CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 38-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

scottish AFFAIRS Committee

implications for the scottish economy

of the current economic climate

wednesday 10 december 2008

MR IAIN MCMILLAN, MR DAVID LONSDALE, PROFESSOR DAVID BELL,

MR GRAHAM SMITH, MR STEPHEN BOYD and MR GARRY CLARK

Evidence heard in Public Questions 1 - 69

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Scottish Affairs Committee

on Wednesday 10 December 2008

Members present

Mr Mohammad Sarwar, in the Chair

Mr Alistair Carmichael

Mr Ian Davidson

Mr Jim Devine

Mr Jim McGovern

David Mundell

Mr Charles Walker

Pete Wishart

________________

Witnesses: Mr Iain McMillan, Director, CBI Scotland, Mr David Lonsdale, Assistant Director, CBI Scotland, Mr Garry Clark, Head of Policy and Public Affairs, Scottish Chambers of Commerce, Mr Graham Smith, General Secretary, Scottish Trades Union Congress, Mr Stephen Boyd, Assistant Secretary, Scottish Trades Union Congress and Professor David Bell, University of Stirling, gave evidence.

Q1 Chairman: Good afternoon. I would like to welcome all the witnesses to our session. Our original plan was to take evidence separately but members of the Committee felt that it would be appropriate to take evidence from all the witnesses together. Would you like to introduce yourselves please for the record?

Professor Bell: I am Professor David Bell from the University of Stirling Economics Department.

Mr Clark: My name is Garry Clark and I am Head of Policy and Public Affairs with the Scottish Chambers of Commerce.

Mr Lonsdale: I am David Lonsdale; I am Assistant Director of the CBI in Scotland.

Mr McMillan: Iain McMillan, Director, CBI Scotland.

Mr Smith: Graham Smith, General Secretary of the Scottish TUC.

Mr Boyd: Stephen Boyd, Assistant Secretary, STUC.

Q2 Chairman: Before we start on the detailed questions, perhaps you would like to make an opening statement.

Mr McMillan: Just to say something about our organisation, Chairman. The CBI-the Confederation of British Industry as it has been traditionally known-is a UK organisation. CBI Scotland is a part of that organisation and devotes its attention to matters of public policy and business advocacy here in London, in other parts of the UK and of course in Scotland and overseas. On behalf of David and I, we take the work of this Committee very seriously. It is good to be back. It is the first time in 10 years since that other place opened 400 miles north, so thank you very much for inviting us to engage with you today.

Q3 Chairman: Thank you for coming. Anybody else?

Mr Clark: If I could say a few words to introduce the Scottish Chambers of Commerce, we represent some nine and a half thousand businesses in Scotland divided through 20 local chambers of commerce from Wick to Wigtown as we like to say in Scotland. Those businesses are businesses of all sizes from the very smallest to some of the very largest and also covering all parts of the country. We keep a strong focus on all areas of the economy. We are delighted as well to be here today.

Q4 Mr Davidson: Can I just ask a point of the Scottish Chambers of Commerce? Why is the material you produce so consistently and unremittingly hostile to Westminster and to the present British Government?

Mr Clark: I do not believe that it is. Our purpose in the Scottish Chambers of Commerce is to represent views of our members.

Q5 Mr Davidson: Are they all nationalists then? There is an issue for me about the extent to which we take account of your evidence here given that you so obviously have form. There is a contrast between the stuff that you produce and the stuff that Liz Cameron produces. It is unfortunate that Liz is not here today because she always produces a much more balanced account of events than you do. Can you just clarify for me why that is?

Mr Clark: I do not think that is a fair representation of the views of the Scottish Chambers of Commerce.

Q6 Mr Davidson: Neither do I actually and that is why I wonder why it is coming across from yourself, but maybe we can just move on.

Mr Smith: Perhaps I could introduce the Scottish TUC seeing as everybody else has introduced themselves. The Scottish TUC is Scotland's trades union centre. We represent 39 trades unions who represent workers in all industries and occupations in Scotland; we represent 644,000 members in Scotland. We are delighted to be here to speak to the Committee about the current situation of the Scottish economy.

