Revised

Members present

Lord Hollick (Chairman)

Baroness Blackstone

Lord Forsyth of Drumlean

Lord Griffiths of Fforestfach

Lord Lamont of Lerwick

Lord May of Oxford

Lord Monks

Lord Sharkey

Lord Teverson

Lord Turnbull

Baroness Wheatcroft

________________

Examination of Witnesses

Professor Gerald Holtham, Cardiff Business School, Chair of the Holtham Commission, Tom Crotty, Director, INEOS, and Charlotte Barbour, Director of Taxation, Institute of Chartered Accountants of Scotland (ICAS)

Q77 The Chairman: Mr Crotty, Ms Barbour and Professor Holtham, I welcome you to the Economic Affairs Committee. Thank you very much for joining us. Perhaps I may start by raising a question that has come up at a number of meetings, which concerns the paucity of evidence and information that is in the public domain to inform the debate about the finances for a devolved Scotland—in particular, some of the details about how the proposals will or will not work to the benefit or detriment of Scotland. Is it your view that sufficient care has been taken to provide enough information? If not, what further steps do you think should be taken to help to inform this debate which is going on and which will have a very important and long-lasting impact on the public finances of Scotland? Who would like to start?

Professor Holtham: I will start, Chairman. I concur with that. I do not think there is enough information in the public domain. That is probably because there is not enough information in the private domain either. There are a lot of questions that have been covered only in very broad terms. One does not really know what they mean until certain details are determined. If they have been determined, that has been kept very quiet. My suspicion is that they have not been determined and that the can has been kicked down the road in too many respects. One gets the impression that the thing is being busked, as it were, and that difficult decisions are being deferred or the parties are failing to reach agreement on them. It is therefore very difficult for the public—even the informed public—to understand exactly how these things will work out.

Charlotte Barbour: My speciality is tax, so I suppose that is my focus. I might come at this from two points of view. The Smith commission and the proposals are much discussed in Scotland. I ought to say that I suppose my evidence is from the Scottish end of things, because that is where I live and am based. Smith is quite widely discussed, but there is a slight disadvantage—well, two disadvantages. People tend to talk about Scottish taxes as though it is a case of, “Here, catch—here is a Scottish tax”, but there are quite a lot of different types of devolved taxes. We may come to that. Something that is completely devolved such as the land and buildings transaction tax, which is completely within the remit of the Scottish Parliament, is fundamentally different from the income tax or the VAT assignment that we are going to have. So, Scottish taxes, yes; the distinct features of each and what it will mean on accountability, perhaps not. Because Smith has been much more in the forefront of people’s minds recently, there is also a complete lack of knowledge of what we are getting already, which is the Scotland Act 2012 measures. Some of those—the purely devolved taxes—have been in since last April. The Scottish rate of income tax comes in next April. I do not think there is much awareness of that yet. In fairness to HMRC, it is doing its best, but that is on an operational front as opposed to a political front.

Tom Crotty: I can speak only on behalf of INEOS. I am not sure whether I am speaking on behalf of all business in Scotland, but our knowledge in this area, as probably the biggest manufacturer in Scotland, is almost non-existent and the engagement in the process has been non-existent. I would agree with your opening premise that we do not feel as businesses that we are fully cognisant of the likely changes or the impact on our business going forward.

The Chairman: Given that you agree with the basic proposition that there is inadequate information in the public domain, what can be done over the next few months? What information could be released over the next few months to help inform this debate? It is striking that a lot of the building blocks of the current arrangement—how much revenue is raised by each tax, for instance—are not available or in the public domain. What could be made available to help to inform this debate?

Professor Holtham: Apart from historical data and projections of what these various tax bases might be worth, it would be very useful, where the parties have not been able to reach agreement on exactly how to implement these things, for some statement of negotiating position, if you like, to be made public, so that people understand what the issues are and what is being deferred rather than agreed. The big one that sticks in my mind is that there will be a very complex interaction between the block grant, which all the devolved territories will continue to receive for the foreseeable future, and the devolved taxes. Some reduction in the block grant has to be made for the tax bases that are being handed over. Although you can get into rather arcane and technical detail, unfortunately those details have constitutional implications, because they determine, for example, who should be able to vote on what in the House of Commons. As far as I can see, none of these issues has been resolved. They just say, “We’ll settle it. It will be determined, with an appropriate formula”. If they cannot determine it, it will be rather difficult but, meanwhile, if they cannot determine it, let us at least know what the thinking is and where the debate is centering.

The Chairman: So a statement of differences, as it were, might be helpful.

Professor Holtham: Yes.

Charlotte Barbour: There have been quite a few criticisms and questions around the fiscal framework and the fact that a lot of what is being discussed is being discussed, I think, behind closed doors. On the one hand, that is understandable, because otherwise you would have everybody’s tuppence ha’penny-worth in relation to how it should or should not be done. At the same time, if it is behind closed doors, you cannot see it. What you need here is transparency and accountability, so that people feel involved and they understand what is going to come down. It is all very well having a tax power awarded to you, but if you cannot see how it operates vis-à-vis the fiscal framework, the Barnett formula and the block grant, because they are all intertwined, it is very difficult to know quite where you are going with this.

Tom Crotty: I cannot really add much to the expert view. From a business point of view, when we are looking for help on these issues, we tend to turn to the Department for Business, Innovation and Skills, so for us that would be a logical place to look to for advice and information.

The Chairman: Professor Holtham, when you chaired your commission, which looked into the finances of Welsh devolution, did you have access to information that was not readily available in the public domain or did you work entirely from information that was in the public domain? How did you come to conclude that that was sufficient for your purposes, if that was the case?

Professor Holtham: Yes, we mainly used information that was in the public domain. We had to carry out quite a lot of analysis on those data, so in a sense we produced our own conclusions, but the raw data were all public. We were not privy to any state secrets.

Q78 Lord Forsyth of Drumlean: May I ask Charlotte Barbour—without in any way leading the witness—whether she thinks it is sensible to bring forward legislation for discussion before both Houses of Parliament in the absence of having an agreed fiscal framework? I personally find it very difficult to look at the devolution of particular powers or the principles without actually knowing how it could work. That is the first point.

The second point is on the information that is available to companies. Have you found any evidence of people shifting companies from being Scottish-registered to English-registered? I think I read in the newspapers that Standard Life had moved its domicile south of the border. I am aware through other channels that some people are thinking about that. Is there any evidence of that? Do you think that that represents a real threat, or is it just people reducing the risk because of uncertainty?

Charlotte Barbour: Coming to your first question, I hope that you have not led the witness and that I do not cop out completely by saying that, as a member of ICAS, I represent chartered accountants, who are primarily interested in the operational sides. However, I completely appreciate your question. It is quite difficult to understand the tax powers in isolation, because your tax powers, fiscal framework and borrowing are three bits of a triangle and have to slot together.

Lord Forsyth of Drumlean: So I am not just being thick.

