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Professor Muscatelli talked about the importance of the public sector reform programme, which your report says “remains key”. You add that

“there has never been a more important time to consider prioritisation in public services and productivity-enhancing reforms in the public sector”.

The Scottish Government resource spending review published in May suggested that the public service reform programme would be undertaken over the remainder of this session of Parliament with additional outcomes to be reported in the 2023-24 Scottish budget, but there is no mention of it in the Scottish budget. Is that an issue of concern to the panel?

You have also said that the UK Government has announced two new fiscal targets, which

“gives the UK Government more scope to cut capital spending to achieve its deficit rule by treating current and investment spending equally.”

However, you add that that is

“potentially hampering productivity and economic activity in the long run and reducing tax revenues.”

We have seen that there is a £185 million reduction in the Scottish Government’s capital budget for the next financial year. How concerned are you about that?

As we did not touch on social security at all in the previous evidence session, I will start with that. As you pointed out, by 2027-28, the social security budget will be £1.4 billion higher than it would be if the payments were maintained at the UK level.

The Scottish Government has three priorities: the move to net zero, tackling child poverty and sustainable public services. What impact do you feel that the £1.4 billion will have on public services?

Just before you respond, you are probably aware that the Institute for Fiscal Studies said:

“The main reason why more services are facing cuts than elsewhere in the UK is that the Scottish Fiscal Commission expects Scotland’s growing range of devolved benefits to eat into a bigger share of its budget. Extra spending on benefits will help tackle child poverty and support more disabled people but will mean less for public services.”

I am going to ask you a follow-up question, but I should have said that I and my colleagues will direct all our questions to Professor Roy, who can decide which of his colleagues should come in on specific questions.

One of the things about the public sector is that 60 to 70 per cent of the money that goes into it is for salaries. So, obviously, if there is £1.4 billion less because that money is, for example, going to additional social security payments, that means that there is less money to pay wages, which will mean a reduced head count. In its overall calculations, has the Scottish Fiscal Commission looked at the taxes that are paid? I would think that the difference between social security payments and wages is that some of the wages will come back to the Scottish Government through income tax, whereas that is much less likely to happen with benefit payments.

That is an issue that the committee will need to look at more. We all want more revenue, but we do not want to kill the goose that lays the golden eggs either. There is always a balance to be struck.

You have given us some very healthy-looking projected income tax net positions as a result of fiscal drag—which, as much as anything else, is about the reduction in disposable income for people—but what will be the difference in Scotland between the percentage of GDP coming from the tax that is being taken now and that which will be taken in 2027-28? Where do you see that shift as a result of what I guess are generally called increased tax burdens? I should say that John Mason would not call them that.

In your report, you say:

“High inflation means that, over this year and next, Scottish households are expected to see the biggest fall in their real disposable income since records began in 1998. Even once inflation returns to lower levels, and real household incomes start to grow again in 2024-25, living standards will take time to recover to the pre-crisis 2021-22 level. Our forecast suggests that, by 2025-26, real disposable income per person will be no higher than its level a decade earlier.”

That is grim news, indeed, but how will that impact the different income distribution quintiles? Have you done any work on who will be affected most adversely, and where the balance lies?

Hospitals and schools still have to keep the lights on, and ambulances still need to be fuelled, so the GDP deflator underestimates the real costs that impact on the Scottish and UK budgets.

One aspect of the increase in the higher rates of taxation and so on is the impact on behaviour. When I was convener of the equivalent of this committee 10 years ago, Professor David Bell talked about that and the research that had been done on it. What research has been done on behaviour and on where the tipping point is whereby increased revenue is offset by behavioural change? For example, when do people who can do so register in England instead of Scotland for income tax purposes? When does that happen with incorporation, or even with people who class themselves as self-employed? I imagine that such behaviour would have an impact at this time. Where are we with that?

There is frequent use of the word “uncertain” in your report, I have to say. [Laughter.]

The review of the fiscal framework seems continually to get kicked into touch. There has been delay on delay.

More positive, perhaps, is that Scottish households tend to have smaller mortgage debt than those in other parts of the UK, which means that they will be less affected by rising interest rates—which will support economic activity in Scotland. I would hope that that would mean less fluctuation in house prices, apart from anything else—less decline, then less bounce back, so more stability in house prices. Has that helped economic activity in Scotland in any way? How much of a difference will it make?

I thank our witnesses for answering our questions and, indeed, my colleagues for their questions.

Before I close the meeting, I wish everyone a very merry Christmas, a restful festive break and a happy and prosperous new year.