a big way. it. I I don't question that at all other than that uh there's a report this week that across seven Scottish health boards the number of staff registered at addresses outside Scotland has risen by 56% in the last 3 years. So is there any evidence that that's connected to the tax rate? And in conclusion, is there given what you've said about the lack of evidence actually uh is that something that the Scottish government ought to be investigating alongside the growth of remote working and the impact of fiscal drag? And should the 2728 budget accommodate these facts? >> I I haven't read the reports. 56% sounds like a large number, but it might be from a very small base as well. So, I don't know what what what that refers to. So, I I I think we should be cautious about seeing that as necessarily indic indicative of a of a of something that is kind of material to the to the broad uh income tax revenues. Um that doesn't mean they you shouldn't be looked into. And um the Scottish government should definitely have an interest in in uh in ensuring that the the right tax is paid as HMRC would collect the the tax on Scotch government's behalf. So I I leave it to them to to to do anything if anything needs doing. >> Uh but yeah. >> Yeah. So I I mean I I agree. I I I wonder if if these are are perhaps on the books of the health boards that are brought in for short very short-term contracts uh uh to tide over for example you know absences and and and that kind of thing but I don't know so so it's it's something that could be uh certainly could be followed up. What one thing I I I think is not given enough attention is whether and to what extent people don't come to Scotland because they they are told that it's a that it's a high tax regime in Scotland uh relative to the rest of the UK. Um that's a very very difficult thing to measure but um it I I think uh it may well be the case that arguments are made about uh that in in general about the positioning of employees and so on that relate to tax uh which which were perhaps not being made prior to these differences in rates but incredibly difficult to draw. uh accurate evidence on that. I'm very grateful. Conven, >> thank you. Did you say one in in the back of that? >> Yeah, questions if possible. >> Um, Professor Bill, you were you were explaining um some of the problems created by the need for reconciliations. This was a a topic we picked up with um Professor Roy and the Scottish Fiscal Commission uh colleagues last week. Um and intriguingly they were suggesting that their um their estimates of tax revenue actually become more accurate but the the the scale of the reconciliations were bigger than ever and actually the expectation going forward was that would that that that was anticipated to be um a kind of factor. So I just wonder whether um you have any thoughts about the way in which Scottish government can better manage that that that lack of kind of certainty whether it it will require um adjustments to the the fiscal framework or there's anything that can be done in the in the interim and the impact that that's having in terms of trying to achieve the the budget savings that they're seeking to achieve over the next two three years. >> Yeah. Well, so I mean it it kind of uh harks back a bit to um what I was talking about later earlier, sorry. the the issue around having now an increasing uh proportion of the budget being demandled on the one hand uh and the fact that we're dealing with forecasts that may have significant errors associated with them even if even if this are smaller the the total amount that we're talking is around 18 billion so you know 2 or 3% either way which is certainly not unknown in in in forecasting terms does make does make quite quite a bit of uh of difference. What um you would uh perhaps uh uh think about is is uh where your current borrowing position is and what action you might consider taking in anticipation of uh this kind of uh pretty significant re reconciliation that that that we've seen. So how do you buffer that that kind of uh change which which will have a significant effect on on next year's budget? >> So in in terms of of the the the forecast I think part of it is a product of the fact that there are two institutions that that do forecast and do they forecast different things but the things they not forecast have to be netted off. So the Scottish fiscal commission forecasts income tax revenues. The block grant adjustment is forecast by the office for budget responsibilities responsibility. Um each of them is trying to do their best forecast of the thing that they've been asked to forecast. So SC Scottish fiscal commission has been asked to forecast the Scottish economy. This is their best view and they have a particular judgment about um uh where income tax is is likely to go. Um the office for project responsibilities try to forecast growth uh in earnings um and the UK for the UK economy as a whole. They have a more pessimistic view. Again, that's that's perfectly reasonable. Um however, what matters for the Scottish budget is neither one or the other in isolation, but the two put together. and the fact that the Scottish fiscal commission has a more optimistic view. They say not of Scotland in particular but of earnings growth for the whole economy of the UK which manifests itself in higher growth in Scotland um than the implied by the OBR means that that gap has grown in the forecasts. Now even if the Scottish commission physical commission is getting more we're getting more accurate and you know the in some sense you could say that they've been vindicated by the fact that growth in earnings has been faster than what the OVR has predicted that doesn't change the fact that the net effect is what matters for the Scottish budget. Now the reconciliation essentially if it's a negative reconciliation says actually the the gap was too big. This money was spent before. Therefore, u there has there's a clawback of that money a couple or three years in a in a um so this in in our view at the IFS certainly um this gap looks too big in the forecasts and so that's why we think that there's going to be negative reconciliations in the next few years. Um obviously all else equal. Uh so it's it's important to kind of look forward and think well if this is going to happen then how can we prepare ourselves. Um David mentioned the the the the borrowing position. I would say looking at the reserve as as a way of of uh of managing this is is good. There there's been some reforms to the fiscal framework which have been genuine improvements. So there's been increases to the amount of borrowing uh that can be done for these purposes and and there could be a case for for not having annual limits on borrowing for example on this. Uh but there we think there should still be some sort of cap because otherwise you just delay the pay inevitably until it all comes due. uh but it's um you know it's it's it's something that that is difficult to manage but but ultimately it it just reflects the fact that you know the forecasts were too optimistic for the the the the gap between the two. Um so that's something that that needs um needs to be to be taken into account. The other thing that that has happened before actually is that the so these reconciliations are obviously one-off pots of money right you know they come every year but we don't know how how they will relate year to year so you can't predictably rely on them being positive for example and what the Scottish government has done in the last few years is use those pots of money to finance not oneoff um spending but actually recurring spending so it's kind of used these pots of money to just say well we need to for example increase pay awards um because of marketing conditions uh or we want to expand a particular social security um payment or things like that um and we have this funding but if you spend all this funding that is oneoff to fund recurring spending eventually if that turns negative doesn't come in then you have to find some other way of funding at that recurring spending. Otherwise, you you're just in a position where the numbers don't add up. >> Absolutely. I mean, it it it just doesn't make sense when these are oneoffs and are, let's say, completely randomly distributed uh to use them if they're if they're if they averaged out to zero. uh to use them to make commitments that are long-term because on average you'll get nothing from the reconciliations. So it's a very it's a very very dangerous path to go down to use them for for uh recurrent expenditure. >> I just just come in the back of that. So back back to Dr. SA you you mentioned the reserve as other problem you've already touched on borrowing powers but is there not an issue that the reserve is not big enough to actually deal with a these reconciliations and and and maybe other matters and something else I was thinking about so we need need to get to the current savings so if we take the the previous medium-term financial statement we're talking about 2.6 6 billion of recurrent savings by the end of the parliament. But strikes me if and this is maybe somewhat optimistic but see say you get to a point you've got 1.5 billion of the current savings early you can't actually put am I right in thinking you couldn't put that whole 1.5 aside in the reserve because of a clawback. So it makes it even more difficult to smooth out your savings as it were if you're if you're trying to do it in a smooth incremental manner. um there there are limits to the reserve. I would say that that that and it's about 750 million pounds. Uh there one of the things that happened in the in the last um review of official framework which I think was helpful was the abolition of the annual limits as to how much can be put in and drawn down. That's obviously helpful. um the the the reserve I would view in conjunction in in terms of of smoothing this with the borrowing powers already um in place for reconciliation errors. to deal with that. You know, for example, the the the Scottish government can borrow 600 nearly £700 million. So, so it'll borrow the nearly all the reconciliation next year. Um you'll have to pay interest on that, but there will be a bit that will be above that that if you had some some money in the reserve to pay for that, then you could um kind of smooth that a bit more than than than if you don't. But, you know, the the cliff edges and the clawbacks, I think it's it's fair to say they're probably one of the things that would be that the that you can understand why they were put in, but they aren't necessarily great design mechanisms because they encourage, you know, if you don't want to lose it to spend on things that you can spend it on uh rather than to to to to to just, you know, uh do do what would bring the most value. I I think the I would take the the the kind of savings more in the round because the the Scottish government I don't think would necessarily be thinking, oh, we get these savings, so we're just going to put money in the reserve um if we get these savings. it it then goes into how much funding you actually need to cover all your expenditure. So that that then takes you into into the point where you might think well we we're spending say a billion less so we don't have to raise necessarily as much tax to to pay for that for example that kind of thing. Um, so it's it's not just, you know, can can you bank all those savings. It's also well, if you if you don't need as much revenue to pay for what you're spending, then the the way the fiscal framework works is that you have an incentive to not necessarily raise as much revenue. Yeah, >> you could you could look to cutting taxes for example which which might have beneficial effects on the kinds of uh issue that we were discussing earlier about income tax per head. >> But of course there's a there's a two-year lag in reconciliation before you see the the positive or negative effects of that as well. >> That that's true. But we we don't the the we would see the forecast effects. It's only if the forecast that then turns out to be wrong that you get the reconciliation. So you'd see the immediate effects of that but then there would be a reconciliation down the line to make sure that the that the forecasts then align with actually would actually happened. >> Okay. Thanks. And I know we're doing chairs proive jumping in there. So, if you can make it quick, Liam, and then we'll go to >> That's absolutely fine. I I'll I'll leave um Liam K maybe to to cover the bond issue that probably flows from some of what you've been saying. Dr. Susa, I I was intrigued by um the comment though in uh in the IFS submission suggesting that Scotland's tax and economic strategies have traditionally focused more on how economic growth can boost the tax base rather than how the tax system can best support growth. I mean, I think some of what you were saying there in terms of the the response or the reaction the government might take um to uh to to additional reserves being there um maybe you pointed to to some of what you think would be an alternative strategy for the government to take. I would be interested if you could flesh that out a we bit. >> So there's there's obviously the the the the tax that that gets raised but also the way in which the tax gets raised uh I think matters. Um, so we've we've kind of I think it's become a a classic IFS talking point that we think that things like land and building transaction tax or stamp duty, you know, house uh um property transaction taxes are pretty bad taxes. They kind of they stop people transacting um and moving houses when it would be beneficial for everyone because there's this tax on doing so. and that actually you could have a different property uh tax that could raise as much money and be less less distortionary to to the economy. So thinking about tax design is really important about that. Um there's there's also, you know, even within the income tax system, which we've been talking a lot about, there's uh quite weird um I mean, I wouldn't call them design sources. I would say they're more like design accidents. uh like the the the very high marginal tax rate that you get for people between 43 and 50,000 pounds uh of salary if they are employees because they are subject to the higher rate of national