Q7 Mr Walker: We ought to make sure that everyone has had a turn. Professor Bell?

Professor Bell: I am simply here as a person with a longstanding interest in the Scottish economy and its performance. I have no particular axe to grind.

Q8 Chairman: I will start the questions. How do you think the Scottish economy is linked with the United Kingdom economy as a whole? In your view, do you think there might be some changes because of the current economic climate?

Professor Bell: Can I say something quite brief? I presume you are really talking about it in the context of the recession we are now facing. I have been looking at the way that unemployment has been developing since the beginning of the year and it is quite interesting to notice that really Scotland and England are performing almost exactly the same in terms of the increase in unemployment that they are experiencing, whereas Wales is actually doing somewhat worse. In terms of things like the fall in house prices, Scotland is at the lower end of the decline in house prices in comparison with Northern Ireland where house prices have fallen by almost 30% in the last 12 months. The decline in England has been somewhat larger than that in Scotland. I am sure we will come onto the financial services sector to which Scotland is particularly exposed in other respects perhaps also too because it has a reasonably large public sector and at times like these that is an insurance in a sense from a huge drop in demand. So there are some plus factors at the moment as well as issues associated with the financial services which we will come on to.

Mr McMillan: I agree with David on that and I think that the numbers for economic growth in Scotland and the UK this year are probably quite close. For example, we expect GDP for the UK to grow by 0.8% in 2008; we do not do a separate Scottish breakdown of these figures, but Fraser of Allander, for example, expect the economy to grow by 0.7%, so the GDP growth this year is really quite close and certainly closer than any standard error in the estimate which I think is consistent with David's point on unemployment.

Q9 Chairman: To what extent do you think the Pre-Budget Report and the fiscal stimulus will aid the Scottish economy?

Mr McMillan: I think two things, first of all it does appear that the Barnett consequentials are going to bring some extra capital expenditure to Scotland. We think it is a good thing provided the capital expenditure is devoted to improving the supply side of the economy. Obviously the Barnett works in both directions and therefore the Chancellor of the Exchequer's efficiency savings are going to work through the Barnett consequentials into Scotland as well. On the one hand there will be a fiscal stimulus in the short term. Over the longer term then clearly there is going to have to be some belt tightening.

Professor Bell: What is happening is that, as a result of the extra capital spending in England and Wales, £160 million has been brought forward from 2010/11 into 2008/09 and 2009/10.[1] There will be £5 billion worth of additional efficiency savings by the UK Government in 2010/11 and that is going to create difficulties. The medium term that Iain was referring to there is really 2010/11; I think that is going to be a difficult year for Scotland, certainly for the public sector and it will reduce demand and affect the private sector as well.

Q10 Chairman: The Government has injected billions of pounds to rescue the banks. Was that the right decision by the Government? The business community and the people who have mortgages are finding that unfortunately the banks, building societies and financial institutions are not passing that relief-the cut in interest rate-to the business community or to the people who have big mortgages. How do you think the government can force these institutions to help the people from the building society and the people who lend money?

Mr McMillan: First of all the measures that the government has taken to rescue the financial system are probably about right in two respects: first of all, injections of money to support the capital base of the banks and also to inject liquidity into the system. That was very important; it was the right thing to do. I think it remains to be seen whether that is enough. We hope it is. I think as far as lending to businesses and so on, we cannot ask the banks to repeat the mistakes of the past and therefore there needs to be a balance struck between doing what is right for the business community and making sure that credit is readily available for companies whilst making sure that lending is not foolhardy. I think it is a question of balance, if I may say so.