Charlotte Barbour: If you are, I will keep you company. I do not really understand it in isolation. It is all very well to have a tax power, but you cannot do much with it unless you know what is getting taken away or put together with it. That perhaps partly answers your fiscal framework question.

In terms of companies, we have completely anecdotal evidence from some of our members that pre-referendum they were advising that if people were to set up companies they might register them south of the border. I have not heard that kind of talk since then. As regards other anecdotal evidence, at the moment what we are really working with is the Scottish rate of income tax, because that is due to come in this coming April. There are a lot of questions about what it will be. Your experience seems to be quite common—that a lot of people do not know much about it. There is also quite a bit of talk about Scottish taxpayers, who they might be and whether the better-off ones will get up and go.

Q79 Lord Lamont of Lerwick: May I come to the proposal that has been put forward for an independent body taking responsibility for providing advice on block grant issues? Is this really feasible? Is it really suitable to be delegated to so-called experts? Is one not then attempting something rather impossible—depoliticising spending and accepting that there will be some body of so-called experts who will tell the Government where precisely to spend their money? Is that really a credible proposition?

Professor Holtham: I do not think that would be a credible proposition, but that is certainly not anything that I would advocate. Decisions on how public expenditure is to be distributed around a state are essentially political, of course. If the decision is being made ostensibly on the basis of certain criteria, there is no reason why those criteria should not be applied by an independent body. If the Government then want to override the criteria and make a political decision to do something different, they are, of course, completely free to do so. What you do not want is political chicanery, if you like, or political influences intruding—

Lord Lamont of Lerwick: But if there are elements of public expenditure determined by formula, are you really saying that you do not trust the Civil Service in Whitehall to adhere to that formula?

Professor Holtham: There is always enough latitude in a formula for it to be manipulated. It is not my view particularly, but you would probably find that every devolved politician in this country can think of at least one instance where he thought the Treasury pulled a fast one. I am sure that the Treasury thinks otherwise, but that is the case. There is not total mutual trust; that is just a matter of fact.

Lord Lamont of Lerwick: You might say, “They would, wouldn’t they?”.

Professor Holtham: Of course, but everybody is competing for resources. That is one of the arguments—if there are criteria, which will be determined politically? After all, we set interest rates without its being done politically. The Government have a general policy and somebody is charged with implementing it. I do not see that it is very different. If you have a formula, it is then applied by independent people, so people have more confidence that it is being rigorously applied. The Government can still override it at the end of the day, if they wish to. Ultimately, it is a political process, but it is not bad to keep the politics and the implementation clean, if possible.

Lord Lamont of Lerwick: Do the others want to say anything?

Charlotte Barbour: I do not want to comment on that.

Tom Crotty: I cannot comment on it at all.

Lord Griffiths of Fforestfach: If there were sufficient transparency in the process, would that not be good enough for you?

Professor Holtham: It would certainly help. I cannot see that it is very different, for example, from having the Office for Budget Responsibility not making any decisions but providing independent projections on which policy can be based. It is rather similar. You are setting up as one element of the policy an independent body to carry through the technical side of it.

Lord Griffiths of Fforestfach: But rather than having a new body, you would conceive of it being given to, say, the OBR.

Professor Holtham: Yes. The Australians, of course, have an enormously complex procedure, which I do not think we would want to replicate in this country. They have a very large independent agency that carries out lots of calculations. That would probably not be in the British tradition, if you like, but I do not see why the OBR could not do it.

Q80 Lord May of Oxford: I want to offer some second-hand opinions about the Australian thing—second-hand because my brother is a quite senior economist and Australians have quite a bit to do with it. I know what he thinks about it. The circumstances are a bit different. After all, Australia was six independent countries until it was federated about a century ago, which was a trickier thing—and still is—than dealing with just one or two, namely Wales and Scotland. The way that body is put together is basically sensible, but it is riven with not just Scotland-England, as it were, but every one of six countries having different views about things. In principle it is good and sometimes it works well, but the second-hand impression I have from my brother is that in Australia, when you have a really efficient Government and people who know what they are doing, it works quite well. However, as everywhere, you cannot always count on having that. Relatively recently, Australia has had a rather unfortunate set of chief executives, as it were.

Professor Holtham: The procedures in this country are a great deal simpler than those in Australia. In Australia, they attempt to have a fairly complicated needs assessment of each of the states. That then determines flows of public expenditure. In this country, we do not have a complicated needs assessment; in fact, we do not have a needs assessment at all. It is a very simple Excel spreadsheet, basically—there is not a hell of a lot to it. I think it would not be the same anyway.

Lord Forsyth of Drumlean: You say that we do not have a needs assessment. It is certainly true that under the Barnett formula the money is sent to Wales and Scotland, but how they distribute it is based on a needs assessment, is it not?

Professor Holtham: Yes, indeed. That is absolutely right. The devolved Governments behave like the UK Government in England in having needs assessment formulae for distributing expenditure around their states internally.

Lord Forsyth of Drumlean: If you are doing a needs assessment to work out how to spend the money on health and education, what is the complication with having a needs assessment to work out what you think it should be in the first place?

The Chairman: I think you are anticipating Lord Turnbull’s question.

Lord Forsyth of Drumlean: I am sorry.

Lord Lamont of Lerwick: We have not finished this one yet.

The Chairman: Go on.

Lord Lamont of Lerwick: I do not mind.

The Chairman: No—continue, please.

Lord Lamont of Lerwick: It has been suggested that there is not adequate parliamentary scrutiny of intergovernmental relations. I think ICAS has even put forward the suggestion, which I do not find very attractive, that there should be an office of the regions, so that the devolving of powers to the different regions could be co-ordinated. Are we not going slightly mad, just having one quango on top of another?

Professor Holtham: I do not really have a view on that. I think a little more co-ordination in certain respects would not be bad. A lot of devolution seems to be—

Lord Lamont of Lerwick: What about variety and competition?

Professor Holtham: You can organise for that, but it is still not bad to organise for it, rather than just busking it in a series of bipartite discussions and ending up where you happen to end up, which is more or less what has happened.

Charlotte Barbour: From where I sit, based in Edinburgh, there are certain powers that are coming to Scotland. We argued quite strongly against devolving corporation tax. The Smith commission accepted that—not necessarily our arguments, but generally speaking—but corporation tax is being devolved to Northern Ireland. There seem to be different things going in different directions. I have given evidence to a number of different committees in Scotland and here. An office of the regions might be quite the wrong term or might be another quango that you do not want, but you wonder whether it needs some kind of co-ordination somewhere, somehow, because otherwise it seems a bit disjointed. When you come down to something much more elementary and practical, such as who is a Scottish taxpayer, I do not think you will identify all Scottish taxpayers until you also identify English taxpayers, Welsh taxpayers and Northern Irish taxpayers. That is because the system is such that HMRC is going to write to everybody it thinks may be Scottish taxpayers, but I do not know what happens to the ones it does not pick up. They will just fall down, because they are not being written to at all. In part, that is where that suggestion came from.