insurance contributions and the higher rate of income tax uh which means that you end up with a sort of roller coaster income tax schedule um that I think doesn't doesn't really pass the the the the good text design uh test. Uh so thinking about how those distortions can could be eased would support more economic activity. Um and and that you know economic activity you know more economic activity is good as a whole period even if you didn't raise any more tax revenue because people would be better off in average on average. Um but uh certainly then if you could encourage even more growth then you might get some rewards. Uh not you know and not not saying like tax cuts paying for themselves or anything like that. I I I don't think we're anywhere near the that that kind of um situation for most t taxes. Uh but certainly, you know, they they could support growth through design of the tax system. >> Yeah. I mean, I'm a uh I'm a convert to the IFS view about tax design. It all stems really from the Deon review of uh of taxation in the UK and uh Angus Deiton uh a good Scott um highlighted problems with uh with generally the taxation of property and we're now in situation where we've got LBTT, we've got council tax, we've got mansion tax and we've got second home premium in some parts in some parts of the country And this is uh uh as I said creating very strange incentives that that are not consistent with overall improving economic activity uh in the country. I mean it obviously some of this applies to the rest of the UK as well. Um uh but uh you know there there's a there was a quite a long time ago one of uh the early MSPs Andy Whiteitman uh did a lot of work on land value tax in Scotland. I've done a little bit of updating of that work, but it it in order to um possibly raise the same amount of revenue, but at the same time do much more to encourage economic activity, we really need to encourage the Scottish government to start thinking seriously about redesigning the way that that property is is taxed in Scotland. And I also completely agree about the structure of the income tax schedule. When you combine with national insurance, it just looks I more like a uh a camel with two humps. Uh it it doesn't make sense at all for people on on that particularly in that 43 to50,000 band. The marginal tax rate they're paying is extremely punitive. >> Thanks. colleague Paul staff you've been very patient but if you don't mind I just going to do a couple of follow on questions myself and then I will bring you in so I appreciate your forbearance just on touching on that there that that was raised there in the responses to Lee MacArthur council tax and LBTT council tax first of all I mean it it struck me clearly we're still using council tax which is based in valuations in 1991 so many people now buying houses the the valuations older than the people that's actually moving into the property itself. But and it it's all clearly it's always been a kind of thorny political issue and how do you get agreement but what would a fairer council tax system look like and how would we get politicians to coalesce around a solution that that that would fly through parliament and nobody would complain about winners and losers and would stimulate economic growth and economic activity. What what would that look like? I I think I if we knew that uh and if you all knew that then then then that might have passed already as the old joke about economists thinking that if something was great it would have happened already. Uh but it's I mean the thing about casual tax is well first of all you're right about the valuations it's it's the the the point is also like it's not about the actual valuation itself because you just get placed in a band right it's about relative to the price of other properties how much is yours worth [snorts] um so it's you know you've got a lot of regeneration of of places weren't as good places to live, for example, in 1991, uh, relative to to to the rest of Scotland. Um, and and those would be, you know, if if you just revalued, they they would be the biggest losers of of this. Um, I think thinking about where where things should end up is probably tells you how then you might structure the transition to to that system. Um, and it might be that it costs money in the short run which is a which is a challenge. Uh, but that is for example how uh business rates or non-domemestic rate valuation h uh happens right. uh you don't immediately jump people from where they were before uh to the new valuation. You gave them transitional relief. Uh and we've successfully revalued uh non-domemestic rates um many times, many more times than we have council tax. I think that with council tax um it's so bad now that uh um in in some sense a sense it's it's hard to imagine how it could be worse. Uh, so that's uh and and and the further we get into that the >> Yeah, I'm not I'm not hearing a silver bullet that I'm looking for. >> No, but I think I think the the the further along you get in that, the more obviously unfair it is and therefore the more obvious opportunity for a reform that improves things, even if it's not the silver bullet or the perfect tax. um you know the more the the easier it is to get to to a place where things are at least better. >> Yeah. I mean I I was involved uh at least 20 years ago in in one of the early attempts to reform uh uh council tax which uh was essentially about changing the bands the the the uh ratios applied to to the bands and it never saw the light of day. it just did not fly politically uh at all. But um a key issue it seems to me is is the geographic uh variation now in in you know if if if you do a casual valuation of what's happened since 1991 clearly some parts of Scotland have suffered economically relative to um other parts that have prospered and those that are that have suffered are still paying relatively high uh uh council tax. So that money is is is um uh not uh a reasonable reflection of the value of the property that they have now. And equally some are playing relatively um uh low council tax uh which is not reflective of of the value of of the properties that they have. So um I mean the issue of valuation which seems to be much less of an issue in relation to non-domemestic rates uh is one that has not been for I guess political reasons uh successfully addressed since well well prior to uh devolution even. >> Okay. Um, Paul Stafford, >> thanks. Thanks, chair. And can I just start by putting my register of interest, drawing members attention to my register of interest as a elected member at West Loian Council. Um, it's moved on a little bit, but if it's okay, I'd like to come back um to the point around the risks to devolved tax revenues that Mr. K raised. Um, I think we talked a little bit about some Scottish specific risks. Um in your submission, Professor Bell, um to the question number seven, what's the what's the main risk to devolve tax revenues? You said the largest risk is relative economic performance and you stated that this is a function of the fiscal framework. Um so I just wondered in a general sense given our our growing fiscal autonomy um is the fiscal framework still um fit for purpose to be able to accommodate these these larger risks that come with that? And we talked a little bit about Scotland's faster aging population. Um, thinking of other things that are not within our power in terms of immigration policy. Are there any other Scotland specific risks that would affect um that? >> Um, so the the fiscal framework uh is essentially about giving Scotland power to raise its own tax uh and uh that replaces money that used to come through the block grant. So there has to be a reduction in the block grant and it's how those two are lined up against each other um that that determines what's called the net tax position that we've both referred referred to easy earlier and there were a whole variety of uh uh options. I I was quite involved with with the discussions around how that uh takeaway from the block grant would be determined and we've kind of touched on that. It's it's it's the uh income tax per head is is the key metric. for a while it was just going to be income tax and that was deemed to be um not beneficial to Scotland because of the faster growing population uh in in England and therefore the which in itself adds to obviously to income tax revenues. So it was brought back to income tax per head. But these are extremely arcane calculations that are carried out and and end up in in these reconciliations that we that we that we've discussed uh earlier on. Um the a Wales has gone for a somewhat uh a per potentially less risky uh method of of determining its block grant adjustments. Um, so it because it's it's taken over income tax and it was recognized probably due to the relative weakness of the Welsh economy relative to the Scottish economy that that it couldn't take that higher uh level of risk. But um uh it it's it's a it's um uh difficult to avoid the logic of of of needing to make a reduction. It's just the question of how you design that reduction. And it also seems to me that it's incredibly difficult to get it across to the population both the need and how the block grant is is actually adjusted. Uh it's a very very arcane uh um a calculation. >> Yeah. Um I think it [laughter] the the fiscal framework basically combines two elements like more power but with more power there comes a um a share a bigger share of of the risk that comes with raising that revenue. I think that is a that is a fair um trade-off to have. You you know can't just have the good things. you know, if you if you're going to be given uh the power to to make quite big decisions, then you know that that that means that they have to to to share in some some of that risk and and that seems like a a principle that that should be applied. Um, as David pointed out, there's there's lots of detailed calculations and different uh ways you in which you can design this. Some are more beneficial to the devolved government, some are less beneficial. Um and but it in some sense they are trying to get at the same thing is what would have happened otherwise if there hadn't been uh this transfer of powers. Um so I think I think that that that really for for in in in the way devolution works within the United Kingdom, I think that that probably would have to stay. That doesn't mean that you can't improve things in the in the physical framework. Um particularly regarding flexibility um you know there is a case for for that. There is also a case for doing things like instead of indexing. So we we've done the first step which is the the limits for borrowing and for the reserve are no longer in cash terms which is great. Um, now they're indexed by inflation, but because revenues grow by more than inflation year normally, um, then you might expect that actually relative to spending and revenue raising powers, they're actually decreasing. So there's a case for doing something like indexing it to revenues. >> Uh, but these are tweaks to the fiscal framework rather than necessarily being massive overhauls of it. >> Yeah. I mean, just just to add to that, I mean, The outcome of the fiscal framework that was agreed was essentially a compromise that in effect um the Treasury wanted another potential way of um a a determining the block grant adjustment uh which would have been more difficult u fiscally for for Scotland. uh but the income tax per capita one which was eventually agreed on was less so but perhaps because of that the borrowing powers were less extensive than as we've been saying uh given the kinds of uh u swings caused by things like re reconciliations it it it becomes difficult for the Scottish government to manage the budget within within those parameters. >> Yeah. And just thanks for that. Just to follow up, I think the Institute for Fiscal Studies um and their submission has said that um sectors like oil and gas and financial services um mean that we're we're more exposed probably to some small fluctuations can make a bigger difference. Is that can you expand on that a little? So this kind of just relates back to the point that I was making about um high earning uh taxpayers having disproportionately large effects on um how much income tax gets collected. Oil and gas in particular. So we are exposed on finance. Finance has not been doing brilliantly but not too badly. uh oil and gas has been doing pretty badly um over the the the last decade which means that we have fewer of of of those uh high paying taxpayers and their earnings are actually gone down in real terms. So we're relatively collecting less than than than we were from that sector and because that sector raises quite a lot of income tax. Um if that doesn't perform as well that kind of depresses the the revenue that we get in Scotland uh because of that. So one taxpayer earning £100,000 pays a lot more income tax than than two taxpayers paying 50,000. earnings for 20,000 I should say and >> then just on your um final a final point about migration of high earners that Mr. care um talked about and you said Miss Professor Bell, you'd be interested to know um how many people are put off moving because of the the around it being a high tax regime. Is there any evidence um about what the motivation of taxpayers is um on on the opposition side in terms of tax might not be your only priority? It's about quality of life, well-being, what other benefits are available. Is there any data to suggest that? I it's it's so difficult to to to know, right? Because you know some in some way you kind of trying to to work on what's called revealed preference or you know people might say oh yeah I'm really concerned about this they might they might still move anyway or not move out even if they're concerned about it. Um so we want we want to do it on the basis of like what people actually do rather than what they say they'll do. And that's something that that is really important for determining how how people actually respond. Um I mean that I think I think there is evidence that that there is still migration from the rest of the UK to to Scotland. Um that is a pattern that actually is is not just for Scotland is for Wales as well. you see and it's part of a broader pattern of people a lot of people moving to London um