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That is interesting and is what one would anticipate.

You have said that the underlying structure of the Scottish economy is undergoing profound shifts. You talked about the impact of the pandemic. More people work from home, and some people suffer from prolonged health effects. Have you looked at that? In recent weeks, we have taken evidence from various panels to the effect that, across the UK, around 600,000 people have left the workforce; the corollary is that the number in Scotland is about 60,000. Do you look on that as a long-term consideration or as a one-year or two-year blip, when it comes to your projections of future economic growth and so on?

Thank you. I have just one more question before I open things up to colleagues around the table. Last Thursday, you sent me a letter, which said that non-domestic rates will be levied on a revalued roll. You said that

“significant uncertainties remained throughout the forecasting process.”

Obviously, that is of concern to the Scottish Fiscal Commission. Will you expand on that a wee bit, for the record?

I will follow up before I let Liz Smith in. I am struck by something that you said, Professor Breedon. You said that you assume that the 1p increase in the top rate will increase taxes by only £3 million rather than £30 million because of behavioural changes, but that if we put the rate up by 2p, that amount would double to £6 million. Surely you get to a point where the effect of behavioural change exceeds the additional income level. If the volatility is such that a 1p increase will take 90 per cent off the revenue, surely 2p in the pound—I am quite astonished at that high level of elasticity—would tip it over the edge and you could end up with negative revenue.

Thank you. I have just one final question before I open out the session to colleagues round the table. It is a question about taxation. We see that fiscal drag will increase income taxes quite considerably over the next few years, and you have said that the Scottish Government should continue to consider

“ways that the tax system could be made fairer and better aligned to improving productivity and wellbeing, either through reforms to existing taxes or through the introduction of new taxes”.

By 2027-28, what share of gross domestic product will be taken up by taxes compared with now? Also, you say that the system could be made fairer, but fairer to whom?

We have an anomaly in Scotland whereby people who are earning £45,000 a year, for example, on marginal tax, will pay in the next financial year 42 per cent in income tax and 12 per cent in national insurance, giving a marginal rate of 54 per cent; on the remainder, they will have to pay excise duty, VAT and all the rest of it, depending on their lifestyle. However, for people earning over £50,000, their national insurance level falls to 2 per cent, so their marginal rate is significantly less. How can the tax system be made fairer, given those anomalies?

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?