Tom Crotty: From a business perspective, you always want things to be as simple as possible. You need things to be as simple as possible. Certainly, that is the case when it comes to interaction with Government. If you take the situation we have today, we interact with two Governments to do business in Scotland. The process works reasonably well. The Scotland Office is very helpful in making sure that is co-ordinated and provides a useful link between both those Governments. From a business perspective, you do not want to introduce yet more complexity. Simplification is the watchword for us.

Q81 Lord Turnbull: Charlotte Barbour correctly pointed out that the nations are being funded from three boxes. There are devolved taxes, there are shared, assigned taxes and you have the grant. The first question is: is that a workable system? Do there have to be the same shares, roughly, between those three boxes in each of the territories, or can you make them bespoke in some way?

Professor Holtham: I believe it is a workable system. There is no reason to try to impose a uniformity that probably is not welcome in the three areas, anyway. The key problem is that it is not clear that what has happened is derived from a set of clear principles. I know that sounds dreadfully academic, but it would be helpful if people knew where they were trying to go and had a set of principles. Then the different circumstances of the different areas would automatically lead to somewhat different results. However, it is not clear that that initial clear-sightedness about principle has existed, so we have a much more random set of provisions. For that reason, too, people are having a lot of difficulty resolving the issue of how you adjust the block grant for the devolution of taxes. There are certain principles that should be applied there, but I am not confident that they will be.

Lord Turnbull: May I come back to that? Let us deal just with box 3, the grant—the Barnett formula. It will be a smaller box than it used to be. When people say that there is not a needs assessment, I say that there is a needs assessment. The problem is that it has only one variable, the number of people—the number of mouths to feed.

Professor Holtham: Not even that. The number of people is applied to the increment. There is no adjustment for the main block grant, even for population. It is an historical accretion, with a population adjustment applied to the increment.

Lord Turnbull: It seems to me that the starting point should be that under that system the grant per head should be the same in all three territories. How far adrift of that are we?

Professor Holtham: We are quite far adrift of that. The numbers I have in my head are not fully up to date, but if England is at 100, Wales is around 114, I think, Scotland is nearer 120 and Northern Ireland is nearer 120-something—the low 120s. I could be wrong to the nearest few percentage points, but it certainly is not the case that expenditure per head is equal—nor would you expect it to be.

Lord Turnbull: If you were to look at it on a population basis, imagine we were trying to equalise grant per head. Then these things should all be the same, should they not?

Professor Holtham: That is done in quite a few states. If you are just saying that poorer areas have less revenue, so we are going to equalise revenue per head and therefore expenditure per head, that is certainly one possible approach.

Lord Turnbull: Under the Barnett formula, we do not take account of relative income, dependency, the number of old and young, geographical issues, sparsity and so on. We have just this one thing—population—and it seems to me that we do not even do a good job of that. Step 1 would be to have something that enshrines the principle that that is where we ought to be getting to, and the new system should have some kind of convergence mechanism in it. We are always told that Barnett had a convergence mechanism, but, if anything, it has got worse rather than better. Is that the case?

Professor Holtham: The Barnett convergence mechanism fails simply because there is no population adjustment for the bulk of the block grant. The block grant works by saying, “What did you get last year? We are going to give you the same this year, except we are going to give you the same increase per head in cash terms as England”. That means that the increase per head is adjusted for population, but last year’s grant is not. If your population falls, they do not go back and reduce your block grant for that—they just reduce the increment. That is why Scotland has not had much of a Barnett squeeze, whereas Wales has—for that very reason. There is not even a population adjustment. You are absolutely right. If you were going to equalise expenditure per head, you would need to adjust the whole grant for population. Of course, that is a very controversial thing to want to do. As you say, if some area has many more old people, young people, sick people and people out of work, you will still have the same expenditure per head.

Lord Turnbull: Is it not a very controversial thing not to do it or not even to attempt to do it? That is how it looks to me, looking at this objectively. The analogy I come up with is that you send a return to the tax man and he gives you a tax code. At the end of the year, it turns out that he has not collected the right amount of tax. The next year, he changes your tax code so that you are then paying the right amount of tax and making the correction for the underpayment the previous year. The way this system works at the moment, which we are apparently going to perpetuate, is that the previous error is left in the system. The previous errors have accumulated to something that I can only describe as grotesque.

Professor Holtham: I do not disagree. I have been as severe a critic of this system as anybody else. You are absolutely right. It has nothing to recommend it except simplicity. It is extremely simple. There is nothing else to be said for it.

Lord Turnbull: You have argued for widening the variables—not to the kind of Australian grant complexity of 50 or 60, but maybe five or six would explain 90% of the difference. I cannot see how you can get that far if you cannot even get the population element of need corrected. That is the most important one. It is out of line, and there is absolutely nothing in this system that would make it any better.

Professor Holtham: I do not think we are disagreeing. I agree. It seems to me that there ought to be a system that determines the entire block grant, not just the increment. It would be perfectly possible to do that on the basis of ignoring differences in relative need and to do it just on the basis of ensuring continuous, constant expenditure per head. I would be in the camp that thinks that would be a shame, that we can go further and that, just as we do when distributing money to local authorities, we can take some coarse account—we will not fine-tune it—of relative need. That can be done, taking things such as dependency ratios.

Lord Turnbull: We have one other variable left, which is the adjustment of the block grant by revenue. Different formulae could squeeze the Scots more than others. Professor Cuthbert told us that the squeeze could be “catastrophic”, or whatever word he used. Of course, he has 20% to play with before the system starts to become unfair. There is a difference between adjusting according to the growth of total revenue in the UK and adjusting according to total revenue per head. Do you have a view as to which one of those we should use?

Professor Holtham: Per head—we should take account of population, of course. One can take different views about distribution. The formulae for distributing to local authorities are not identical in Scotland, Wales and England, so there is obviously scope for political dispute there, but any plausible formula would see quite a large reduction in the expenditure per head in Scotland. We calculated that 105 would be fair; some people would say 109. However, if you are sitting on 120, that is a 10% cut any way you look at it. You would have to phase that in. I do not think it would be reasonable to impose that with a bang. Once you had the formula, you would have to have some smoothing mechanism.

Lord Turnbull: I have one last comment. I just hope that in 30 years’ time people are not going around saying, “That Holtham formula—God, what a mess that was”, and it does not stick around your memory in the way it stuck around Joel Barnett’s.

Professor Holtham: If my name lived as long as Barnett’s, I would be both astonished and gratified.

The Chairman: We will have one last comment on this question, from Lord Forsyth.

Lord Forsyth of Drumlean: I am sorry—I did not mean to intrude on Lord Turnbull’s question, but the point remains unanswered. Perhaps I should declare an interest, as someone who lives in Scotland. If the formula was just population-based, there would be a 20% reduction. That money is currently being spent on free care for the elderly, free tuition for students, no prescription charges and so on. Of course, that goes to the root of the resentments that are being created, particularly in Wales, which, as you have pointed out on numerous occasions, has lost out as a result of this. Where I have a difficulty is with what was said earlier—that we could not have a needs-based system. The money is distributed on a needs-based system. I very much agree with Lord Turnbull that the starting point should be population, but then you should look at other factors: sparsity, demography and all of the things that are dealt with when money is sent out to health authorities, health boards or to local authorities. What is the difficulty with doing that, other than that Wales would suddenly find it had won the lottery?