where early in their career and then kind of moving outwards um but also people can who come to stay study in Scotland for example things like that um so that that looks like it's part of a broader pattern um so it's not like there isn't that migration the question is then what would have been in the absence of of that change. That's where the tricky bit is. Uh because we also have limited data that we have about these people. So there was an HMRC um study uh looking at the the first uh batch of of changes to Scottish income tax. Um and actually what they have to construct is is a counterfactual of what would these people what would this group of people with these characteristics have done in the absence of this? That's so difficult. Yeah. >> Yeah. The interestingly um the situation in Wales is is uh even more tricky in the sense that it much larger proportion of workers cross the border anyway. Um so uh that's one of the reasons I suspect why why Wales uh ability to vary tax rates is is limited. Um clearly time's gone on but I'll I'll run run the session on a bit a bit longer and we're indicative of timings presum that's okay with the two panelists. Um and in the back of that get Michael want to come in and then come but try and make them kind of brief and then we'll go there. >> Thanks a question Dr. Sa. Um the IFS during the election campaign said that the S&P manifesto pledges additional [clears throat] spending costing an estimated 1.4 4 billion pounds a year by 21 203132 without credibly saying how it would pay for this. I wonder if you could tell us whether you have any sight of how that will be paid for and for clarity in terms of examination of the budget is that in addition to the MTFS's identified 5 billion pound gap. So it's I don't think we have any anything to add in terms of of of of the paying for for this to to what we said at the during the campaign. Um it's it's adding to to pressures. It's not adding to the five billion because as I said before the the five billion was the indicative gap at the MTFS. Then we had the the spending review which brought SP so funding I'm simplifying but funding didn't change by very much. Uh spending was adjusted down significantly to match that funding. The the the spending uh on on manifesto pledges will be on top of that uh that spending review settlement. Uh and the spending re review settlement itself depends um on or or it's predicated on efficiencies being achieved which you know look like they might be challenging not impossible uh um and not unreasonable to to to aim for but certainly difficult to deliver at the same time as doing transformation of public services. So there's there's there's there's a a multi-billion pound pressure there. Um less than than it was at the MTFS more than there was at the spending review >> and and the 1.4 billion is additional to that >> is in is additional to what was in the spending review. >> Yeah. Okay. Thank you. come in. Can I just ask and maybe I'm too lateral in this because politicians like round figures in there Michael Mar 5 billion gap but that's split between revenue and capital isn't it's two very different things when we talk about 5 billion spending gap round about 5 billion that actually is going to get dealt with two with two very different funding streams. Is that correct? >> That that's right that the there is split between the two. It's not that different between one and the other. So is um so it's I think it's it was two and a half for one and 2 point something for for the other. Um David might have the the actual numbers uh in front of him. Uh but uh yes so these budgets are managed separately. They both need to be funded every year. So that doesn't kind of take away the that that fact but yes they are they are separate uh separate pressures. >> Okay. So, um, you talked about tax revenue being lost because of what's happened with the North Sea oil workers, and we know that the wages and green energy jobs are not, um, at such a high level, which ultimately means that we have to grow the tax base in Scotland. What advice would you give to the Scottish government in terms of growing the tax base? as as innocent bystanders. >> If we can't make it succinct, we would like we didn't get for by the way. [laughter] >> Um, so I I mean I I I certainly think there are opportunities that are in danger of being lost around supply chains uh and particularly in relation to green energy. Uh and um again, it's one of these areas where a bit of spending up front can can potentially uh add to uh positive outcomes uh going forward. Um but there are you know it's a very competitive industry. China is a huge supplier of of the main elements of uh of renewable energy. Um but there there are there are still potential there that's an area of potential growth. uh that that we could be looking into and there are there are um other sectors I won't I won't spend all my time going going through them all but there are also big challenges and I'm from the islands and one of the big challenges at the moment is around the whiskey industry which is which is uh struggling um and uh although it's not a big employer uh it it's a it's a key uh element of um both Scotland's export growth and indeed the UK's export export offering. >> I would say that um areas to to to focus on we talked about tax design um that that could help focusing on education and skills and matching the the and or a kind of role in in in kind of helping develop the skills that will be needed for for for the future. um helping provide training beyond um you know usual school years um and retraining uh is really key. Uh, and those are things that are within the the the Scottish government's um competencies to to to do and to to help improve um essentially, you know, we we want workers to be to be trained as well as possible and we want them to be matched to the best jobs that they can be at. Uh that's that is a key driver of productivity, that match in the labor market. Um, and so kind of doing what we can to facilitate that transition to to better matches and to having a dynamic economy is um is part of of of growing the the economy and the tax base. >> Yeah. Sorry, I I should have jumped in because I I've done a a little bit around that too. One of the issues, one of the big issues that's been uh uh well starting to be addressed at at UK level is that of needs. those not employment, education or training. And my um estimate suggests that the rate in Scotland isn't that much different from the UK as a whole, which means that around 13.5% of 16 to 24 year olds are not in education, employment, aren't training, and there is an issue. So that that group is split into those that are unemployed, which who are looking for a job and those who are what are termed inactive. So they're they're not apparently uh seeking uh seeking work and and this is we know that from past uh uh past experience of this that people who do not have a good entry into the labor market when they're young tend to suffer right throughout their careers. And so as we were saying the uh provision of um services to this group seems to me because they are the potential taxpayers of the future seems to me to be incredibly important. And one of the areas that that I'm uh uh I have been puzzled by for a long time is the gradual decline in support for the college sector sector which which may uh be which may have closer ties into that group than than does the university sector. And just as a supplementary to that, are you concerned at all about the additional funding that's going to be given for retraining older people um in terms of college funding and that that might disadvantage the group that you've just talked about, the ones that are leaving school um end up on benefits and and aimless uh leading that into their later life. >> I mean, I'm not sure that they're necessarily substitutes. It depends how much capacity there is in the college sector. uh to train them. But there's als there's a good case uh for for also training older people because um those uh often who drop out sometimes with health for health reasons in their 50s then become uh then may end up in poverty uh because they have effectively no no pension support. So it I I I don't want to treat it as a you know a contest between the young and and and older workers. It's it's important to to um maintain the possibility of gainful employment right across the spectrum. >> Thank you. >> Almost a session as a standalone William >> convenor. One more question for me. add one suggestion that's been made to support public investment is the issuing of bonds. Now, Professor Bale, you highlight uh that this is not free money. Um it's got to be paid back eventually. And the IFS then went on to say that issuing Scottish bonds could actually cost more than borrowing from the UK's National Loans Fund. Now, to be fair, I think the Scottish government analysis suggests the other way round, but Dr. Soua, can you then explain why might Scotland nevertheless prefer bonds and what evidence would allow you to say that they represent value for money? >> So the just just to to to be clear, the bond bonds are one form um that's allowed for the Scottish government to borrow for capital purposes. Um you can also get commercial loans can al get loans from the national loans fund which is basically getting money borrowing money from the UK government which then has to finance it somehow. Um so you know that tends to come at a relatively low cost. The spread is very small at the moment um between how much the UK government pays and how much um is charged to the Scottish government. It has been larger in previous times. Um I think there there are two so the the the interest rate there I think there is some uncertainty as to what um the actual interest rate will be if if Scottish bonds are issued. Um it's not unreasonable to expect that the market won't be as liquid. There's less of a a track record of uh of of borrowing in in the bond market. So you might expect a small premium but it's it's not there is uncertainty there but then you have two other things that you might want to consider. One is there's some more flexibility the in terms of the of of how you can issue these bonds. Uh for example repayment terms might be delayed into the future. So you can have what is this called bullet bonds where you you you it's almost like an intereston mortgage. So you pay interest uh all the time until the principal comes to you and then you pay all of it. You still have to to find money to to to roll over that debt at the end or or or pay it pay it off. Um and the what you could have as well is uh some wider economic effects. So um the the first minister's investor panel uh um and we had some this is just our interpretation of of what was written in the IFS Scottish budget report last year by the chair of the investors panel but they concluded that there could be you know you could meaningfully potentially improve the engagement of the the the of the the Scottish economy with bond markets and if that's the case if you can bring in more investor investment then even a small amount of additional investment could pay for the additional administrative costs and maybe if the costs are relatively small uh to um to to borrowing with bonds. Um so I guess you know none of these things are certain uh and it requires a judgment to be made but you have to cons I guess you have to consider four things. One is the admin costs of of running the scheme. Potential differential costs. You could do like a trial to try and see if uh if there's going to be lots of demand for it or not. Um it's not cost free, but it stops you issuing loads of bonds that don't get subscribed afterwards. um how much value the Scottish government places on this additional flexibility of repayment terms and to what extent you you are confident about the wider economic impacts that that having this would would bring. I'm very grateful. Just a very quick clarification uh for my own purposes. Then how does the Scottish government set the yield on the bonds such that they're more attractive than the interest rate on the the national loan fund? >> Is it can they set it whatever they want to make it attractive to subscribe? Well, normally what you what you do with with this um is, you know, there'll be an underwriter who will try to to market this. Um, but you don't you don't set the yield as such. The the the the bond is is issued and essentially uh potential buyers of it bid for it and it clears at a certain point. You don't have full control over it. Now there have been cases in in uh in other you know uh in countries who who kind of say they're going to issue bonds. It turns out it's undersubscribed for example and they might pull it which does have costs. You have to pay um for that but you don't have to you know if it's undersubscribed you might end up paying like a much higher interest rate than you would want to. And so the penalty that you pay for pulling out is smaller than the cost would have been. Uh but I guess you can you can have an an interest rate that you have in mind or a yield that you have in mind at which point you might pull the plug on it. And that's why we you know a trial could be helpful in that because it helps you to gauge that without going the full hog of putting a massive issuance out. Um but you don't have as much control over it. I mean, you don't have that much control over the national loans fund uh rates either, right? Because um as we've seen with the the the UK government uh borrowing costs, those have increased as well. And that means that any new borrowings on the national loans fund will also have been increased. >> I understand. Very grateful. >> Okay. Uh thanks very much and thanks for staying on a bit longer than was probably indicated. Thank thanks to colleagues. Um, as I said at the start, we're going to review evidence in private later on. I'll be interested to see if we all heard the same answers from you or if we all heard different answers or different variations on that. But, uh, thanks very much. Um, so I'll now suspend the meeting for a comfort break and for change over um, of panels. So, thank you. Okay. Um we'll now uh reconvene and continue our evidence uh taken as part of the committee's pre-budget scrutiny for 2728 which is upon