Chamber and committees

Good morning, and welcome to the 23rd meeting in 2023 of the Finance and Public Administration Committee. We have one public item on the agenda, which is to take evidence on the sustainability of Scotland’s finances from two panels of witnesses as part of our pre-budget scrutiny this year. I welcome the first panel: João Sousa, deputy director of the Fraser of Allander Institute; Professor David Heald, emeritus professor and honorary senior research fellow at the University of Glasgow’s Adam Smith business school; and Professor David Bell, professor of economics at the University of Stirling.

I intend to allow up to 75 minutes for the session. If you want to be brought into the discussion to respond to a question that has been directed to a specific witness, please indicate to the clerks and I can bring you in.

We have the witnesses’ excellent submissions, so we will go straight to questions. João Sousa, in your submission, you say:

“The Medium-Term Financial Strategy ... highlighted a large funding gap, of £1 billion in 2024-25 and close to £2 billion by 2027-28. The 2024-25 and future budgets will need to include realistic assumptions on spending commitments given the available level of funding and be clear about prioritisation decisions, as well as realistic policy on tax.”

What do you consider to be “realistic assumptions”?

That is the UK scenario whereby someone on £51,000 a year loses child benefit, but two people who earn £49,000 a year continue to get it.

The reason why I am labouring the point a wee bit—that said, I have asked only two or three questions so far, but the answers have been excellent and very interesting, and they lead to many other questions—is that there is so much pressure on the Scottish Government to increase taxation. Later, we will speak to the Poverty Alliance, which is a coalition of many organisations, all of which have talked about increasing benefits, introducing wealth taxes and putting up the higher and upper rates of tax. What would the impact of that be on behavioural change and on economic growth?

Phil, can you answer Michael Marra’s specific question? He was concerned about how an increase in taxes was going to enable us to—

Professor Bell, you have been very patient, and I know that João Sousa wants to come back in. I also want to be able to give my colleagues an opportunity to ask questions. However, I am a bit miffed that I have asked only three or four of the 25 questions that I had written down to ask.

In your submission, Professor Bell, you mention the following:

“the outlook remains difficult, with funding for day-to-day non-benefit spending set to be almost 2% lower in 2027-28 than in 2022-23. This is despite forecasts for a significant increase in net revenues from Scotland’s devolved income tax revenues over the next few years: if this did not materialise, the reduction could be closer to 5% over the same period.”

Will you talk about that? We have already talked about tax, but how do you feel the Scottish Government could adjust its taxation policies to be more “strategic”, as Professor Heald put it?

That loss aversion makes Governments nervous about making radical change.

I am tempted to come back in, but I will call John Mason, to be followed by Michael Marra.

Yes, I do think that this goes back to loss aversion, to be perfectly honest. Whatever the Scottish Government would do on that would be attacked from all sides. Indeed, our predecessors—and the Government south of the border—have not exactly run to change it.

Of course it is. I think that we have already said that.

I think that the issue is the Government’s survivability if it were to implement this across the board, given the ferocious onslaught that would come from all sides. That is just the political reality. In my view, the economic reality is different from the political reality. I think that we would all agree with the economic reality.

David, my last question is on transparency with regard to mitigations. The Scottish Government mitigates a lot of UK taxes; in fact, some of the witnesses who will follow this session are suggesting yet more areas where the UK Government has reduced expenditure or where more expenditure should be given. What do you think that we should do to make the mitigations more transparent?