Professor Holtham: No, it would not make much difference in Wales.

Lord Forsyth of Drumlean: The Barnett Formula Committee of this House concluded that Wales would benefit significantly, but the numbers may have changed. Wales would do better, but Scotland would lose out. Surely, the way to deal with that is to have a transitional system, so that you do not have an impact of losing 10% in one year. You might phase it in over five years, at 2% or whatever, and give people the opportunity to adjust. If we do not do something like that, will there not be continual conflict between the territories? Politicians will fight elections on the basis that they have lost out, and it will tear the kingdom apart. Is this not absolutely central to the whole question of effective devolution?

Professor Holtham: I believe it is, and for more reasons than people perhaps realise. At the moment, Scotland is slightly poorer than the UK average, but not by very much. If the oil price, contrary to my expectations, were to go to $200 a barrel, Scotland would be a wealthier part of the country. In any well-ordered system, the Barnett formula would then be negative. If you have a federation, the wealthier parts are supposed to support the poorer parts. At the moment, we have no system in place that could handle a situation where one of the devolved territories became relatively wealthy and needed to pay in. There is just no basis for working out what that payment would be. We have a situation where three or four regions of England are considerably poorer than Scotland, for example, and get much lower expenditure per head. That cannot be good. This is one of those principles that just does not exist. We are having negotiations in vacuum as far as what we are trying to achieve is concerned. If we are trying to lay down a pattern for how a multinational union will continue to work, some set of principles about how we do equalisation has to be there, and then the chips fall where they do. However, we have not got there. We are perpetuating what Lord Turnbull has correctly described as a hopeless system, with no set principles underlying it.

Q82 Lord Monks: I should like to follow this general line of questioning and to shift it slightly towards the “no detriment” principle—that there should be “no detriment” as a result of UK and Scottish Government decisions post-devolution. You have suggested that this is impossible and impracticable unless there is a “dictatorial” element—I think that was the phrase—in this. Who can play that dictatorial role? Is the “no detriment” rule sustainable?

Professor Holtham: I am afraid that I am very sceptical. I do not really think it is. Take the case that somebody puts a tax down and somebody else claims, “You have taken business off me by that tax reduction. I need compensation”. You cannot observe the counterfactual, so there is scope for infinite argument about what compensation is due. I know of no means to resolve that, so it can lead to endless argument. Everything you do could give rise to such a claim. In fact, we are now devolving things where some spill over is inevitable. If, every time you do something, you get hit with a claim for compensation, it will paralyse the system entirely. Either it abolishes devolution, in effect, or it becomes quite unworkable. I really do not think it is an operational principle. It may be something useful to put in legislation to guide the judge, as it were, if he has to deal with a case—to say what was intended—but heaven forbid that you would get the Treasury to apply it as an actual operational principle.

Charlotte Barbour: I would support that. In principle, if you take “no detriment” to its logical conclusion, you do not have any differences. If you do not have any differences, what is the point of devolving it? If you look at landfill tax, for instance, the rates are the same north and south of the border. That is “no detriment”. Part of you might ask, “Why devolve it if the rates are going to stay the same?”. “No detriment” also lends itself to some fantastic arguments, because tax policy is not just raising money. A whole lot of other policies are intertwined with it, whether it is environmental policy, trying to drive behaviours in certain ways or trying to attract inward investment. All of those elements come into play. I say this just for the purposes of illustration, as I do not know whether they will or will not, but if you put up the income tax rates in Scotland you could convert your income into a corporation—a company. Then you not only lose income in Scotland through not having your higher income tax rates, but you end up with UK rates. Is that to different people’s detriment? Corporation tax is lower than income tax. Is that another detriment? You could have lots of lovely arguments about it.

Professor Holtham: One of the difficulties here is that, because people have not wanted to confront differences at an early stage of the negotiation, certain things have been conceded that people would rather not have conceded. They have introduced “no detriment” as a kind of sweeper: “This is our back-stop. This is our insurance policy. If they really try to pull a fast one, we will spring this on them”. My own view is that it would have been much better to have had the hard discussion up front, because then you have to have it only once. If you said, “Look, we are going to limit what you can do with higher rates of income tax, because there is a limit to the tax competition we want to understand”, the Scots would scream bloody murder, but at least you would have the scrap and have the limitation. As you do not want to have the fight, you say, “Yes, do what you like with it”, and then bring in “no detriment” as an attempt to sweep. I just think it is folly; I really do.

Charlotte Barbour: If you were being more generous, you might just say that people have looked at this, certainly from a Scottish perspective, in terms of accountability. They have not really appreciated that, once you have your own taxes and are accountable for them, inevitably you will end up doing something different with them, because otherwise why have them? Then your flip side comes into competition/tax avoidance, which is the other side of competition. You get some very mixed messages from it.

Lord Monks: The Barnett formula, as we know, has become a tablet of stone, and all sorts of commitments have been given. The “no detriment” principle is close to becoming another tablet of stone, brought down from the Highlands or somewhere. I understand that in Scotland people are regarding it as a high-level principle. Navigating your way through these things to have a sensible discussion about technical matters such as population, economic growth and so on is an extremely difficult task—I am not saying it is impossible, but it is extremely difficult—without the rancorous political games that Lord Forsyth was talking about and that people will play, blaming other people. Do you have any feel for how we can avoid that kind of disputatious future on these issues?

Charlotte Barbour: Do you not need to draw up parameters around what “no detriment” means? If you go back to the Smith commission, it is very principle-based. He says there will be no detriment and has his first principle and his second principle. However, one could set parameters around that to say what you actually mean by it, because it can get up a head of steam that it does not need to have. The underlying concept is very broad.

Professor Holtham: Where you are devolving taxes on mobile tax bases, where tax competition and mutual detriment become a real risk, you really ought to have some protocols in place as to how far people are expected to use those powers. If Scotland decided to turn itself into the Isle of Man, it could successfully cannibalise the entire British income tax system. I do not think for a minute that it would do it, but basically you want to say up front, “We do not mind you cutting the top rate by 1p, 2p, 3p or 5p, but beyond that, no”. You need some protocols in place in order to avoid having to have recourse to this “no detriment” principle. You have the scrap upfront and do not try to postpone it.

Charlotte Barbour: Perhaps you want to define what might be deemed to be competition, as opposed to “no detriment”. For some people, they might be different things. Of course, you are slightly confined, because the main tax that is being devolved is income tax. Given that income tax is still part of the UK system, there is a limit to how far you can go anywhere with it. If you upped the income tax too much, people would head towards corporation tax or capital gains tax, capital gains-taxing their block on income tax avoidance—is that not the case? I think there is only so far you can go on any of these things. Again, there is only so far you can go in putting up income tax. While it gives a political message, I do not think you will collect any money from it—or not much.

