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We discussed that with the Auditor General last week. Over the past 10 to 15 years, the freezing of thresholds, particularly in Scotland, where new tax rates have been introduced, means that more and more people are being dragged into the higher rates of tax. The upper rate of tax—rather than the Scottish top rate—used to be in single figures. Between now and the end of the decade, it could be approaching 40-plus per cent. How does where the tax base falls in relation to the different tax rates compare with comparative nations?

You highlighted earlier that the way in which the UK Government has structured the budget is probably unrealistic and certainly not electorally sound, given that the greatest spending cuts or tax increases will potentially come in the year before an election. You then alluded to the issue in relation to the spending review in Scotland.

Let us say that the UK Government does not manage to have the spending restraint that it is envisaging, and that then provides the Scottish Government with additional funds towards the end of this UK Parliament. However, both Governments say that they are determined to rein in public expenditure, particularly in relation to administration costs. You mentioned the £1 billion that the Scottish Government has identified. How likely is it that the Scottish and the UK Governments will both be able to rein in expenditure in that area? What impression are you getting of the work that is going on behind the scenes to prevent this from simply being, as you said, a salami-slicing exercise in which productive parts of Government are cut?

Good morning, Mr Phillips. The chancellor trailed a lot of what she thought would be in the budget, which did not materialise, in some respects. Alarm bells started to ring in Scotland at the suggestion that income tax rates would rise, because that would have been the first time that there was an increase in tax and it suddenly dawned on observers in Scotland that, under the fiscal framework, that would potentially mean a material cut to the block grant. However, that did not happen.

Both Governments are leaning on freezing thresholds as the means by which they will raise tax. In the Scottish tax system, there has been significant behavioural change when the Scottish Government has increased or introduced new tax rates. What happens to behaviour when governments raise tax by simply freezing thresholds?

We found out recently from data that, if the Scottish Government were to increase the advanced rate by 1p, it would yield only about £5 million. It would be a very small amount of money relative to what the Government might initially estimate or what we might think. How concerned should we be in Scotland about the profile of our tax base relative to the rest of the UK, when an increase of that level would bring in such a relatively small amount of money?

I turn briefly to welfare. The UK Government has stepped back from the bold welfare reforms that it initially planned to implement. The Scottish Government did not have such plans, and the two Governments are now proceeding in lockstep in relation to the two-child benefit cap. How concerned should we be about the difficulty of tackling that area of expenditure, which the Government classes as demand led, over the medium to long term? Is there a risk that, if the Government becomes seriously financially constrained, as we can see it becoming by 2030-31, it will start to make cuts in other areas because it simply cannot make cuts in demand-led areas? In fact, the demand could go in the opposite direction, as we see happening with the rise in unemployment.

Particularly if you freeze the bands.

Would you say that it is important that that is done? That seems to be one of the strategic weaknesses of the position that we are in.

Good morning. In your November 2024 report “Fiscal sustainability and reform in Scotland”, you said that the Scottish Government was not being candid or transparent with the public about the scale of the challenge in the fiscal outlook: by the end of the decade, it is about £4.7 billion of a shortfall. Would it be fair to read into today’s report that it is unrealistic to think that tax can be the mechanism by which the Scottish Government will manage to close that gap?

Paragraph 58 identifies what the problem is and talks about the need for the Government to tackle that weakness in the forthcoming budget. It goes on to say:

“If this were to be the case, and if the Scottish Government were to further use tax as a lever to close the medium-term fiscal gap, then it would need to increase tax revenues through other means.”

When you talk about “other means”, do you mean that the Government needs to try to change the pattern of the labour market in Scotland? Is that what we should be considering, or does “other means” sound an alarm bell with regard to the possibility that the Scottish Government might look at other, new forms of taxation?

I have a final, technical point. In paragraph 71, you rightly note that,

“In its letter to the Public Audit Committee, setting out its assessment, the Scottish Government committed to providing further analysis within the MTFS”

in relation to

“weaker relative earnings and employment performance in Scotland”.

Obviously, the Government has not provided us with such analysis. Are you aware of whether it has been done? The committee can perhaps take that up, but I wondered whether, through any of your inquiries, you had found out whether that work has been done.