Mr Smith: Perhaps if I could take a step back and respond to the initial question you asked about the Pre-Budget Report and the stimulus. Certainly our view was that we welcome the measures taken by the Chancellor. There certainly was not an option to do nothing and what the Chancellor did we believe were bold steps that should have a very positive impact on the Scottish economy. All the measures that were introduced were perhaps not ones that we ourselves had called for or indeed if we had had the powers ourselves to introduce measures they would not have been the ones we would have chosen, but certainly we believe they are ones which should have a positive impact on the Scottish economy moving forward. In relation to how the government can encourage banks-if that is the right term to use-to improve lending back up to respectable levels, there is little doubt that the key problem that is facing a number of businesses in Scotland is the ability to access finance. We know from talking to a number of companies in a number of sectors (for example in petrochemicals, in pharmaceuticals) they have fairly healthy order books but the problem they have is that they cannot access finance and where companies are particularly highly leveraged then the cost of servicing the debt, because of the business models that they have operated-there is a question about whether these where appropriate business models-they are being placed under significant difficulties and potentially could result in significant job loss in the future. However the government now holds important stakes in a number of banks and it should use its stakeholdings in these banks to ensure that the banks are lending to business. We also believe that there is a role for government in perhaps directly lending to business and as STUC we have long advocated the creation of a Scottish investment bank which would provide long term patient finance to companies. One of the problems we have had we believe not just in the Scottish economy but in the British economy more generally is the inability-if that is the right word to use-of financial institutions to finance long term patient finance to companies to allow companies to grow. We believe that is a market failure that government should act to address.

Q11 Pete Wishart: Can I just take you back to difficulties we will be having in the budget and of course the next couple of years. Professor Bell identifies that a cut in efficiency savings will come in the region of £500 million in the first year and £500 million in the second year, a total of a billion pounds worth of cuts to the Scottish block grant. I think Professor Bell identified this as a 3.4% contraction of the Scottish block grant and the impact on services is obviously going to be quite immense on the back of all this. I just wonder if our guests here have any idea about how these cuts are going to be implemented to the Scottish block grant, the impact that this is going to have on the Scottish economy and what representations your organisations are prepared to make to the Treasury to ensure that Scotland is not going to be disproportionately hit by this attempt at efficiency savings of up to a billion pounds in Scotland.

Mr McMillan: The public finances need to be brought into good order. The Chancellor expects the pubic sector net cash requirement to reach 57% of GDP within the next two to three years which is very high. Measures to reduce that ratio are needed. Nobody can pretend that that is going to be easy. As far as Scotland is concerned, I hear what you say about it being disproportionately hit. My understanding is that if Barnett works in the way that it should work then it will not be disproportionately hit but I am not sure how you come to the premise behind your question there. Perhaps you could help me with that.

Q12 Chairman: Professor Bell, will you be able to help?

Professor Bell: I will try. I do not think Scotland will be disproportionately hit in so far as the way the Barnett works in this respect. It all depends how the Chancellor decides to implement the £5 billion efficiency savings that were talked about in the Pre-Budget Report. It will depend whether these fall disproportionately on areas where Scotland has a devolved power and we do not know the answer to that question yet. I suspect it will be broadly in line with government spending in which case that overall £500 million figure will be about right, but I do not think that that will be disproportionate. That is just the way the Barnett formula works. Then the question is, as Iain points out, the UK cannot afford to go into a debt much more severely than it already appears to be doing. The question is really one of timing. When do you start to reduce the rate of growth in public spending so that, for example, the debt to GDP ratio starts to come back down again? It had been coming down; it has gone back up and it looks like it is going to go up quite significantly over the next couple of years. It is a question of timing so that you do not make a situation which is already difficult worse when you start to implement these efficiencies in the public sector because they are going to have to come eventually.

Q13 Mr McGovern: Professor Bell says that the consequentials from the Pre-Budget Report for Scotland was £160 million. I was under the impression it was £260 million.[2]

Professor Bell: What I am talking about is the amount of capital spending that the Scottish Government is going to be able to bring forward from the financial year 2010/11 into the current year and the next financial year and I think that is £160 million.

