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That is a fair comment and a fair assessment, and we would have to consider that. The principles were a set of compromises that emerged from a political negotiation. We have probably learned from that process. In relation to what we just discussed about VAT assignment, it is necessary to be clear and careful about what is part of that negotiation. Some of those areas were inserted into the Smith commission at the last minute.

The principles would need to be looked at. We would be in a completely different era with a completely different set of arrangements, so we would have to look at it in the round.

That point has been made on a number of occasions. There is scope and a need for a discussion of those fundamental issues. We would have liked to have got into that space, but, as I said at the start, when you are in a negotiation, you can only negotiate within the parameters of the other party’s willingness. In this case, those parameters were narrow, so a judgment had to be made.

Those issues remain on the table. As you have pointed out, the prudential borrowing powers of local authorities are markedly different compared with those of the Scottish Government and other devolved Administrations across the world, and that is not acceptable. Those matters remain live and we want to get into the space of further negotiation on them. However, this negotiation was very limited in scope.

We had to be pragmatic. I would not want to underestimate the gain that was made with the adoption of the indexed per capita block grant adjustment methodology on a permanent basis. In my opening statement, I set out that that could be worth around £500 million per year by 2026-27, so that was important. I was also mindful of the potential negative tax reconciliation quantum for 2024-25. We are now in a different space with the quantum, but at the start of the process, we did not know what it would be and it would have had a material impact on our budget next year. Therefore, being able to increase our resource borrowing powers from £300 million to £600 million was important, and that will be able to cover all the negative tax reconciliation for next year. Those things were uppermost in my mind. I accept that, if we had started with a fresh negotiation, other matters—some of which you have mentioned—would have been on the table. However, in order to secure some immediate benefit, I made that judgment and that was our conclusion. The negotiation took place within a limited window of opportunity.

Thank you, convener, and good morning. I am pleased to have the opportunity to attend this meeting to discuss the recent fiscal framework review.

The agreement with the United Kingdom Government to publish an updated version of the Scottish fiscal framework on 2 August fulfilled a key commitment in the First Minister’s policy prospectus. Since the fiscal framework was agreed in early 2016, it has been thoroughly stress tested as Brexit, the pandemic and the cost of living crisis have unfolded. Therefore, it was right to review arrangements and consider improvements.

The new agreement with the UK Government includes a balanced set of changes that strengthen the financial management tools that are available to the Scottish Government and provide the Scottish Parliament and the Scottish Government with greater long-term funding certainty. That said, I want to be clear that the review was not as broad in scope as the Scottish Government would have liked it to be. That reflects the fact that the scope and process for the review and its outcome were subject to agreement with the UK Government. Nonetheless, under the circumstances, the revised agreement represents meaningful progress and a good outcome for Scotland.

The adoption of the indexed per capita block grant adjustment methodology on a permanent basis is a significant win for Scotland. The authors of the independent report estimated that the use of the indexed per capita methodology for calculating income tax block grant adjustments alone could be worth around £500 million a year by 2026-27 compared with the use of other methodologies that were considered in 2016.

The agreement also provides a substantial increase in the Scottish Government’s resource borrowing powers to manage tax and social security forecast errors—the amount has doubled from £300 million a year to up to £600 million a year of borrowing capacity. That greatly improves the Scottish Government’s ability to manage and smooth funding volatility driven by forecast error.

The removal of drawdown limits on the Scottish reserve is also an important development. It provides a significant increase in reserve flexibility and improves the Scottish Government’s ability to manage funding across financial years.

The agreement to uprate borrowing and reserve limits in line with inflation ensures that the effectiveness of those powers will be maintained in real terms, which makes Scotland’s financial management arrangements more sustainable.

Taken together, and within the context of the narrowly scoped review that was on offer, those are meaningful improvements to the framework and the financial management tools that are available to the Scottish Government.

That said, we should not lose sight of the scale of the fiscal challenge in the aftermath of the pandemic, the on-going cost of living crisis and the urgent need to tackle climate change. Although the changes to the framework are welcome, they are not of the magnitude required to offset that broader fiscal challenge. That requires action by the UK Government and I hope that the Chancellor of the Exchequer will heed calls from the Scottish Government to take action on public services, fuel poverty, net zero and the cost of living as part of tomorrow’s autumn statement.

I also understand the concerns that the committee expressed about the process surrounding the review and its timing. The Scottish Government’s preference had been for a process involving broad stakeholder involvement. However, when a window of opportunity emerged earlier this year to conclude an agreement with the UK Government on changes to the framework, I was mindful of the value of securing borrowing powers ahead of the 2024-25 budget and that we were dealing with a UK Government that is likely to go into election mode soon. In that context, I judged that it was appropriate and prudent to conclude a deal when it became possible to do so.

I hope that the committee recognises the improvements that have been secured through the revised agreement and I look forward to discussing the detailed arrangements.

Matthew Elsby, do you want to come in on that? I think that it is fair to say that risk is inherent in every decision. I guess that our starting point was to minimise that risk for the Scottish Government and what came out of the review does that.

As you can imagine, we pushed on a number of fronts to try to get the maximum benefit and best deal and were more successful in some areas than in others. Getting indexation was better than getting nothing on capital, but we would clearly have wanted that to go further.

The biggest challenge that we face comes from capital borrowing limits. As part of the budget, I will lay out the full implications of that for the Scottish budget and for infrastructure projects. It is a real challenge and links directly to the economy, economic growth and the ability to invest in Scotland’s infrastructure. Capital borrowing limits are crucial and will be a major impediment to growth. We got as much as we could achieve, but were just not able to expand the basket of measures that were being looked at.

We would definitely want to reflect on the process. My predecessors engaged with the committee and stakeholders in the early days of the review, and the independent report was jointly commissioned, which was important for its credibility and acceptance as part of the process. There was then the rapid opportunity to conclude matters. The CST made it very clear that he wanted that to happen in a confidential space. I would not have had any issues at all with having further engagement with the committee and stakeholders but, given the CST’s very clear position, that would have been very difficult. Sometimes in a confidential space, agreements can be reached that might otherwise be difficult. Those are balancing acts.

Going forward, our clear preference would be to have the engagement that preceded the reaching of the agreement, not just with the committee but with external stakeholders, and to have that in a more open and transparent way.

I do not think that the UK Government would want to do that, to be fair. I think that it understands the risks, and I do not see any appetite for a unilateral imposition of VAT assignment. In the light of all the evidence—from HMRC and major influential organisations, which all say the same thing—I do not see any Government wanting to impose something in the full knowledge of the harm and risk that it would cause.

What I was getting at earlier was that what we end up saying about VAT assignment post-review will be discussed at a future joint Exchequer committee. The point that I was making is that I foresee us reaching some kind of joint position on what we do with VAT assignment in future.

That goes back to what was said earlier, which is that we need a more general look at the fiscal powers. Even with further tweaks to levels, resource borrowing does not change some of the fundamental weaknesses in our ability to respond to an economic shock, whether that comes from a pandemic or for any other reason. We have very limited levers, so tweaks to some of the levels do not suffice.

Our ambition is to have the policy levers to be able to manage VAT. The problem with VAT assignment is that you are assigned the revenues but you have none of the levers to be able to deal with risk: you get the risk but none of the benefits. If VAT and all the controls over it were devolved, that would be a very different proposition, but that is not what was on the table.

Assignment brings all the risk but none of the benefit of being able to use VAT as a tax lever to raise revenue. As I explained earlier, the evidence on that is so compelling that both Governments need to reach a position on what we do with VAT assignment in future, but we continue to want full devolution of VAT, along with the policy levers, so that we can manage that.