Lord Sharkey: I wonder how there can be competition without detriment.

Charlotte Barbour: It depends on how you define them, does it not?

Lord Sharkey: No. In the common-sense definition of the words, I would have thought it was impossible.

Professor Holtham: I entirely agree. The point is that you have to decide what is the permissible extent of competition and specify that upfront. Then the detriment business does not come into it.

Lord Forsyth of Drumlean: Is it not more complicated still? It is not just about tax. For example, when I was Secretary of State, in England they privatised water. In Scotland, we decided that we were in enough trouble, so we did not privatise water, but we then lost the Barnett consequences of the money that was spent on water—the whole amount. Under the “no detriment” principle, if we had that now, the English, having privatised water so that people got their bills, would presumably have to send a cheque to Scotland to compensate them for the fact that they were now having to pay for their water. Is that right?

Professor Holtham: That is just an instance of how difficult it would be to apply a “no detriment” principle.

Lord Forsyth of Drumlean: Yes, because policy that has revenue implications for Barnett—moving things into the private sector or nationalising things—would have consequences. For example, if a Labour Government decided to nationalise industries in England, presumably the reverse would apply. I just do not see how this is workable.

The Chairman: Can we move on?

Q83 Baroness Blackstone: Leaving “no detriment” to one side, do you think the package of taxes that are being devolved is the right one? Is there a rationale for it, or is it just a matter of more political horse-trading without any real rationale to explain the decisions that are being made?

Charlotte Barbour: Do you want me to go first, as a tax person?

Professor Holtham: Please feel free.

Charlotte Barbour: Who knows whether it is the correct one? You could have any kind of different combination, but if you want to make it work, you can make it work and therefore it would be correct. It is for everybody to pull together and make it work. I think it is too soon to judge, because it has taken a while for the 2012 measures to start to come in. Now we will move on to the next Scotland Bill’s measures; we will need to wait and see when they come in. There are sensible reasons for quite a lot of what is being done. If you look at the purely devolved taxes such as land and buildings transaction tax, it is a discrete tax that does not have much knock-on effect on other taxes, so it sits on its own. It is quite sensible to devolve that. Its locus is on property—you cannot really argue about whether or not it is in Scotland. That is a nice, easy thing to devolve. There is a lot of sense around those smaller taxes that are location-based.

On income tax, first, the Scottish rate of income tax was mooted. Now there are the Smith proposals for rates and bands to be devolved. From an operational perspective, there is an awful lot of sense in that, because you will still have the underlying UK tax legislation. You do not have to write a completely new tax system, so that is an advantage. It keeps things intermeshed. We still have HMRC collecting it and, more importantly, if you are talking about employers, we have PAYE, so your main collectors of the tax will not be unduly put out—they just have to work with “S” codes, for a Scottish taxpayer. Those make a lot of sense, yet when you look at income tax, you think it is partially devolved. There are UK levers in it and Scottish levers in it, because it has not been completely devolved. Again, is that correct? Could it lend itself to arguments? It could, but there are a lot of sensible reasons for doing what has been done.

I am less convinced on VAT. I do not know how you calculate what is a Scottish bit of VAT in the way the VAT system works. If you calculate it properly to reflect the economy, you may have unintended consequences of that becoming a driver of where you target your economic measures—on to VAT-able things, because you would want your VAT up. Of course, financial institutions tend to be exempt. Food industries tend to be zero rated. I think you would have a lot of problems with the VAT, if it works.

Baroness Blackstone: What are you saying about VAT? Should it be based on the point of production or the point of consumption? Which is the right way to do it?

Charlotte Barbour: Take your pick. You could argue the case on any way of divvying up the VAT. I do not think you get the VAT to work properly unless you set up borders, and who would want more borders? It runs completely contrary to the notion of VAT, does it not, where there is a common market? I question the rationale for it.

Baroness Blackstone: You have not mentioned corporation tax.

Charlotte Barbour: No, thank you.

Baroness Blackstone: Where do you all stand on corporation tax?

Professor Holtham: To answer your first question, there are certain principles that you would want to apply. You want to devolve taxes that have few spill overs and are clearly local taxes. Property taxes are quite good, because the tax base does not move around.

Baroness Blackstone: That is the easy one.

Professor Holtham: That is the easy one. Secondly, you want a tax that is paid by a lot of people. If the idea is to introduce accountability for the devolved Government, you want a tax that is paid by a lot of people, is visible and makes a substantial contribution to their budget, which is the argument for income tax. I do not think there is any problem about the basic rate, because there is no tax competition about the basic rate. If you put the basic rate up by a penny, it will not cost anybody more than 300 quid a year. That does not pay for the removal van, so nobody is going anywhere. It is only the top rate of income tax where tax competition comes in. In my opinion, there should just be a protocol saying, “We will agree that we will not change this by more than X”. Then you do not get into problems about “no detriment”.

The problem with corporation tax is that the Treasury refuses to take seriously where the liability is incurred. In this country at the moment, the liability is incurred where you register the company. As far as I can see, “no detriment” came in because there was a political commitment to give the Northern Irish corporation tax. The Treasury was utterly appalled by that, so it did a calculation of how much revenue would be lost if people went and brass-plated their business off to Northern Ireland. It then announced that it was going to have a “no detriment” principle, so the Northern Irish would compensate them for the brass-plating. In an orderly universe, the Treasury would just have said, “We are going to have a proper assessment of your corporation tax liability”. They do this in other countries; it is not impossible. It is some combination of turnover, investment and where your payroll is paid. You pay tax at the highest rate unless you, the company, can show via this formula that you are entitled to the discount because some of your business is held in the low tax region—and we do not care where you are registered. If they did that, you could talk about whether it was possible to devolve corporation tax to some extent. While you assess liability on the location of the brass plate, it is absolutely impossible. Maybe you do not want to devolve it, so it does not arise, but if you wanted to do it, you should not be doing it like this.

The Chairman: Where is INEOS’s brass plate, Mr Crotty?

Tom Crotty: We have lots of brass plates in a lot of different countries. As far as our UK business is concerned, including our Grangemouth business, it is actually south of the border. We are registered with the UK for tax. If you look at the driver behind that, we made that change a few years ago because the UK Government were helping enormously with our issues in sorting out Grangemouth and making UK guarantees available for investment in the site. It seemed only sensible that we returned the favour by making sure that we paid our taxes in the UK. That is why we have gone that route. Going back to your original question, Baroness Blackstone, we are free marketeers and the whole thing sends us into a spin. Yes, it does feel like the result of a horse-trade. It is very hard to see the market logic that sits behind this.

The Chairman: By the UK, do you mean England?

Tom Crotty: Yes. Sorry, it is easy to slip into this terminology, is it not?

Q84 Baroness Wheatcroft: Do you think there is emotional impact from devolving income tax in its entirety? Alistair Darling, for instance, has talked about it. He said, “I am paying my income tax in Scotland. What am I getting for it? Where do I buy into foreign policy, defence and so on?”. Is it just driving the union further apart?