Q14 Mr McGovern: I will certainly check my sources but I was definitely under the impression it is £260 million. I just wondered whether either Iain or Graham had a view on how John Swinney (the finance minister in the Scottish Executive who welcomed the money) opted to use that money. I do not know if anybody here will be able confirm my opinion that it is £260 million.

Mr McMillan: I thought it was £200 million.

Mr Lonsdale: I do not want to reveal a split in the CBI but I thought it was £260 million as well. We made a submission to the devolved administration in advance about some of the options they should take with their budget and any windfalls they would get through the Pre-Budget Report. One of the headline issues from that was to look very closely at all their expenditure, particularly on the capital side and accelerate what they can. When that announcement was made we strongly welcomed it. The proviso in our submission was of course that it is spending that could help productivity and help the economy, not just advance and accelerate any spending within the devolved government's remit. I have not studied Mr Swinney's statement in detail but my understanding is that it is on skills building, transport infrastructure and related items like that. That is something we called for in advance and we support. One of the concerns we have is that although capital spend has been accelerated at a UK level actually when you look down the line several years it is not just a case of taking from then to now, it is actually going to be slightly less in future, but I guess that is part of trying to repair the public finances at a UK level.

Mr Boyd: Could I go back to the previous question. I think it was entirely right that when the Chancellor was setting out his Pre-Budget Report that he should set out in the longer term how we wish to pay for that. I think we need to recognise that there are options there about how he chooses to pay for it; it is not all public sector efficiency. We very much welcome the change in direction set by the new higher rate of tax but I think we have to realise that there is still a way to go in that particular issue. This time last year the TUC published their report where the estimated tax gap in the UK tax that was avoided by the super bill for the individuals and some of the UK's biggest corporations through evasion or avoidance was at £26 billion. The Treasury have since suggested the figure might be approaching £40 billion. So I think it is not all about public sector efficiency here; there are other ways in which you can try and get the public finances back in order. However, on the specific point of the public sector efficiencies, Graham has already said that the STUC welcomed the PBR package as a whole but we do have some concerns about what this is going to mean for Scotland and we will be speaking to both the Treasury and the Scottish Government about how this is looking forward; it is one element of a wider package which we did support. I think Professor Bell has already made the point about the payment here. Given the extent of the recession that we might be facing 2010 might be quite early.

Q15 Mr Carmichael: I was struck by what Iain McMillan said about not wanting banks to repeat the mistakes of the past which I think is a proposition which very few of us would disagree with. My impression though is that businesses in my constituency, which are predominantly SMEs,[3] were not part of the mistakes the banks made in the past. The mistake the banks made in the past was getting involved in silly money; lending to SMEs was not really part of the problem. That notwithstanding, it is the SMEs in my constituency that are now being made to pay for the recapitalisation of the banks who are trying to get their balance sheets back in order in a way which is seriously damaging to a number of local businesses. I spoke to one retailer last week who had just renegotiated her overdraft facility with HBOS (this was at the end of a normal two year cycle that every business goes through) and HBOS insisted that her new interest rate would be another 1% above base and the arrangement fee, so-called, was to be increased by a further 0.25% of the total lending. This was for a perfectly routine business transaction. That is HBOS putting the cost onto a small business which is in a sector which is going to be challenged in an economic downturn. That is my perspective as a constituency member from a part of the country which is not perhaps typical of the rest of the country. From your point of view, Iain, from the CBI and from your point of view, Garry, from the Chambers who I think probably have more SMEs than the CBI, is that something that has been found across the country?

Mr Clark: That is a very familiar picture you have painted there. We have been speaking to businesses right across the country and the question of overdraft facilities going up by one or even one and a half percentage points above base over and above what they are already paying above base has not been unusual. We have had reports of that coming in from Thurso, we have had reports coming in from Mid-Lothian, West-Lothian, Glasgow, Dundee, Aberdeen, right across the country. We have one business, for example, where they had a half million pound loan of which £40,000 was outstanding. That was then called back in by the bank for reassessment and an additional £55,000 was added onto the repayment, more than doubling what was already there.

