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In other devolved regions around the world, the baseline is reset every five, seven or 10 years. The previous panel touched on that. That might take into account major structural changes such as—as you and others have mentioned—in the oil and gas industry in the north-east of Scotland. Should a reset be built into any future agreement between Scotland and England and, indeed, Wales and England—or, I should say, between Wales and the UK and Scotland and the UK?

A reset must be based on fairness to both sides. There cannot be a situation in which Scotland—or Wales—would always benefit. The reset would have to be based on specific criteria. That should be looked at.

Wales’s powers are different from Scotland’s. What impact has that had on the block grant adjustments? Wales has more limited powers. You said that property prices have gone up more than was anticipated and that that has helped with land taxes and stamp duty. What impact has that had? Has the Scottish experience encouraged or discouraged Wales from seeking more fiscal powers?

Wales might have learned from Scotland, but it is time that Scotland learned from Wales. In terms of the block grant adjustment, what has happened with regard to separate tax rates has been a real eye opener.

Our inquiry will go on for some months; I hope that we will be able to speak to both of you further down the line. However, I have a final question for you, before I bring in other members. If the Scottish Government could wave a magic wand and make one change to Scotland’s block grant adjustment, what should it be?

Who has not fed their dog? Is that you, Michelle? It is Michelle’s dog—I wondered why she had disappeared from view. Are you back, Michelle? Are you joining us?

Yes, I do not want to focus too much on political issues. Scotland might get powers over corporation tax and a share of VAT assignment, and I am quite keen on getting powers on alcohol and tobacco duties, which would certainly help, given some of the issues that we have to deal with on those matters.

I thank Ed Poole and Guto Ifan for their evidence. I apologise for delaying you by some 30 minutes because the previous session overran. I appreciate your patience.

The committee will consider the next steps on this work once the UK and Scottish Governments agree the terms of reference, timetable and authorship of the report. In fact, we might invite Ed Poole and Guto Ifan back. We did not spend a lot of time asking questions, mainly because their submission is so detailed, which meant that we already had many of the answers before us, so I thank them for that.

We have been joined by Kate Forbes MSP, Cabinet Secretary for Finance and the Economy, for our second evidence-taking session on the Scottish budget 2022-23. Ms Forbes is joined by Scottish Government officials Lucy O’Carroll, who is the director of tax and fiscal sustainability; Douglas McLaren, who is the deputy director of budget, pay and pensions; and Ian Storrie, who is the head of local government finance. I welcome the cabinet secretary to the meeting.

I remind members and witnesses that our broadcasting team will operate the microphones and that they should pause for a few seconds before speaking to ensure that they will be heard. I intend to bring members in to speak in the order that we discussed earlier. If anyone would like to come in at another point, they should type R in the chat function.

All questions should be directed to the cabinet secretary, in the first instance. If Ms Forbes wants an official to respond, she should make that clear so that the broadcasting team can bring them in.

We have up to two hours for the discussion. Before we open up the meeting to questions, I invite Ms Forbes to make a short opening statement.

Of course.

That concludes the committee’s questions absolutely on time. I thank Jackson Carlaw and the supporting officials for their evidence.

I suspend the meeting for five minutes to allow final checks to take place before the cabinet secretary takes questions.

In your statement on 9 December, you said:

“On income tax, the Government’s priority has been to make the tax system fairer and more progressive, and to protect low and middle-income taxpayers.”—[Official Report, 9 December 2021; c 72.]

However, on page 18 of its briefing, SPICe says:

“Scottish taxpayers who earn between the proposed Scottish higher rate threshold (£43,662)”—

that threshold has not increased by inflation, and neither has the UK one—

“and the rUK higher rate threshold (£50,270) will pay 41% income tax and 12% NICs on their earnings between these two amounts – a combined tax rate of 53%.”

That means that people in Scotland who earn between £43,662 and £50,270 will actually be paying more in tax than people who earn more than that. Someone earning £51,000 will have a marginal rate of taxation of 43 per cent, because of the 10 percentage point reduction in national insurance. How can that be deemed to be progressive, given that that includes many people who have families and large mortgages?

I can understand your argument about the UK, and, obviously, that is something that I subscribe to. However, if people earning over £43,662 are going to be confronted by a 54.25 per cent marginal rate of tax, perhaps the threshold should have been increased, rather than allowing the fiscal drag to ensnare more people in that tax net.

There has been a lot of debate and discussion on the resources that are available to the Scottish Government, but there has not been much debate on capital and infrastructure. Everyone accepts the figure on page 2 of the budget: there is a 9.7 per cent reduction in real terms of the draft capital. That is backed up by the SPICe report, on page 34. That has significant implications for Scotland’s capital programme, particularly as the cost of materials is still much higher than the general rate of inflation. What projects in Scotland are likely to be put on hold, from repairing fewer potholes to building more schools? What are the implications of that severe cut in capital resources?