Professor Holtham: Forgive me, but I think that depends on how you handle the deduction from the block grant. The sensible thing to do would be to restore that link, because first you would make a deduction for the income tax that the Scots collect in year 1 and then you would say, “That cannot change with their revenue, otherwise we are cancelling out devolution. If they change rates, they get more or less money. However, we are going to index that deduction to tax receipts in England”. That has the following implication. Suppose the British Government decide to go to war in Syria and are going to raise income tax to finance it. Defence is a reserved area, so the Scots are supposed to pay their whack for this war in Syria, or whatever we are doing. If you have indexed the deduction in the block grant to UK income tax, they will do so, because when UK income tax rises, the deduction from their block grant rises, the block grant goes down and they have paid their share of the war.

Baroness Wheatcroft: We are all in it together.

Professor Holtham: Exactly. On the other hand, if there is an Ebola outbreak in England, so we are going to spend a lot more money on the health service and are raising income tax to finance it, that has two implications. Raising expenditure in England on health will increase the block grant to Scotland via the Barnett formula. If you have indexed the deduction to English revenue, the deduction from the block grant goes up as well, and it is very nearly awash. In other words, the Scottish grant is net not affected, or not affected very much, which is exactly what you want. If the British Government are raising taxes to spend on devolved items, the Scottish block grant should not be affected. If they are raising income tax to spend on reserved items, the Scottish block grant is supposed to be affected. There is a way through this. You may think it is slightly round the houses, but there is a way through this to a sensible outcome, if you handle the deduction from the block grant in the appropriate way. If you do not, you are in exactly the situation that you describe, where we go to war and the Scots do not pay for it. The devil is in the detail.

That has another implication, of course. If you do that, changes to English taxes affect the Scottish block grant, which I think is appropriate. However, if that is the case, you cannot possibly tell Scottish MPs that they are not allowed to vote on English income taxes, because there is no such thing as an English income tax that does not affect the Scottish block grant. We are all in it together, both in terms of voting in the House of Commons and on the implications of changing English income tax. However, for that to work, you must have that indexation mechanism. I am not clear that they are thinking in those terms.

Lord Forsyth of Drumlean: I absolutely agree with what you say about having to link the block grant to the thing, but hang on a second here. If it is linked to tax revenue in England, suppose you have an English Government pursuing what I would say are sensible policies. Suppose they have cut the top rate of tax and the revenue has gone up, and in Scotland you have a not very sensible Government who have put up the top rate of tax and the revenue has gone down. Perhaps I have not thought this through properly, because you have just put it into my head, but would your formula not result in the Scots being rewarded by getting more revenue because in England, where they were pursuing sensible tax policies, the revenue will have gone up, whereas north of the border they are pursuing non-sensible tax policies that have reduced revenue? Would that not create a degree of resentment among the English that they were sending more money to Scotland because they had pursued a daft tax policy?

Professor Holtham: I will try to answer that. What you are trying to achieve is that Scottish revenue depends on the actions of the Scottish Government but is not affected by actions of the English Government—at least, not very much.

Lord Forsyth of Drumlean: Agreed.

Professor Holtham: If the deduction is indexed to English taxes, anything the Scots do that affects their taxes stays in Scotland—they shoulder those implications—so the second bit of your point is handled.

Lord Forsyth of Drumlean: I was making a political point.

Professor Holtham: However, it is the case that, if the UK Government reduced taxes, the immediate impact of lower revenue would mean a lower deduction and a higher Scottish block grant.

Lord Forsyth of Drumlean: I am making a leap.

Professor Holtham: If they go up still further because of secondary effects—

Lord Forsyth of Drumlean: I think that if you cut the top rate of tax you will get more revenue, but that is a tendentious point. If they changed their tax policy in a way that the Scottish Government were opposed to but that resulted in their getting more money, is that not rather difficult to explain?

Professor Holtham: It may be difficult to explain, but there are rather few instances where it is a perverse outcome. It is generally what is supposed to happen. If you think through why people are doing it, what they are spending the money on and the implications, it is generally appropriate that that indexation takes place.

Lord Forsyth of Drumlean: I have another example. This is a real example. Suppose in England they introduce a graduate tax to pay for students who have gone to university. That would result in more revenue, while in Scotland they maintain free tuition.

Professor Holtham: No. You are indexing it just to income tax revenues, not the total tax revenues in the UK.

Lord Forsyth of Drumlean: All right. The principle is the same.

The Chairman: Baroness Wheatcroft, do you want to add anything?

Baroness Wheatcroft: It is just a supplementary, if I may, particularly to Charlotte Barbour. Although income tax is going to be devolved, it will not include tax on savings and dividends. Do you see any problems with that? Is it just a practical issue? Is there a logic in it that we ought to be able to overcome?

Charlotte Barbour: I suppose the logic is that savings are a longer-term thing. It is tied into your longer-term savings—it is not income year upon year. There is an operational sense to it, in that lots of people have £5.50 in their bank accounts, so do you really want to diddle about with getting a different rate of income tax on that? Until next April, income tax has always been withheld at source at one rate. In pure operational terms, it makes a lot of sense. For those who have higher amounts of business dividend income and interest income, especially with the changes that come in after next April, it is more complicated, because you have some income liable to the Scottish rate and some income liable to UK rates. For the majority, it works well.

Baroness Wheatcroft: Mr Crotty, do you have any views on that?

Tom Crotty: No, not really. I would agree with what Charlotte has just said. It is not an issue.

Lord Forsyth of Drumlean: Could I come back to Professor Holtham? Surely a graduate tax would be income tax.

Professor Holtham: It depends on how you classify it.

The Chairman: As we dive deeper, there are more areas of potential confusion and argument. That seems to be the—

Professor Holtham: Yes. As Poul Anderson said, there is no problem, however complicated, that when looked at in the right way does not become still more complicated.

The Chairman: We may quote you.

Q85 Lord Griffiths of Fforestfach: I would like to address this question in the first instance to Mr Crotty. If I were a Scottish businessman, as a result of this afternoon’s discussion I would be confused and would feel I had a major uncertainty in planning what I am trying to do and so on because there is so much uncertainty. Can you tell us what the feeling is in Scottish business about the competition there may be between different countries in the UK and the possibility of people and companies moving—even moving offshore, if that gave greater certainty? Secondly—coming back to Professor Holtham—if you want to introduce some certainty into it, you need principles and some sort of structure and foundation to it. What would business want there to be?

Tom Crotty: Coming back to your opening question, there is confusion and therefore uncertainty. Whether that uncertainty is sufficient to cause people to take action to try to eliminate it—let us say by moving south of the border or even moving offshore entirely—will depend on your business. It would not apply to a business like ours, where the investment in Scotland is so enormous. It is not something you walk away from or pick up and move. We are wedded to a huge operation in Scotland. We are in the process of spending another £300 million on that site as we speak, so we are there, come hell or high water, almost regardless of the fiscal regime and the governance. That applies to a lot of the bigger manufacturing industry. In the service industry—we talked about Standard Life earlier—it is obviously much easier to take those decisions. There is a risk that, if uncertainty is high, service industries will choose to try to reduce that uncertainty by physically relocating. That would be my view.