Q16 Mr Carmichael: Given that this is essentially a contractual relationship between two private businesses what can governments actually do to effect some meaningful solution to this? It is pretty clear that Alistair Darling making speeches saying, "If you keep doing this I'm going to get very, very cross" just is not going to cut it.

Mr Clark: I think what is ultimately going to be the deciding factor in this is the restoration of competition back into our retail banking sector and that is a very difficult solution to achieve.

Mr Carmichael: Do you think a Lloyds TSB/HBOS merger will help that?

Q17 Chairman: The banks are clearly telling people in the business community-the people who have spoken to me-that even with a reduction of interest rate to 2% they are not willing to come less than 5% or 6%. What is the benefit to the business with the reduction of interest rates and, on the other hand, the people who are small depositors, they are losing out because they are getting hammered. What can the members of the Scottish Affairs Select Committee and MPs do to name them and shame them? What else can be done? Obviously it is very disturbing when it is brought to our notice that financial institutions-banks, building societies-are charging the most vulnerable in our communities up to 300% and in fact in some cases up to 1000%. How can the government deal with this situation?

Professor Bell: I do think it is extremely difficult because of course the banks in a sense hold a gun to the government's head because if they fold over then we have chaos, but it does seem to me that maybe the government will have to take one more step and that is to some extent to guarantee lending between businesses and banks. That might not be too costly a route to go down and I think it would certainly be worth looking into at the moment.

Q18 Mr Walker: Stephen Boyd suggested that although the top rate of tax has gone up to 45% there might be room to increase taxation. I think I am right in believing that the Scottish Parliament Executive has the right to vary taxation by three pence in the pound. Do you think that if there is a need to push up public expenditure to get public works happening that there is a case to be made to the Scottish Executive to actually start using this power in the area of taxation?

Mr Boyd: It is not what I would start from. I think what we need is a fundamental overhaul of the taxation framework in the UK at this moment in time. We have a situation where the lowest paid in society pay a greater proportion of their income in taxation than the wealthiest. I think this is unsustainable. As I have already said, a third of the top 700 companies paid no corporation tax whatsoever in the last financial year and I think we need a fundamental overhaul. If this is forthcoming then I think the tax take will increase. We are not starting at the point of looking at the taxation rules of the Scottish Government. I think that gets us into a completely different question about the financing of devolution; that is a very appropriate debate to be had at this time and it is one that we are participating in through the Calman Commission and the Scottish Government's National Conversation and it is one where we are developing a position but we are not at a stage yet to give you a comprehensive overview of what that position will be, but we think that the position we come to on this is going to be very important for Scotland's constitutional future and it is one that we are taking a time to come to a true and considered position and how we believe devolution should be financed.

Q19 Mr Walker: Today we are discussing Scotland. We have Scottish Trades Union Congress, we have Scottish CBI, we have Scottish Chambers of Commerce and we have a Scottish academic and within Scotland there is the power to increase taxation. I still am searching for an answer on this. With that power why would you not, if you felt it could alleviate some of the pressures in Scotland, ask the Executive to levy increased taxes?

Mr Smith: I think we just gave you the answer to that. If that is a power to be exercised it will be exercised in the context of a more fundamental assessment and overhaul of both the UK taxation system and the nature of funding of the devolved Scottish Government. We gave you the answer.

Q20 Mr Walker: I do not think you did. Can somebody else try to answer it?

Mr Lonsdale: Certainly from our members' perspective we have looked at this issue of using the tartan tax where we can reduce it by up to three pence in the pound or increase it by up to three pence in the pound. The arguments are actually quite similar on the issue of the proposed local income tax north of the border. Firstly it would add a tremendous amount of cost to business and secondly the complexity would add to business. There are other questions as to the public spending or the taxed income that the devolved government would forego and what might that come from which is allied to the question from earlier on about public spending and what it is being used on. We have some very deep reservations about that agenda with its costs and complexities. The Burt Commission published a report two years ago looking at the issue of local income tax and they said at that time that the upfront cost to business would be up to £60 million and the on-going costs to business would be anything between £20 and £30 million.[4] We have not seen any estimated cost to business from using the tartan tax in recent years.