the affordability and sustainability of Scotland's tax and spending plans. So a warm welcome to our sec second panel of witnesses this morning. Um, we've got Steven Boyd, director of the Institute for uh, public policy research Scotland. Professor Jim Gallagher, trustee and chair of the Edinburgh Audit and Rust Committee at the Royal Society of Edinburgh. And we've got Allison Payne, research director at Enlighten. Now, again, you're probably aware, but just a reminder, you don't have to try and activate your microphones. That that will happen automatically through part of the the broadcasting uh features. And so if it's okay with you, we'll just get straight into questions and ask Michael Mara to kick us off. >> Thanks very much, Kim. I'll come to IPR first and I'm sure members will be careful not to be scrolling on Twitter given uh relevant. Exactly. Okay. [laughter] We'll all be on our best behavior now. The police are in. No, not at all. So innocent until proven guilty. Um so I wanted to come to your evidence on this issue. Um so you're um obviously clear that the government has talked about the scale of the deficit but I think in the evidence you presented to to committee in written form you said that they failed to provide a clear and credible plan for addressing it. So you'd like to expand on that please. >> So I mean I think the medium-term financial strategy does a a very decent job of setting out the scale of the fiscal challenge does so in great detail and I think that's to be welcomed but you look at the policy framework as a whole. So the MTFS, the um fiscal sustainability delivery plan in particular, the spending review and other documents published since these taken as a whole do not provide a credible and coherent plan for dealing with the fiscal challenge that the Scottish government is going to face over the course of this parliament. I think the FSDP in particular has a lot to say about the efficiency of public services. Now much of this we would agree with but again I think in totality the chances of these measures summing to a total that's going to make a real dent in the in the fiscal gap that we're going to face by the end of the decade I think is vanishingly unlikely. I think again the measures on growth again many of these you could welcome but again I think there's generally uh sometimes quite wild optimism I think about what deolved policies can do in terms of growth over the short term and finally in the tax strand I think the the tax system we get more I'm sure we'll come into detail this through the the the discussions today but you know there's nothing in that tax section of the docking that leads me to believe that the government's thinking seriously about how tax might be used to help fill this gap for the coming years. >> And a couple of particulars, the um the 3% target for efficiencies within NHL's health boards. Do you have clarity on whether those efficiencies would accumulate to the health boards or whether they would result in a reduction in the deficit? >> We don't. >> We don't. Do you have any clarity on the 1.4 4 billion pounds of additional spending committed by the S&P in their election manifesto as to what a status that it has whether that'll add to the scale of the deficit. >> I would have nothing to add to Dr. SA's response to the same question the previous panel thought answered it. >> I don't know. And would you agree that the with the IFS's recommendation that this committee might pursue uh in the absence of an MTFS this year an updated FSDP? >> Would that be a useful tool? >> That seems absolutely reasonable. >> Yeah. >> Okay. That's that that's appreciated. Um you've also said in the evidence that there's a danger that overly optimistic assumptions on the potential fiscal benefits of reform measures might push back a more cleareyed view of uh what might need to happen. I'm going to ask all three of you to perhaps reflect on the um program for government last week and some of the measures that were set out there. Do you have clarity as to whether those measures are going to uh go with health boards in the first instance contribute to savings within the to meet that deficit or whether they're actually about a change in delivery mechanism and improving outcomes? >> I mean my understanding it's a bit of both would be my reading of the documents. My concern would be when it comes in the fiscal side realizing these savings over the course of this parliament I think will be tremendously challenging indeed. I think if you're going to do change well and do it effectively in the short term you're probably looking at additional spend you know so [clears throat] I would think it's unlikely that will be making a significant contribution to filling that gap that was discussed at length in the last panel over the course of this parliament. Als lack of clarity in terms of how that might work. So if you take on the reforms of the structures of the health boards and if we have two mainland health boards um there wasn't a great discussion around about what happens in terms of the delivery of primary and community care because at the same time we're also reviewing local authority boundaries. So it's not even as if we can see well okay primary care is going to be devolved down to local authorities because we're going to be devolving we're going to be changing what our local authorities are. So there's that lack of clarity as to how things are going to be organized. Um the certainly that my concern is that that lack of joined up thinking about the health board structure and the local government structure. I think they need to be taken together because we're properly looking at where responsibilities lie where powers and um and spending and things should be organized in a a strategic way. We don't march ahead with the health boards and then kind of tap on the local authorities later. they have to be done in conjunction. So in terms of any savings, um I don't see how that we can possibly have clarity on that because we don't know the the structures that we're going to have. >> Okay. Would you not be worried about upfront costs as well? Steven Boyd recognizes some of that in terms because we have a short time period in order to address the deficit, the fiscal deficit and trying to get a path to balance. Certainly, definitely. I think as you mentioned in the earlier session that the uh the example of the police centralization um was not one that is going to bring up front costs to begin with and I think generally speaking whe whether it whether it's a good thing or not when you rationalize or centralize a service there are upfront costs and the savings will come considerably later. I think in the um fiscal uh the FSTP it talked about there the need to review every single spending line. I don't think there was any evidence of that last week. I think there's um there's additional spending. There are things like, for example, the breakfast clubs, which sound like a great idea on principal, but when you start unpicking it, what are the capital costs? Because how on earth do you put 500 kids that are going to school that are starting at different times? Where's the room? Where are the teachers? Where's the staff? Are there capital costs that going to be associated to that? There there's additional spending that comes that's not clear. and how does that sit that new commitment sit alongside a commitment to review every single spending plan and to consider impact and outputs. I think we're still focused on um inputs rather than outcomes. >> Okay. >> Professor Gallagher on the uh program for government whether it meets that path to sustainability or whether you feel there's any clarity on that. So to the extent that the program for government is an enabler for public sector reform, it should in principle be able to contribute to the budgetary savings which are necessary though those are very large and the time scales are problematic. However, if the public sector reform program is to have an impact on spending, it needs to be much more concrete than it currently is. Um the the RSC gave evidence also to the public sector reform committee on this and these issues are deeply connected. Um if public sector reform uh is to make a contribution uh even over a rather longer time period uh it needs to have a series of specific proposals that will save actual money uh rather than a series of broad acceptable principles which don't actually contain any concrete reforms. And if one looks over the uh last 10 years or so, the only substantial reform uh of this kind has been in relation to the police as Allison mentioned that has produced budget reductions but not because of the reform but by reducing the number of police officers and this takes us to the question of health board merging. There's nothing magic about the present number of health boards. uh they are perhaps an accident of history and there may well be nothing wrong with merging but whether two is the right number I think is a reasonable question to ask but it would be a mistake to assume that you get substantial savings from cutting the top hamper of organizations or merging them. uh most of the expenditure and most of the pressure comes not from the high heions uh but from the people actually doing the work and that's the doctors nurses supporting staff simply because of the volume of them. You can make some savings by having fewer chief executives or fewer directors of finance but arithmetically that doesn't come come in the end all that much even though they're very uh they're relatively uh well paid. So the the challenge for this budget round uh in respect of public sector reform is the lack of concrete um changes and the timetable which they might take if there were any. uh and if one looks at the public sector reform strategy, it's full of additional documents and propositions and plans and pillars and foundations and beliefs and principles, but it doesn't actually have a single concrete reform program in it. Okay. And in that short run question, you mean you mentioned cutting the top tier of management that [clears throat] the reality is that moving from 14 chief executives to two, those 12 chief executives would have to be paid off, I would imagine. And you know, any organization doing that would have to then take those costs over a period of time. So there's there's also initial upfront investment to allow that to happen. Is that the case? >> That is undoubtedly correct. >> Yes. Okay. Thank you. >> Thanks. Just following on from that, Professor Galler, you you spoke about the fact that it's big numbers in terms of savings that need to be achieved. And I don't want to belittle the sums because it is large sums, but it's reality not in terms of percentage terms of Scottish budget. That is only a few percent that needs to be saved. I say I'm not not not decrying there's not going to be a challenge there but in actual percentage terms >> um you [clears throat] you are of course right that the uh we're not talking about 10% of the Scottish budget um we are talking at one two or 3% um uh the medium-term financial strategy which the RSC has welcomed as a as a first step down this direction identify some potential savings and they are a few% of the budget um I think I would say two things about that. Uh first of course um it is not certain that the spending pressures have all been taken into account in the medium-term financial strategy. Uh as the earlier panel pointed out substantial components of the Scottish budget are now demand determined and not actually chosen by ministers. Uh and the mechanisms for managing that demand particularly in relation to social security are really very limited. So there's an upside risk in spending uh and the um capacity to make the kind of savings we're talking about over the time period we're talking about uh is um I'm afraid [clears throat] uh limited and the Scottish government's um uh ability to deliver them uh seems not to be uh certainly not in the short term uh readily available. So the result I fear and this is a fear uh will be that uh straightforward slamming slicing cuts might have to be made in order to achieve say one and a half% or 2% savings which in other organizations is certainly achievable. >> Okay. And can I just ask what uh Steven Boyd um IPR Scotland I think said that need to in terms of spending review plans need to shift practice um more towards prevention and reform which preventive spending is always it's like the holy grail that I want to get to but how how do you make that shift in the short term and how do you actually measure the benefits of say additional upfront investment for preventive spend because clear quite often different organizations will say if you spend £5 here you you'll save £10 in the long run but there's you're almost proving a counterfact show at the start with that investment. So how how do we reshape that while we're trying to do public sector reform or make that that shift in a meaningful way. So I mean I think it's it's worth commenting the fact that the Christy Commission proposals achieved a degree of consensus in Scottish civic society and political circles. I think that's highly unusual for Scotland and I think you know presented a real opportunity 15 years ago to make a decisive shift towards preventative spending that this hasn't really happened. I think emphasizes the challenges that are inherent in this agenda. So I think the the key challenge is again to do this well you're looking at additional spending in the short term you know and I think that is why these decisions have been postponed and postponed again over the the last 15 years or so. I think the Scottish government's recent introduction of preventative budgeting tool was interesting and I have to say I've not really found time to properly interrogate that with various stakeholders and we look to do that over the coming year or so but you know it it signals a degree seriousness that perhaps was not there in the past but you know again this is the right thing to do. Is it going to make a tangible impact in addressing the fiscal gap by the end of this decade? I think probably not. >> Okay. And did you want to come in also? >> Yeah, if it's just um I just wanted to say I think part of that conversation we do totally need to invest in prevention. There