Lord Griffiths of Fforestfach: What about the second question? If you wanted to have more certainty going forward, what sort of arrangement commitments would you want from the Governments together to give you that certainty?

Tom Crotty: For our type of industry—large-scale manufacturing—the issue is usually around investment and certainty of investment. We are investing in an asset base that probably needs at least 10 years of certainty before we make an investment—probably longer. Earlier, I mentioned the investment of £300 million that is going in at Grangemouth. We need a runway ahead of 10 or 15 years of certainty to make that sort of investment, to get it back. At the moment, we would do that through a dialogue with both the Scottish Government and the UK Government, because we need to do it that way, and some assurances that we will not see significant fiscal changes that would impact on our investment. That works at the moment for us. We are big enough to have those conversations at a high enough level of government to give us the assurance. A lot of other companies would not be big enough to have that type of access or assurance.

Lord Teverson: I want to follow that up with Charlotte Barbour. Are her members tooling up to take advantage of all these different tax differentials? Do they see this as a great opportunity to get more business from clients?

Charlotte Barbour: I am not sure that it is a great business opportunity, perhaps for a couple of reasons. If you look at the purely devolved taxes such as land and buildings transaction tax, it is quite a niche tax and is run by the lawyers, as it is about purchasing property. We can park that to one side. Accountants would be involved only in reorganisations and group restructures—that kind of area. If we look at the income tax, one of the strengths of what is being proposed is that it will operate through PAYE. At the moment, employers and some of our members are slightly nervous about it, because we are still waiting for HMRC to roll out the general information programme. That is not to be done until the rate is set, understandably, but once it is in place I think employers will find that it is very little different from what they do today with PAYE. You will simply get a separate tax code for any Scottish taxpayer—an “S” code. Just stick it through a different bit of the machine, because the rates are different, and that is it.

Q86 Lord Teverson: Could I move on to the other area of fiscal policy, which is borrowing? Following the Smith commission’s proposals, what additional borrowing powers should Scotland receive? I am particularly interested to understand whether you think Scotland is of a size where it has to have borrowing powers. Some of our witnesses in the past have said that that is absolutely essential, but local authorities in the UK and individual government departments in the UK with grant in aid have to balance their budgets. Even the EU, with a budget of €148 billion, has to balance. Is it necessary, or what should happen?

Charlotte Barbour: ICAS has more interest in the mechanics of the tax side. However, when it comes to tax and the fiscal framework, you must have borrowing to make your tax work. Obviously you want prudent, sensible borrowing that is balanced between this generation and the next, but you need something to make your tax work. Beyond that, it is a much more political decision as to how much you want to—

Lord Teverson: What do you think about the sort of limits we have at the moment? I think it is £200 million, and loans have to be repaid within four years. Does that have to be increased or larger for things to work?

Charlotte Barbour: I do not have particular views on that.

Professor Holtham: There is a need for borrowing for capital investment. Just to take an example, the Welsh budget is about £15 billion a year, of which £1.5 billion or something is capital. If they want to build this chunk of the M4 around Newport, that is going to cost £1 billion. If we did it over three years, you are wiping out nearly 30% of your capital budget on one project. Why would you not want to spread that over 10 years or whatever, especially at these interest rates? I think it is perfectly reasonable, in terms of capital budgeting and management, that you have the ability to spread those very lumpy expenditures.

I do not have strong views on exactly how much they should be allowed, but it would be good if there were a principle that said, “All right. There is a certain debt you can carry relative to your income. We can assess your income. You should not be carrying debt of more than X% of your annual income, which would give you this amount”. I do not think anybody should complain about that. At the moment, though, we are just told that it is £200 million. Why not £201 million? It is completely arbitrary. Again, it would be useful to have some principles. As you have remarked, you need to borrow for budgetary management, if you have tax receipts coming in and they are variable, but there is also a case for spreading capital investment for very lumpy items. It is not impossible to derive sensible limits. If you just look at the fluctuation of revenue, that should tell you what your requirements are likely to be, worst case, for short-term borrowing and so on. I have no objection to limits. I do not think it is appropriate to say, “Borrow what you like”—certainly not—but there are certain principles that you could use to derive those limits within—

Lord Teverson: A bit like the mortgage industry or whatever.

Professor Holtham: Yes.

Lord Teverson: I am particularly interested in your infrastructure example in Wales and the M4. You are saying as a principle, as an area of real potential difficulty, that this problem is really going to be in devolved areas where there is major infrastructure expenditure. I do not quite understand, therefore, why in Scotland, with these sorts of paltry amounts, it is not a problem already, given the sort of rail investment that is taking place on a number of lines.

Professor Holtham: But they have had a number of fixes. They have been allowed to borrow. For the Forth Bridge, there was a one-off deal. The Scots are very good in the back room. The Welsh are lousy at it, but the Scots are very good at it. They work that back corridor much better than the Welsh do. There have been a few fixes for things like that.

The Chairman: Can you point us to any examples of devolved financial arrangements that have a formula in them for borrowing by a devolved part of the country?

Professor Holtham: I am sure I can, Chairman, but I cannot do it off the top of my head. I can send you something afterwards.

The Chairman: So this number has just been picked out of the air, has it?

Professor Holtham: Yes, as far as I am aware. If there has been thinking behind it, it has not been made public.

The Chairman: Over five years, it will be £1 billion of borrowings. Under the rules, could Scotland decide to bring that forward to accelerate an infrastructure programme? Is that permitted?

Professor Holtham: No. In fact, it is much worse than that. Not only have you not been able to borrow, you have not been able to save either. There were very limited rules in place—end-year flexibility rules. We argued for them to be loosened so that countries could underspend deliberately in order to accumulate reserves or capital, and they were actually tightened. If you do not spend the money, it is gone. Essentially, you cannot borrow very much and you cannot save at all, which makes capital budgeting more difficult than it need be.

Q87 Lord Sharkey: If Scotland had a modern equivalent of the Darien expedition and it became necessary for the UK Government to consider bailing it out, do you think that we should be able to do that or that, as some people have proposed, we should legislate so that in theory we cannot do it? I accept the obvious observation that it is very odd for a sovereign country to declare that it will not bail out a constituent part of the country, but what do you think? Should we legislate so that we do not bail out Scotland?

Professor Holtham: The federal Government do not bail out states in the United States, at least not formally. The difficulty is that the market would not believe it. The British Government would say, “We are not going to bail them out”, and the response would be, “Oh yeah, that is what they say”. There is what economists call the time inconsistency problem. You are supposed to say that you will not beforehand and then do it when it happens. That is a difficulty. I do not see any reason why you should not say, “There is no bail-out”. The point then is that you can protect essential services in the country, but you are not going to bail out the lender. It is the lender’s risk—be aware of the risk you are running. That will be reflected in interest rates. I see no reason why you should not do that.