Mr McMillan: No we have not, and these costs would also fall on the public sector because it is around employment and making adjustments to the PAYE system.

Q21 Mr Walker: In what circumstances could you see this tax raising power being deployed? Professor Bell, you are an academic and tend to rise above the politics of this, in what circumstances would you see it being deployed?

Professor Bell: I think it could only be deployed upwards. If Scotland unilaterally decided to cut income tax you would find that the Treasury would pretty much, pound for pound, cut the block grant to Scotland on the argument that you must have enough money if you are able to cut tax. There has never been a consensus within Scotland that it should be raised. Clearly it can't be a solution to the present problem because what you need is increased demand and all you would do is to reshuffle some demand. This would add to the public sector coffers and make Scotland even more dependent on the public sector. There has never been an appetite for that. I can speculate on the reasons why that is the case and of course there are economic arguments why you might feel it would cause the Scottish economy to become uncompetitive.

Q22 Mr Walker: If there is a shortfall in the block grant and there is a debate to be had about how to fill that shortfall, surely raising taxes should be part of that debate if that power exists in Scotland.

Professor Bell: It should be part of the debate; I do not disagree with that at all. The power is there; it has never been used.

Q23 Mr Carmichael: Can I pick up on the point about tax cuts in Scotland bringing with it the consequential reduction in the block grant? I do not quite follow your thinking here. We have the the tax varying powers for the Scottish Parliament set up in the Scotland Act. We have the Barnett formula. The two stand independently of each other. It would actually be a bold Treasury minister that would say, "Actually we are going to disregard the terms of the Scotland Act and we will force the right of the Scottish people to exercise the powers that Westminster has given them". Why is it you say that if we put tax in Scotland up it would reduce competitiveness but there would be no effects from bringing it down?

Professor Bell: I think it is asymmetric in a sense. The Barnett formula is not enshrined in law. It is just by convention that the Treasury allocates the so-called consequentials to Scotland. We had the Carter review of prisons last year and the Treasury decided to fund that out of the UK reserve. Anything that is funded out of the UK reserve does not have a Barnett consequential although clearly prisons occur on both sides of the border. If, let us say, Scotland cuts the level of income tax I do not take the view that the Treasury will just carry on applying the Barnett formula in a dispassionate way and not take any regard of the fact that Scotland has enough money and can apparently afford to cut income tax.

Q24 Mr Carmichael: The whole point of having a Scottish Parliament and giving it a tax varying power is that these are things that you can decide for yourselves. It would be brave of Treasury to turn round and say, "Well actually we've changed our minds, you can't". Do you not think there is a case for the Scottish Parliament to say, "Here is an opportunity to give Scotland a distinctive competitive edge compared to the rest of the United Kingdom"? I thought your analysis of the Pre-Budget Report was pretty grey. It was Stephen who said that this was a package was bold; I did not think it was bold at all, I thought it was a passive mix of a fiver here, three quid there, four quid here and we will have eight quid back, tax cuts, some tax credits and we will increase national insurance contributions. Here would be an opportunity for the Scottish Government to say, "There you go, money back in your pockets, go and spend it".

Mr McMillan: I think that is happening. If my understanding is correct I think that north of the border the Liberal Democrats do want to invoke the tax varying power and cut the basic rate by two pence in the pound. We have seen that in the past. If I recall correctly I think the SNP in 1999 had a manifesto commitment to increase the varying tax by one penny in the pound. I think the debate is there. It maybe an idea if somebody, perhaps one of your clerks, could research the Treasury rules on this treatment of the use of the tax varying power. My understanding originally when the Scotland Act entered the Statute Book was that if the tax was increased then the Scottish revenue was increased by the amount of tax raised and if it was cut then the Scottish authorities lost the tax forgone. What Professor Bell is indicating is that that may have changed and it would be worth looking at that.