does need to be that shift but a shift implies that we stop doing something else and I think that's the one thing that we've not really had a conversation is about is that you efficiencies [clears throat] aren't enough. We need to look at if we want to shift that investment to prevention, what are we going to stop doing? And I think that's a conversation that is kind of being ducked too often. >> Okay. Professor, >> um I think this prevention qu this prevention question is uh very important. Uh the first thing to think about is everybody agreed with the Christy Commission 13 years ago. They all said this is a great idea. We believe in this. We have to ask ourselves why in substance it hasn't happened because it hasn't. Um there are potentially two reasons for that. And if one looks um at the for example the uh prevention tool that uh Steven mentioned um prevention is not an abstract concept. Uh if you're going to prevent something you have to want to know what is it you want to prevent? What is the bad thing that you want to stop that's costing lots of money and how are you going to prevent it? A prevention tool has none of those things. Again, it's a bit like the public sector reform strategy. It is insufficiently concrete. The second uh potential problem uh is that you've really got to drive prevention because it requires you, as Allison says, to make some cuts today to find the money to invest for uncertain savings in the future. And if the government are unwilling to be first of all bold uh and wanting to do that, secondly having the uh drive to to put it into practice and thirdly knowing where to put the money uh we won't get any prevention and that's been the experience of 13 years. >> Okay. But on that shift from maybe stopping doing something to put more money into preventive spend. I'm hoping my colleague Liam K is going to help me because the center know he's got he wants to come in in two ways to save money so >> yeah it's just a couple of questions that arise good morning and and thank you for coming um because we talked about services talked about the size of the workforce and cuts um the previous UK government had a public sector productivity program which put I think 800 million into delivering ing 1.8 billion of savings by 2029, especially by using things like technology and AI. Is there any evidence of the Scottish government doing similar thinking around productivity uh especially in relation to technology? >> Um thanks Mr. K. Um public sector productivity unlike productivity in the private sector is quite hard to me measure. In the private sector, you've got money in and money out, and you can see when you're getting more money in for less and more more money out for less money in. In the public sector, you're um your outputs are not marketized. You can't put a price on them. So, productivity is hard to measure. The the OS south of the border has measured uh has made an attempt at measuring productivity. I wouldn't put too much authority on it but it does suggest that in uh in England and Wales at least I think um there's been some improvement of public sector productivity though the mechanism by which that has been achieved is not clear um no s no detailed measurements have been made in Scotland though um the um assumption of the fiscal commission looking backwards I think it was the fiscal commission uh uh was that public sector productivity in Scotland hadn't improved. There's no no data on that. Um you might well be right about um the use of AI. Uh if one looks at the public sector reform strategy, uh one of the aims, one of the places where it seeks to look for uh improvements is in so-called back office functions. Uh the RC's view is that that's an unhelpful distinction between back office and front office. But nevertheless, some of the processes which one thinks of as back office might well benefit from the use of AI. >> Um I wasn't going to particularly draw on the public sector, but there is plenty of evidence and learning that could be have from the third sector and people that are working in communities. If you look at um organizations say like the wise group that um or chest heart and stroke Scotland or others that are delivering prevention and working on tight budgets and having to constantly kind of manage themselves um they have been able to show and they can show productivity and how they can develop um outcomes. On the technology side, I think there's a um there's obviously lots of potential from AI, but there's some basics that just improving our health data and data sharing that you know that we need to get right first. I mean, I think the whole thing around about if you look at the the development of the health app in England and the fact that we don't share health data between hospitals and GPS here that we're we're still kind of trying to play catch up. massive potential there that we've been talking about for years that you know if you've got an occupational therapist, a physical therapist that works for a local authority, they have access to different patient records than if you work for um the health board. Things like that have been tried to be addressed for years and have always kind of been stuck in the too difficult pile. There's so much work that we should be doing there around about data sharing. >> Yeah. So a few comments to make. Um the first I mean professor Galer's absolutely right that measuring productivity in the public sector is just incredibly difficult. So ONS have just been through a very extensive review this came 20 years after the Atkinson review of famous review of public sector productivity almost exactly the same exercises. So I think that points towards the kind of intrinsic difficulties here. I think measuring productivity in some private sector services can be difficult as well but that is massively compounded by the lack of market prices when attached outputs. I think the second thing to see is when we're talking public sector we're talking about labor the delivery of what are intrinsically labor intensive personal services and the rate of productivity growth and the services will always lag that for the economy as a whole. if gets there, it's probably one of the best evidenced areas in all economics, I think. So, we should be modest in our expectations about what we can achieve through productivity improvements. And thirdly, technology. Again, we need to tread very carefully and this is kind of an issue about whether or not you're going to just for quality in your measurement of productivity. So we can introduce technologies and you look at health services over the longer term utterly transformed by technology and have massively improved outcomes but they have added to cost because they tend to be complimenting rather than substituting for labor. So if you look at manufacturing, new technology tends to displace labor and you see quite consistent and large productivity rises. In public services, you don't see that. You see better outcomes and depending how you adjust for quality, you can see increases in productivity, but nonquality adjusted is what really matters when it comes to costs. So you might see quality adjusted measures going up, but you see non-quality sp adjusted spending continue to rise year on year. So I think as William Bulmo the kind of economist who kind of led the agenda here said it's all very well to say to a hospital to a hospital hospital administrator that your quality adjusted productivity has gone up year on year but I administer say well so are my costs you know so I think we just have to tread very carefully when we talk about productivity in the public sector. understand a related point then uh in 2020 between 2022 and 2024 I think the UK government uh UK government department saved about 300 million pounds uh in property running cost efficiencies uh they did collocation government hubs that sort of thing is there any evidence that the Scottish government is also looking at the same sort of uh thing which could mitigate reductions in frontline services >> I I believe there is. Yes. >> Mhm. >> Um some buildings have been disposed of. This was uh I think uh described by possibly the minister for finance maybe even in the last parliament. The Scottish government has done some of this and I believe it is planning to do some more which is entirely sensible of them. [clears throat] >> Very grateful. Conven you want to come in briefly? >> Did take a a quick step backwards. the convener identified the scale of the necessary adjustment, but I thought I thought it was worthwhile maybe taking to yourself Steven Boyd regarding some of the comments that you had made in your submission about where that falls because in essence because there are parts of the budget that are protected health spending growth frontline uh workers. You've set out that you think that that could result in certain sectors having a reduction of 13% by 2930. Is that maybe expand a little bit on that in terms of the differential impact that you would see around those cuts? >> Yeah. So I mean I think I mean it's all there in the spending review you know. So we know over the next three years there'll be real term spending cuts in education and skills local government. I don't have it all to hand I'm afraid but you know and even the real terms increases for health are insufficient by the Scottish government's own numbers to meet current demand. And then you've got some specifics. So I mean we focus quite tightly on the headcount reduction target of 0.5%. So the Scottish government has said this will be met by losing jobs from back office functions. So we don't really accept the delineation as valid between front line and back office and the public sector. I don't think it's helpful. But if you assume that certain areas of frontline delivery will be protected and if you assume that health and social care employment will continue to rise roughly in line with demand then that assumes very significant cuts in areas that the Scottish government might describe as back office amounting to probably 20,000 jobs by the end of the decade. Now you know the point we make about that is that's all well and good. Now we think that's very unlikely to be achieved without you know sufficient cost to the quality of public services. But if that is your target then you have to set out how it will be achieved, how you think this will be affected by demand, how it will affect the quality of the services etc. And that has just not happened thus far. >> Okay. Thank you. Go to Paul and Stafford. >> Thanks chair. um if it's okay to um just come back to the IPR um response. Uh in terms of the risks to the Scottish spending review, one of the um one of your submission points was around climate change adaptation, mitigation and damage um repair measures and I'm conscious that we're all here after quite a volatile summer of responding to these emerging impacts and that going into the future they probably won't emerge in a smooth or predictable way. Um, so the question is just really around are there any Scottish specific risks emerging in the next decade that you see in relation to this and do you think the fiscal framework gives us enough resilience to be able to respond to the to the scale of these potential shocks? >> Yeah, it was really brought home to me in the summers actually walking to the green lock and the K gums the day before the wildfire. So I mean it's all seemed very very real. So in terms I mean I love Scottish specific risks. I mean, I'm I'm not sure about that. I would have to give that a bit of thought. But I think we know that, you know, experience throughout Europe this summer has shown us that these risks are very real. Your own welfare risk is an obvious one. It's one Scotland seems quite exposed to. I think the you know the point you know the broader point really is round about the capital spending challenge and I think professor Bell touched on this in the last panel if you know so it's about climate change mitigation adaptation certainly but we also want to be building those supply chains related to the buildout of renewables etc which will undoubtedly require public investment so yeah I mean I think some additional flexibility around about that for the Scottish helping to be able to invest in these areas particularly in those areas that's going to leverage our private investment would be very welcome. >> Allison pain or professor >> I'm pretty sure that Steven Boyd is right to say that Scottish specific risks are relatively small compared to the big risks that you refer to. Uh you asked in particular whether the fiscal framework cope with this. Now to the extent that the UK government deals with these UK risks that will feed through into by in the fiscal framework in the Baret formula. >> Thanks. >> Um I'll get Michael Marin to come back in. >> Can I about the issue of bonds um and regarding the RSSE uh submission said RSA feel RSSE feels the Scottish government's plan for the purpose and mechanism for bonds is unclear. I suppose I'm feeling that this is um accelerating at the moment. Feels that the government's approach to this with hearing announcements. So I'm I'm interested to hear a little bit about why you feel that it's uh there's a lack of clarity on those key issues of purpose and mechanism. >> Uh thanks Mr. Mara. Um the just to set to put this into context, bonds are not a way of spending, they're a way of financing. um they do not produce any more capital spend. Uh it's all that's all constrained within the uh capital spending totals. So the question is whether uh bonds can effectively be used to substitute as was discussed in the last panel from borrowing from the uh national loans fund which is where the Scottish government borrows almost all borrows indeed all of its money from at the moment. um that the unclear lies in the nature of the process. Uh we know that the Scottish government has uh spent a reasonable amount of money uh in trying to ascertain the potential demand uh in the city of London which is where uh one finds the market. Um it's not clear however uh turning that into actual bonds that are value for money will be done. Um the underlying uh reality here is that um I don't think we are aware of any subnational government which uh pays less than the sovereign government for the issue