Lord Sharkey: What would the implications of that be for the conditions of the people who were living in Scotland at that point?

Professor Holtham: Their Government would be slightly more prudent in their borrowing and would have to pay slightly higher interest rates.

Lord Sharkey: After the event, of course. I am talking about the implications if this Government refused to bail out Scotland. Surely the effect on the people north of the border would be disastrous.

Professor Holtham: I am not clear why. You certainly would protect the provision of essential services. You would not let the creditors come in and distrain the Government of all their assets. They could not take over the hospital and sell it for housing or something. You would have to protect that. It would be a case of “Let the lender beware. This is not guaranteed. It is not guaranteed either by the assets of the borrowing Government or by the revenue of the British Government”.

Lord Teverson: Do you not then start in the real world to have all the issues that Argentina has had with assets worldwide? The Scottish Government could own something that is going to be repossessed. Do you not get into all of that legal vulture fund stuff, or whatever the—

Professor Holtham: I do not see why you cannot write the bond contract that says, “This is payable on the faith and credit of the Scottish Government. You have no claim on public assets in Scotland”. You can just do that. It would have consequences for the interest rate, but that is the way it is.

Lord Forsyth of Drumlean: We did have the modern version of the Darien scheme—it was called the Royal Bank of Scotland.

I think this is crucially important. I have not been the greatest fan of devolution, because I could never quite work out how it would work, but now that we have got to the point where people believe they can have a Scottish Government who are made accountable and raise their own revenue, surely borrowing is crucial. If you do not have borrowing, effectively you have a Government who must always have a balanced budget and cannot adjust for the economic cycle. In thinking about this, I am a little confused, but surely the amount that the Scottish Government would be allowed to borrow would really depend on the arrangements that are reached—going back to where we started—on how the grant would be affected by revenues and how they would operate towards the normal business cycle. Does this not all have to be pulled together?

I am really asking the same question I asked at the beginning. Is it not essential that you work out this so-called fiscal framework—the rules and principles—and have it on the table before you start to consider what powers you are going to give? You cannot just say, “You will have some borrowing powers and you will have some of that”. I am very concerned that in a few weeks’ time the Scotland Act—the next one, before the other one has even been implemented—will come. Of course, if it is a negotiation, the Scottish Government will always say, “That is not enough”, which is what has been taking place all summer. What would your advice be to the Government as to how to bring this to a conclusion and ensure that we get legislation that reflects that fiscal framework?

Professor Holtham: I entirely agree with your position. Of course there ought to be some architecture around this. You are quite right. Once you have decided what taxes are devolved, you know—you can work out—what the worst-case fluctuation in revenue might be. If you have income tax but you do not have business taxes, there will be a certain volatility in your tax receipts. If you have business taxes, there will be a much bigger volatility in your tax receipts. So yes, you have to know what you have in order to be able to say what the borrowing requirement might be.

Let me take a worst case. If we get a recession half as bad again as 2008, what will happen to your revenue, because that is how much you can borrow for two, three or four years? You just have to take a view on what might be required, and that would be the outer limit for short-term borrowing. For long-term borrowing, I would do it just on a debt ratio. The British Government are running 80% of GDP, so the Scottish Government can run 20% of their GDP or something. I would do it something like that. However, for the short-term stuff, you have to know what you have in order to know how much borrowing you need to buffer for fluctuation.

Q88 The Chairman: The arrangements that are being proposed seem to me to be a recipe for confusion and argument. Given that we are where we are in this process, what particular recommendations could each of you offer that might help to clarify the rules and principles, so that at least some of the areas for dispute are potentially reduced?

Charlotte Barbour: Let me start by going back to the “no detriment” discussion. There are some parameters needed around that, just to make it sensible. It is there and you will have to make it work, so you need some kind of parameters about what it means and to what extent you can take it.

In my specialist area, which is taxation, there is a great deal of confusion. People do not really appreciate what is coming. I do not think that is the fault of HMRC, because it is there to do the operational side of it. Of course, if most of it is collected by PAYE, PAYE was never designed to maximise the profile of income tax, was it? It is plucking the goose with as little hissing as possible. On the tax side, there need to be messages from outwith HMRC on a more accountable, political level, so that people know what is coming, why it is coming and what it will give them. Coming back to your question, will it lead to hypothecation—that income tax equals health and education? I do not know, but it needs to be talked about more broadly, so that people know what is coming. Those are the areas I would focus on from my specialisms.

Professor Holtham: One of the difficulties is that it is the Scottish situation that is driving this. That is a negotiation with, on the one side, a Government who are not particularly interested in arriving at stable, workable, federal relations. In fact, if they are unstable and there are lots of grits in the oyster that might give rise to the pearl of independence, they are happy. That is one of the difficulties—you are not negotiating with the same end in mind. I am afraid I do not have a solution for that one.

It seems to me that it would have been better if the British Government had stated some principles about what they think are essential features of the architecture of a federal state. We do not mind going to federation, but even a federation requires certain things. It requires a certain readiness to accept a sensible scheme of income equalisation, for example, whether it is just revenue equalisation or needs-based—something based on the principle that when your time comes you will pay as well as receive, and we know what it is. That would be a first thing, which really precludes so-called fiscal autonomy. Fiscal autonomy is independence. Fine, go independent, but we cannot do fiscal autonomy in a federal state—it is just kidding ourselves. You have to state these principles and then try to stick to them in negotiation, otherwise you get in a terrible mess.

You could also flesh out some of the details such as how we are going to compensate the block grant for the tax devolution, whether we do it in the way I have suggested or in some other way. At the moment, we do not know how they are going to do it. I do not think they know, so no wonder there is confusion in business ranks. We do not know what is going on. You have to have a certain set of principles, you have to state them and you have to stick to them. I do not think you can save the situation by reverse Danegeld and just saying, “Yes, yes, yes”, to whatever is being asked for, because the other lot do not want this to work. That is the point. You have to say, “We are not going any further than that. That is it”. There are quid pro quos. That means that we are not going to try to chuck you out of Parliament and tell you that you cannot vote on things, because everything affects you. We are all in this together. That would be my approach.

Tom Crotty: To go back to the conversation we had earlier, this is a confused position. It is the result of a horse-trade. There are still huge uncertainties over a number of elements. From a business perspective, we do not like uncertainty, as we said earlier. We need to have those uncertainties resolved as soon as possible and then explained, because they have not really been explained. However, you caveat all that by going back to the point that Professor Holtham made. I personally believe that if we think this is the end of it, think again. Ultimately, there is a desire in the Government in Scotland to go beyond whatever is agreed, so there will never be a situation where both parties say, “Thank goodness we sorted that out. We can all go and relax now”. That is just not going to happen. I do not see the uncertainty disappearing any time soon. However, we need at least to resolve the outstanding issues in what we already have from the Smith commission, to put a line in the sand and say, “That is what we are going to do”, and then to explain the implications of that to business.

The Chairman: Mr Crotty, Ms Barbour and Professor Holtham, thank you very much indeed. It has been a very helpful discussion.