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The issue with higher-rate taxpayers paying the marginal tax rate of 53 per cent on income between the Scottish and UK higher-rate thresholds is, to my mind, another sign of the inadequacy of the devolution settlement. That issue is exacerbated by the decision to introduce the health and social care levy next year, which means that those taxpayers are facing a combined marginal rate of 54.25 per cent. I wrote recently to the Chief Secretary to the Treasury to request that the national insurance upper earnings limit for Scottish taxpayers be aligned with the Scottish higher-rate threshold, but that has not been granted.

My sense of it is that, if we believe in the full devolution of income tax—or even if we believe in the full devolution of non-savings, non-dividend income tax, which is what has happened—we also need to have a voice about the other areas of tax policy that interact with that. You have just talked to me about the interaction with national insurance contributions. There are also interactions with pensions and with some of the allowances. It is just that, often, the national insurance contribution issue dominates.

However, I will take a step back: we have chosen, as I think is clear, to make income tax fairer and more progressive. Therefore, the majority—54 per cent—of taxpayers will pay less income tax next year than they would if they lived elsewhere in the UK. However, that is balanced by the fact that we are asking those who can afford it to contribute a little bit more. In return, those living in Scotland continue to have access to a wider and better-funded range of public services in the UK, whether that is prescriptions or tuition fees.

The funding is certainly not coming from underspends, because this year’s budget is particularly tight. It actually comes from a whole range of different sources, and it has been painstakingly built up from funding that had been earmarked for different initiatives and schemes. In my own budget, there were elements for employability, while in the health budget, there was other business that was going to be undertaken. Those things still need to be done, but they will need to be managed over a longer timeframe rather than being stopped completely. However, I think that we will get into the territory of having to stop things completely if no more funding is forthcoming.

No. It would not be available anyway, because it is all about our internal management of budgets. The key is the autumn budget revision, which we have just had, and the spring budget revision, in which every penny will be accounted for in a transparent way, particularly with regard to transfers. In other words, you will at that point see transfers from the area for which the budget had been earmarked to the area where it will be spent. At a time of quite considerable flux, any breakdown would just be a snapshot, and I therefore point you in the direction of the spring budget revision, not least because there might be additional announcements tonight. The fact is that, as soon as you publish one thing, it is out of date, but the spring budget revision will be the point at which you will be able to see all the allocations and transfers and to hold us accountable for our decisions.

What I am discovering is that, in times of Covid, an hour is a very long time. Anything could happen. This time last year, the UK Government told us that there would be no additional pennies and then—within the hour, I think—something like £400 million was announced.

There are no guarantees at this point in time but, based on what I know right now about the budget, I find it difficult to believe that there will be much, if any, resource underspend. If there were to have been, we would have factored it into the carry-forward and baked it into the assumptions for next year’s budget, which, for the first time in probably two years, we have not done.

I will start with income tax. It must be borne in mind that I have no choice but to accept SFC forecasts and figures—I am obliged to spend within SFC forecasts—so, in a sense, whether I accept its forecasts is almost a moot point. However, when it comes to income tax, the final position on the performance of income tax revenues next year—the year for which we are setting the budget—will be known only once the outturn data is published in 2024. My issue in next year’s budget is to manage the reconciliation from two years ago, which was one of the lowest reconciliations that we have had to manage.

I come back to two points that I have made already. One is that managing budgets over a long period requires you to set multiyear spending reviews, and the spending review will need to factor that in. Therefore, the spending review will be able to allocate only the funding that we expect to receive. That includes grants from the UK Government as well as the income tax forecast. We will need to spend, and, once the outturn data is published, we will need to manage any reconciliations. In the past, forecasts of those reconciliations have nearly always been revised multiple times. The best way to deal with reconciliations is, of course, through resource borrowing for forecast error.

That confirms the point that we have made throughout the fiscal framework discussions that we need borrowing for forecast error to recognise the levels of volatility, whereby, in one year, the error could be £309 million and, in another year, it could be £14 million. We need to be able to manage both those levels. The borrowing powers are designed to smooth that path or trajectory, and to avoid our having to use real spending power for forecast error, because that is what it is—when it comes to the reconciliation process, we are talking about forecast error.

Social security is another challenge, because it is a demand-led budget, so we need to manage that. We have taken a slightly different approach in Scotland, which is, as far as possible, to promote uptake of social security benefits, because we think that people have a right to those. We will need to manage that.

My final point is that you will tell me—and I will agree—that the best way to deal with all that is to have economic growth, shared prosperity and fairness. That will not be delivered single-handedly by one budget. A budget is a list of spending commitments, whereas this is as much about policy as it is about spend.

We will need to manage that. There is not really any other answer but that we will need to manage that within our resource spending review. Come back to me if I am misunderstanding the question, but the nature of social security is very different from that of income tax, because social security is demand led. I will therefore need to meet that demand—I cannot say halfway through the year, “Sorry, I’ve run out of money”—and we will need to take intelligent decisions about the nature of social security in order to meet that demand.

I fear from the look on your face that I have perhaps misunderstood the question.

Absolutely. You have hit the nail on the head. We cannot get away from how important the resource spending review is. I have to manage a trajectory of spend. In each budget, I can almost manage a snapshot of spend. This year, to get from A to Z, how do we plan?

The spending review will allow us to do two things. First, it will allow us to spend over multiple years, which can drive reform, and to manage budgets. It is difficult to drive reform on a year-to-year basis, as we end up budgeting for the immediate challenges in front of us, rather than for the challenges in three years’ time.

The spending review also leads us to expect—and the SFC is forecasting—that, in two years’ time, social security spend will be a certain figure, so we need to manage other budget lines on a trajectory of getting to a position where we are dealing not with huge cuts but with a plan that gets us there. That will not be easy.

When you say “lagging”, will you tell me what metric you are using?

In other words, you are basically talking about earnings growth.

The balance of the initial £220 million was based on health funding that was already expected. We actually anticipated £120 million of additional health spending, but only £75 million was agreed. Therefore, with the second batch of £220 million, there is automatically a £45 million shortfall, which we have used to top up the original expectation on health funding.