of bonds. The reasons for that are obvious. Uh uh the subnational government has a a smaller revenue base uh and it is dependent on the national [clears throat] government for some of that. That's true worldwide. That's not just a Scottish story or a UK story. uh and second uh there's always a degree of uncertainty uh and we see this in the United States about the extent to which a national government would stand behind bonds issued by a subnational government. So these uncertainties have not been answered as far as one can tell uh in the Scottish government's uh proposals on this subject. >> Okay. Comments on this? >> Yeah, I tend to agree with most of that and agreed with Dr. SA's comments in the last panel. It's not clear to me where this view that bonds are going to be a cheaper way of borrowing has came from. I think it's widely assumed that they will be more expensive. I mean, a slightly unpopular point to make. I think recently came from the Scottish government. I don't think it's unhelpful that the Scottish government is engaging in a really comprehensive way with financial with financial sector and markets in a way it's not done before. And I think building that capacity is potentially to long-term benefit. Now you know as if that's coming at the cost of more expensive borrowing at a time of very tightly constrained public finances then yes I can understand the questions will be asked but I think the work that's been done up until date up until till now is likely to stand the Scottish government in you know goodstead to longer term in terms of that capacity build >> and I think I would accept some of those trade-offs and potentials within it but it's do you think that the committee suppose my concern is that we might find ourselves in a budget process towards the end of this year where we are told that part of the capital shortfall, which this committee is concerned about, is going to be met by a bond uh at some point and that there is a kind of an assumption that all of that will be fine. But we haven't really had those tradeoffs set out to parliament or to committee in a policy statement because it would sound like you've not seen any of that. We're just kind of No, there shaking heads here. So with can I just please um it is not possible to meet a capital shortfall that's to say a gap between the capital budget and the aspirations for capital spend by additional borrowing because all our capital is uh is either directly uh funded by the government or within the existing borrowing uh limits which are with the national loan fund. All a bond would do is substitute for um borrowing from the national loans fund. It will give no additional spending power. Okay. And a very useful clarification um as well. Um but the still the risk I think that that is presented in a budget towards the end of this year without that kind of detailed policy trade-offs being set out to parliament. Do you think that this committee should be pursuing a more detailed account from the government as to how they perceive those c costs and policy trade-offs and opportunities as I'm sure they would like to uh include within that? If the Scottish government were to propose to issue bonds, it would have to make provision uh in its budget uh for the additional uh cost, the spread in the jargon which uh was mentioned earlier and for the administrative costs which are substantial uh as was explained in the last session. Uh one doesn't simply go to the shelf and pick a bond off. Uh you have to construct it yourself. You have to decide on the terms of the bond. uh you have to decide uh on the duration of the bond, how many years uh are you borrowing for? And you have to decide uh to whom it should be marketed, who should underwrite it, and it's possible to get a price a bank to say if nobody else buy it, we'll buy it off you. That's underwriting. How the uh the yield is assessed uh in advance. What do you think you might get it for? in other words. But then there's the uh the the uh moment of truth is when you offer this for sale and somebody uh offers to buy it at a much bigger price than you thought. At that point, you're in trouble. And >> we had some evidence last week from the Scottish Fiscal Commission around some of what they perceive their likely a possible role to be in this. And I found some of that slightly concerning in terms of the the fiscal commission's uh role in terms of projecting the broad budgetary position um in terms of the income and expenditure side of of where the government was going to find itself but also having to put itself in a kind of position of neutrality given not wanting to comment on a market sensitive issue such as the costing or the likely issue of a bond. Do you think the infrastructure around the budgetary pressures resulting from the issuance of a bond um is accounted for within the current fiscal apparatus of Scotland? I don't think if you look at the spending review you will see any funds set aside for the administration cost of bonds which could well run to u millions, tens of millions potentially. uh and um it's not a criticism of the Scottish government to say that they don't have the technical capability at the moment and they would have to buy that in uh as they've done in the exploratory work which they've done. where in where in that apparatus I'm happy to hear from either of the other uh colleagues as well but where in uh the apparatus would we find the objective assessment of the fiscal impact against the actual budget of meeting the costs of an unissued bond given that we have um a a constrained fiscal settlement and by those terms I mean in technical terms you know the Scottish government devolved institutions have a constrained set of options whereas a UK government a sovereign issuer of debt has other options and broader borrowing. I I'm wondering who's going to tell us how much this costs. >> I think there will be two things here. Uh one is who's going to make the estimates? Um and I imagine that that will be a combination of the Scottish government officials and whatever advisers be brought on for the uh for the bond um uh uh launch if there was one. uh but ultimately whether this is value for money uh would be an issue which the accounting officer the accountable officer rather would have to determine and my understanding here um though this um isn't gospel uh is that that would be the permanent secretary in the Scottish office and if he took the view that the issue of bonds was not good value compared to the others it would be for him to seek a direction from the Scottish ministers to proceed with it nevertheless if that's what they wanted to do. >> Sorry for clarity. The permanent secretary of the Scottish office. >> Scottish government. >> Scottish government. Thank you. Okay. >> Showing my age, Mr. M. >> Well, indeed. Sorry. Okay. That's is a use clarification. Any any other input on that, >> Steven Boy? >> Yeah. There's quite a few supplementaries triggered from this. [snorts] No problem. Thank you. >> Sorry. So I I suspect the supplementaries will will facilitate for the answers anyway. So I've got uh Kim first >> uh panel. In the past we've often relied upon capital projects to produce economic growth. Given that we've had scant economic growth in recent times and given that the level of our capital debt is quite high, do you think that the plans that the Scottish government have in terms of capital spending are maybe slightly ambitious? What what would your views be on that? I think they're not clear. I think I don't think there's enough detail. I think thinking about reflecting on what was in the program for government and also what are the knock-on other capital expenditures that might come out like you mentioned the breakfast clubs for one that could quite easily um um necessitate uh additional uh capital expenditure and some of the others if you're looking to properly restructure our health boards so that you end up with more centers of excellence are we looking at more hospital programs that are a part of that so that we are centralizing and building in proper ly having a sort of centers of excellence that would make sense if you were restructuring the health boards. So I'm not sure from the program from government last week what additional um capital would be on as a knock on from the policies that have been implemented. I think there's an awful lot of questions that we still don't have answers from that don't tie up to um what we set out in the medium-term financial strategy and and in the the fiscal sustainability uh delivery plan that there's a there's a lack of clarity and there's just a a lack of um money properly sort of allocated and what we're doing and how we're pay paying for these things. I think there's too many um questions remain. So it comes back to the general feeling that we're walking in the dark without a torch. Often in terms of >> I think we know we're walking in the dark with a torch though. That's the the most frustrating thing is we know that these problems there. We know that we've spoken about Christie. We know what we need to do. We know that there are are whether we learn from others that are operating in Scotland that are delivering the prevention programs that we talk about. We know what we need to do. The problem is we seem to have had a long-term ery problem that we we don't know how to get from where we are to where we want to be and that the painful political choices that we have to make along the way to get there. I think there is no easy um when they were talking about the council tax discussion earlier. The problem is winners and losers and to to shift and and to to make the changes that we're going to require. There will be people that will lose um and will not like some of the policy prescriptions. And I think we've been too afraid of making and having those hard conversations >> and we don't have a good track record of delivering capital projects, you know, over time, over budget. That just seems to be a continuous story >> to to be fair. Um, some capital projects have been delivered on time. Uh, an example would be the new fourth road bridge, the third fourth crossing as it was known at the time, but others have been quite disastrous. uh the fairy story uh stands as an example. But to go to your original question whether capital investment uh improves the economy, it depends as much on what the capital investment is as how uh much of it there is. So in the uh so-called fiscal gap, there's a chunk uh which is a gap in supposedly a gap in capital expenditure. That's a gap between the Scottish government's aspirations and its budget. Uh the question is how you spend your budget. Capital can do two things for the economy. Uh one is to make the public sector more efficient. Generally speaking, it increases the cost because you got a nice new hospital rather than anything else or maybe not nice new hospital. uh uh uh and but the second one is investment in infrastructure uh to improve economic growth and that is that is critical for the economy uh and um can probably be best managed at the regional rather than the national level uh which takes you how to uh to the allocation of capital spend to local government or in regional partnerships. Can I just very quickly think professor G has set out economic case for capital spending very nicely. I think in Scotland looking at a particular challenges I mean there's very obvious areas I think require investment as soon as possible. I think housing is a really key one and I think you know there are many contributing factors to a relatively low rate of productivity growth but housing constraints I think increasingly a major one and you know so yes there's a social need there as well but you know also being an economic imperative I think you know again referring back to the various climate change investments earlier on and how we build you know supply chains and renewable energy sectors there's definitely some public investments in port and transport instruction transport infrastructure that would help you know leverage in private sector investment. But I think it's also worth stressing in terms of the conversation we're having today about the Scottish government's budget over this parliament. The idea that we're going to identify bits and pieces of infrastructure, deliver them over the course of this parliament and then see the fruits in terms of higher economic growth I don't think is particularly credible as a much longer term issue. >> Okay. Thank you. That's why I've got a couple other colleagues still wanting on growth but the civil engineering we feel is obliged to point out in terms of project delivery M74 the M80 uh the M8 upgrades and actually and it's worth noting that rail electrification Scotland's 50% cheaper per kilometer compared to the rest of the UK. So there are some good news in capital delivery projects as well. Um I'll bring in Liam K and then Pauline. >> Uh I'm very grateful. Just following on from the questioning uh that Michael Mara was doing about bonds. Uh the Scottish government is also proposing a mutual investment model which some might say looks rather like PFI or PPP except that the public sector I think gets a share of the returns and holds an equity stake in the project. Now Steven Boyd uh the IPR have said that that this model could lead to higher long-term costs. Can you explain that and can it be designed in such a way that uh it provides value for money? >> Yeah. So I mean we are speculating there because we've not seen sufficient detail to make a proper assessment of this. So I mean in the same way that PFI led to higher unforeseen costs at the start by not delivering the quality of the service that it was intended to do. You can see similar outcomes emerging from this model. But I would be reticent about commenting about it in any detail until I see much more detailed plans. Professor Galla, um I think this is an important area. Uh in a time of um constrained capital spending, uh harnessing private investment to provide assets may well be a good thing. Uh the challenge is structuring the transaction in such a way uh that everybody benefits. The private capital has to be rewarded. there's an interest charge and it will be bigger than the interest charge you would get by borrowing the money if you could from the from the national loans fund. So the structure of the project has to deliver better outcomes or um lower costs uh in the service concerned. So simply buying things on higher purchase is is more expensive than buying them. Uh and I'm afraid we've been guilty a bit of that in the provision of assets. uh you get a private sector to build say a school and you pay for it over 25 years, you get some benefits because they might well uh build it more cheaply. They might well control the cost over 25 years. Uh but the main thing that's going on in the school is the teaching and they have no real effect on that. Uh it is however possible to imagine ways of structuring deals uh that are a win-win. Um uh and it's certainly a good idea for the Scottish government thinking about this. Uh and uh housing might well be an example. There we see the Scottish National Investment Bank uh trying to attract private investment into housing. Uh I'm not sure it's got it right yet, but at least they're trying. So there is scope uh for private investment to be drawn into public projects and for the benefits to be shared between the investor and the public. I think there's potential around about um social impact investing and there has been there sort of I think tried to be a few sort of um pilots of that I think where where you've got you know you've got your private sector investor you've got a third sector organization that is kind of the delivery partner um and I think where it's fallen down is getting the public sector to be on board um but there have been I think in Perth a couple of of programs looking at housing small programs that can be piloted and um that are not necessarily capital but are looking at different ways of meeting out outcomes and they're look they're they're based on the the delivery and outcomes. Um and I think trying different things are important. They're not always going to work. They might not work but trying things on a small scale. The growth partnership has done quite a lot on this. Um and certainly um I think Gordon Brown looked into quite a bit of the sort of social impact investing in during his time and I think there there is potential for experimenting because I think that is it would also be a way of bringing in more of the expertise from the third sector in terms of delivery. I think that just just to touch on one other thing as well in terms of the sort of the capital projects I think sometimes we're we're not great at the uh the long-term um look. So when you mention some of the rail electrifications, so if you look at the borders railway, we we we built that and it's been a success, but we did it in the short term and we didn't so we built bridges that couldn't go over a dual track. So when we think, oh well, if this expands and how do we manage to think about this for the long term, we might want to create a dual track, but we've got bridges that are set in such a way that we can't expand. So it's how do we when we are doing these projects think to the long term and not to the short term or the immediiacy of right we've delivered this we can go rather than what is the long term what will be so building a bridge so they go over go overs the space even if we can't you know afford to to dual track a line at the moment just having that kind of foresight and thinking ahead because I think we've not been great at those kind of the longer term implications around some of the decisions that we do >> thank you s can I just come in the back of that if that's I mean obviously the the funding envelope was even different when the borders rail was built but is that not a further potentially a function of constrained capital borrowing and very tight capital limits where you actually you can you can have aspirations to build X but then when you're looking at your spending envelope you maybe can't do that and that's where you you make some savings and I take the point about the the dual track and the the bridges but there's there's the funding and envelope pressures that that need to be managed as well. >> But is that I think we're we're we tend to focus on the short term and I can totally understand those pressures, but that's then just going to build up a cost to the longer term. So if we the border railway which has ended up being so much more successful than we thought it would potential for expanding that becomes so much more expensive because it means we've got to all that infrastructure additionally. So it's more about if we can afford to pay more upfront in the shorter term, the longer term um that the potential for developing things further down the line is >> presumably that means also getting the business case model right because the passenger numbers were greater than initially predicted. So therefore, you know, yeah, >> could I add something to that conveyor? As it happens, I was working in the Scottish government in those days and at the time um as you say, the the business case for the Scottish uh for the borders railway was marginal. Um now, as it turns out, it's been so much better than expected because business cases aren't always right. uh but it would have it might well have pushed uh the borders railway over into an unacceptable business case if we future proofed it. Uh so uh I suspect it wasn't it wasn't as much capital constraint as as the assessment of the business case at the time. It's a long time ago now of course if you bring in Paul >> thanks convenor I've got a couple of questions along the same vein I think to professor Gallaer um in your submission around um capital spend um helping e economic growth uh you've said that in terms of public finance we should be looking at joint funding to derisk developments in areas um of innovative business startups scaleups so I just um I guess for the whole panel as well. What's your what's your take on the role of public finance to shape the direction of growth and leveraging public private money to support some of these things in ter you touched on the Scottish National Investment Bank um and how we could how we could look to use bonds as well and that kind of social impact investing. >> Okay. So there's um I think the social impact bond question is is a slightly different one. Come back to that separately. Um it's undoubtedly the case that um in a way which wasn't so you know 100 years ago uh the um the public sector and the government have a role in promoting economic development. Um uh you can slice it in different ways. Uh the first and most important thing is all the supporting infrastructure that makes an economy work. uh everything from the court service that enforces um contracts uh to the education service that that ensures that people are able to work uh and to more as it were concrete literally concrete projects bits of physical infrastructure which enable people to get to their work which enable businesses to send their products in and out and so on. uh you've got to integrate all of these things and one of the the relatively recent successes of um both the Scottish and the UK government in this area has been the um city deal partnerships which are focused on uh doing precisely that and um and this is where we come to the where you began your question uh public bodies are uh investing alongside private sector bodies uh in into um enterprises one sort or Um, and it has to be both. Uh, because typically you're taking a bit of a punt. You're not sure this enterprise is going to work. Uh, but it's got to be investable for the private sector as well. Otherwise, you're going to throw money down the drain. Uh, and it's the role of the various economic development agencies inside the Scottish government. And we spend, I'm doing this from memory, so it may be wrong about 2 billion pounds a year on this. Uh, so we ought to be getting good results. guess we're not so far. Uh and um finding a way uh to mix the private sector with the public sector. We haven't quite got right yet. Um there are arguments about whether private sector falls short. Um it has traditionally said that um private equity managers can't go beyond a day's travel uh to go and visit the businesses they're investing in. Well, part of the government's job is to make it a bit more attractive to do that. Um uh the uh the challenge in all of this is integrating the stuff and the large number of public bodies which are involved in [clears throat] economic development is a challenge there. uh and the auditor general um uh sorry the um audit Scotland have pointed that there's rather too crowded a landscape in public sector uh um support for enterprises and he's a bit simplification a kind of one-stop shop approach if you like um we've got Scottish enterprise we've got South Scotland enterprise we've got Highlands Enterprise we've got uh the Scottish tourist board we've got the Scottish National Investment Bank uh uh we've got a list of local authorities with these pairs and some have forgotten. Skills Scotland, skills development Scotland for example. So there's too many players on on the pitch for the for the game to work. Uh but the principle is correct. >> I just wanted to mention about the local government element of that in terms of public finance and how it supports growth. We can't do it all from the center. And I think if you saw the recent news story about the job losses in Inenver, if Inenver is swept amongst Glas Glasgow in the greater Glasgow area, the impact on that community in that area is kind of is lost. Um, and I think that that's why it's so important that local authorities are a key delivery partner in a lot of these this what happens here and how do we how do we address the different needs and circumstances that are impacting whether it's included whether it's iness um there are different um priorities that need to be addressed um the infrastructure differences in terms of you know the two pound bus cap that's been talked a lot um about the impact of uh buses you know in Edinburgh we've got excellent functioning bus service that has will undoubtedly contribute to economic growth, but in other parts of the country, you know, kids can't get to school on time with a bus. Um, so there there's a we can't do too much of a a once for Scotland. There has to be an an acknowledgement of the differing needs and circumstances that are going on um within Scotland and empowering those different communities and and and regions, but at the same time where we can pull things together and we can um drive things in a in a more uh efficient way we should do. But I think it's really important that it's not just a case that everything's driven from the center. >> Yeah. And I think the the business growth ecosystem in Scotland just isn't working very well. And I think our recent track record over the you know the whole period of devolution I think has been particularly worrying. If you look at renewable energy sector I mean I remember sitting in this room 20 years ago talking about the opportunities in renewables. Have we in Scotland developed any domestic loan firm of any real scale in that sector that's now playing its trade across the world? We haven't really. You know, I recently did an exercise looking at the 10 largest films by market capitalization, domestically owned films by market cap across a range of European countries. I mean, Scotland performs really worryingly badly, you know. So, compared Denmark, you know, combined market caps about 700 billion over North about half of that, but you've also got other really big domestic loaned players in there. Most of them are trust owned, which means all the decisions have been made within the country. You know, you look at Scotland's 10 largest domestic loan firms, you know, I mean, SSC 25 billion. You could have an argument about what extent that's really domestically owned. And then you're down to where's Pumps at 8.5 billion, you know? So, it's really worrying, I think, about where we are in Scotland in terms of that kind of business landscape. Now, who's to blame for that? I also think we spent 20 years arguing about that, you know, and I think at times there's been a an overfocus on enterprise networks now. You know, I'm not arguing they're working perfectly, but there certainly the whole private side of that ecosystem isn't working very well in terms of nupturing Scottish firms. I'm skeptical about the crowded landscape argument. You know, I think if you're a business looking for support from Scotland's public sector, it's not that difficult to find that support. And I've spoke to many firms over the year who have lent on enterprise networks and skills development Scotland for support at very, you know, really important points in their journey. They've not found it hard to come by. You know, again, it's not to say the system's perfect, but I think we have to be looking at both the public and private sides, but I think we also have to be raising this issue and profile in Scotland. I mean, if we're not managing to grow domestic loan firms of any scale, and I don't really think we are, you can always point to kind of outliers. I think that's something that should concern us all, you know, and requires a really holistic view of what's working and what isn't working. >> Just to follow up on that then because the other part of the question is is more specific and you also mentioned um it's out with our control but one area that requires investment is improving grid connectivity and capacity. So I just in terms from your perspective to what extent is an inadequate grid capacity now becoming a constraint on economic growth and and this given the security um to private investment in Scotland is that >> from an point of view we haven't looked at that I'm afraid >> understanding is as a constraint you know but I mean I think you're immediately there into a whole range of issues about how we can effectively invest in the grid and whether or not that's best done on a UKwide or a Scotch basis etc. It's a a very complex issue and I think again you know we're now confronting the challenges of decades of underinvestment in that system. >> Thanks. >> I was going to bring Liam K back you're okay. >> Right. Thanks. Can I just ask um Steven Boy there? So you spoke about renewable energy and there's an ongoing debate about whether we've maximized opportunities or not and obviously you you feel there's not been enough supply chain development as part of the issue that when you look at the contracts for different auctions for so long it was lost price wins. So therefore, it becomes much harder to invest in startup or or to actually get companies up and running when you're competing with established foreign investment or where labor's cheaper because obviously China cornered a lot of the market. So therefore, it's much harder to compete and build up that supply chain. Is that one of the factors that that's inhibited that renewable energy in terms of manufacturing and supply chain growth? It may well be but I mean I think the issues are much broader and deeper and extend much further back in time. So again you I remember sitting in this very room discussing renewables 20 years ago and we had a a bunch of companies at that time that were at the kind of global frontier in their own particular sector. So you think of Palamis and wave wave gen and wave up and iness you know a number of them why so there might be an issue in wave energy and just you know the viability of that technology at commercial scale but you know you look at tidle you look at wind onshore and offshore given the extent of the opportunity in Scotland that we've been discussing for a very long time why did that not lead us to develop our own domestically owned companies of scale in that sector so to me That's a a much broader issue about the business development ecosystem. You know, I think, you know, yes, there've been failures in the public side and that, but I think there, you know, very significant failures on the private side of that as well. And it's it's kind of a UK issue as much as a Scottish one. So, what is it about the UK system that doesn't allow us to develop companies of scale in a way that other com countries seem to be able to do quite regularly? I think, you know, it's not something I would pretend to have an answer to. Certainly not one I could articulate very quickly, but you know, again, I think it's an issue that I would like to see much more public debate about overcoming months and years. >> I would agree. >> Will you excuse me for a moment? Sure. Can you >> I'd agree about a great public debate. I mean, I I actually want to now debate with you about energy choices, but I'll I'll leave that. Um I'm conscious, Liam, that not any I've not brought you in yet. >> Yeah. I I was going to um go back to a point that Miss Payne was making earlier on actually offer a confession similar to Professor Galler that I was in the Scottish government at the time. The first business cases were being brought forward in relation to the borders railway and and bluntly marginal was probably the most um charitable description of how officials were suggesting those first business cases looked. I think the problem at the time was that um those business cases were being looked at and analyzed as if they were um transport projects in the central belt and actually as a political decision about um infrastructure investment in areas out with the the central belt. So I linking back to the the points that were being discussed earlier about um concerns raised by r a range of witnesses to the to the uh the committee and written submissions about efficiency ser um savings leading to service reductions. Um I think that seems to be a concern across the piece. I would argue that there is probably a greater level of concern in some of the rural and island areas about a disproportionate impact of those um service reductions as part of that kind of efficiency saving process. So as we're taking it forward alongside all the other things that we we need to um see the government and and us collectively achieving as part of this reform process. What waiting um do you suggest that um we should be attaching to ensuring that there's an equitability about this and that that there are some parts of the country who are not paying a heavier toll um for these driving these efficiencies uh than than others. >> I would suggest that you you need to start the the whole process from the bottom up. If you do it from a top down then you are going to end up um having huge problems. Um we recently had shared a an article from a woman in tongue talking about the problems around about social care and um um sort of the palative carees when people are dying in a very remote area um and the inability that they they've got community organizations who could deliver the services but the inability for the the health board to adapt to their one-sizefits-all well we don't we can't do things differently. I think we have to be able to deliver services in different ways in different parts of the country and I think if we start from the top down that's going to be very difficult. If we look at what's actually already working in many of our communities then how do we empower those who are already delivering public service reform? Why do we need to constantly reinvent the wheel and have everything done from within government? Um, so I think if you work with the communities and if you work with places that you're you're sort of identifying where there is a potential danger of feeling that they've been left out and suffering more disproportionately. Well, in many of those communities, there are already groups there that are doing and they're making up the existing shortfall. So, how do you empower those groups? That would be my starting point. It' be well, what's actually happening? Who who's working and bringing them as part of the partners in terms of delivering public sector reform? I think too often the the third sector is a kind of like an adjunct and we'll bring in at the kind of the last minute. They need to be a key partner. Um and we need to be willing to deliver services in different ways in different places and try different things as well because there is a danger sometimes to say well something's worked in one area it'll work all over Scotland and it doesn't always work like that. And I think it's a case of well what is right for one area is great let that work there. Let's see how we can adapt and learn. Um, and so that that I think has to be that starting point of working with our communities and the more that can be if we are going to end up with two health boards, if we're going to end up with more fewer local authorities, there has to be more down at community level. Mhm. I I I mean is there is there a risk that during a process where for understandable entirely human reasons individuals and and and and teams will be desperately looking to justify the roles that they play maybe adapt them somehow but in a sense they're kind of circling the wagons and therefore the sort of discussions that you're talking about that designing in that third sector involvement from the from the outset becomes more difficult because there's an element of um defending your patch. Undoubtedly, Turkeys don't vote for Christmas to put it very bluntly and that's an unfortunate we put but that is the thing I think what we've seen as well since the program for government. So much of the particularly the the narrative in the media has been how many civil servants will be cut, how many jobs will be lost, how many and it's been very much that has been that focus rather than looking at it a different way. Well, how many communities will be empowered? How many new different types of jobs will be created? But if we if we very much look at it only in those headline figures and not about how we rewire and deliver better outcomes, I think the whole discussion has still been very much on the inputs that is as if the structures by themselves will magically fix the way the country operates. But there've been nothing about in terms of how does changing those structures lead to better output. Whereas if you are then bringing in those community groups, then you can talk about the outputs. You can talk about what does this mean to the to individuals in our community? because I've not seen anything that's saying that, you know, how is how is um two health boards going to help somebody get to their GP or get an appointment or go through the waiting list or get the help that they need or access social care. It's the outcomes that we need to be focusing on. And if you start from a design point of well, how do we improve outcomes and work back then you end up with a different conversation rather than well, how do we we need to find money, let's just cut certain things. Okay. >> Thank you. um a great risk of getting back down the bonds rabbit hole. Um could I ask ask Professor Galler, you spoke about I mean I think you said in terms of administration and cost it could cost the Scottish government tens of millions of pounds. Now I'm aware Aberdine City Council issued something like£370 million worth of bonds. has then they done a review how much that's cost them in terms of administration set up and obviously there's a learning there you know I'm not not comparing the council to the Scottish government but it means it has been done in Scotland before I'm not aware of the Aberdine story I'm afraid convenor I'm slightly surprised to learn it to be honest um but historically local authorities in Scotland elsewhere have issued bonds uh but uh very few now do um in the there's a very very limited local authority bond market. Um but in all cases uh bonds issued by local authorities had a spread in the jargon uh over bonds issued by the central government. >> Yeah. Well, if my phone scrolling, which wasn't Twitter's correct, it was city bonds that Aine city council did. >> Um [clears throat] they may have been a structured product um rather than a a liquid bond. >> Okay. Um, does any colleagues have any questions? Um, okay. I'll maybe just do one more from the chair if that's okay. So, we heard earlier on in the earlier panel about restrictions in the fiscal framework particularly around borrowing and you know there introduces some risks and less flexibilities. Um can I just ask professor Galla so as I understand that the fiscal framework's due for review in a couple of years time [clears throat] is that mandatory or is that almost within the gift the UK government obviously any changes the negotiation between two governments but does any review I mean does UK government effectively control the the fiscal framework in terms of whether there will be changes on the review and therefore other events could could overtake priorities in terms of in that review. >> Um my recollection convenor is that when the first fiscal framework was um uh created which was after the devolution of taxes under the 2016 act it contained a provision for a review after 5 years. I imagine but I haven't checked that the present one contains the same because it will be in the UK government's interest as well as the Scottish government's interest uh to have a review undoubtedly. >> Okay. Thanks. Um and just one final question for Steven Boyd. So at the outset um you you spoke about optimistic growth. You think that that it's not realized. is that in terms of the long term because obviously in a a year-to-year basis the Scottish government's working off um estimates from the OVR and the Scottish Fiscal Commission and but we saw in the the latest reconciliation that Scottish Fiscal Commission had overestimated income tax revenues by 200 million pounds. So there was an overestimate but in terms of scale I mean it's a very small scale that optimism. So, is that what you're getting at or >> I think all I'm trying to say is when you look at the devolved settlement, the powers that the Scottish government have are very relevant to longerterm growth. It has considerable supply side powers and if it does the right thing with those powers, you'd expect growth to be higher in the longer term than it otherwise might be. But its ability to affect growth in the short to medium term is just massively constrained. I mean the way you affect growth in that period is through policies that affect aggregate demand and we just don't really have those powers, you know. So I think it's just been in terms of this debate about how we meet the fiscal gap by the end of this decade. I just think we have to be very very cautious about deolved policies leading to higher growth in Scotland that's going to make any kind of meaningful dent in that fiscal gap. Okay. One one of the issues that you discussed in the last panel which was very informative is the uh are the technical issues around the management of the uncertainty in the stream of revenues uh which um is the fiscal framework is the place to address and I agree with Steven uh that the supply side tools which the Scottish government have are long-term tools uh not short-term tools. uh and I think we we've probably gone beyond the world in which I hope we have uh under which we use macroeconomic policies to create temporary booms uh because they they come back and bite you as they become temporary downturns. But there may may be scope um uh for improvements further improvements to the uh fiscal framework uh to increase the certainty available to the Scottish government perhaps at a price overall. Um as you rightly say on one measure the uncertainties are really quite small. They're hundreds of millions uh in a budget of several many billions. Uh but of course at the margin in public spending uh you're always arguing about not the not the 60 billion but the couple of billion at the edges. So they're quite significant uh yeartoyear and as I heard in the previous um uh session the Scottish government has a set of tools to manage this um and they include building up reserves uh so that in a bad year you can fall on the reserves. Uh the temptation however is to spend every penny you've got every year and that's an error. >> But the reserve's got a limit. >> Thank you pardon. >> But the fiscal reserves that unsurprisingly but if you spend it all in the first year you you you hit the limit. >> Okay. Right. Um big thank you to the uh three panelists um for sticking with us and we started that we bit late as well. So thank you. um next the next committee meetings uh [snorts] next week Wednesday 16th September where we're going to continue um hearing evidence on pre uh pre-budget scrutiny but that does now bring uh the public session part of this meeting to a close so thank you and thanks colleagues thank