Q25 Mr Carmichael: The 1999 Concordat must surely be in there at least.

Professor Bell: Can I throw a further fly into the ointment? I was at a very interesting seminar a couple of days ago at Glasgow University where a professor of law from Glasgow discussed the issue of whether sub-national governments within the European Union do have the powers to change taxes. There is a decision coming up on 18 December in relation to the Azores and whether corporation tax and various other taxes can be cut there or whether that is in fact a state aid. That may have a bearing eventually on what is feasible in Scotland.

Q26 Pete Wishart: That is a different question and we probably recognise today the Scottish Finance Committee all but passed the Scottish budget for next year and one of the features of that again was a small business bonus. This is a question mainly for the Chambers. I met with my local chamber just last week to discuss this very issue and what I discovered from my conversation is that this is a very welcome measure for small businesses which has greatly assisted and seen them through some of the worst aspects of the particular economic downturn. Could I ask you to compare and contrast that with the key features of the Pre-Budget Report which was a two and half pence reduction on VAT and the impact that that is having on the high street and retail and SMEs. How do these equate in value to your members and to your organisations?

Mr Clark: I think certainly the small business bonus scheme was very warmly welcomed by many of our members who benefited significantly by it and who will benefit to a greater extent next year when the scheme comes into full force. I think it is important to view both that and the Pre-Budget Report as parts of larger packages of measures which both governments are bringing forward. Looking at the VAT as an example, that is something which many of our members responded to actually fairly negatively at first in that it was costing them money to change it in some circumstances. However, obviously, as part of a package which is designed to restore confidence to both consumers and businesses, it has to be viewed as a step towards achieving that. Certainly the small business bonus scheme north of the border is equally another massive step towards ensuring that small businesses benefit at a time when things can be very difficult for a number of them.

Mr Smith: I am not surprised that small businesses thought that the small business bonus was a good thing. I am not sure that everybody else in the economy reckoned it was a good thing as we have seen no evidence to demonstrate that it is going to have any impact on jobs whatsoever. We consistently asked the Scottish Government to produce that evidence and that evidence has not been forthcoming. We are reassured by ministers in the Scottish Government that that will be forthcoming but we are waiting to see whether that happens. I think governments make political choices about how they spend money. There is no evidence, as I have said, that spending the money that the Scottish Government spent on the small business bonus will have any impact at all on jobs. It is not tied into jobs; it is not tied into training investment; it is not tied into investment in research and development or in plant and machinery. At the same time that the Scottish Government has provided a small bounty to small businesses it has cut the budgets of its enterprise agencies which will consistently fall over the next three years. Our view is that that money could have been better used to boost jobs, training and investment and the Scottish economy rather than handing a very modest amount to small businesses which, as I say, has no evidential base in terms of its overall impact on the Scottish economy.

Q27 David Mundell: I would like to start by saying that I fundamentally disagree with what Mr Davidson said and I felt it was wholly inappropriate in relation to the Scottish Chambers of Commerce. I have never found any material that they have produced-or indeed any of the organisations present-to be politically biased. Following up on the discussion we have had about using the tax varying powers to reduce income tax in Scotland and listening to what Alistair was saying, I am very interested to see what proposals the Liberal Democrats do bring forward in the Scottish Parliament to fund the two pence cut in income tax. That is a legitimate point to make. Returning to the wider point that Professor Bell was making earlier, what is the divergence between the Scottish economic situation and the UK situation? How marked is it and therefore how bespoke do measures need to be in Scotland?

Professor Bell: Historically, when Scotland had a much larger manufacturing sector of a different complexion from other parts of the United Kingdom, it was often the case that Scotland lagged behind the rest of the United Kingdom in going into recession and also lagged behind them coming out. Looking at the data so far, this recession has come from quite a different source. It is really because of the squeeze on credit and what has happened is that Scotland and the rest of the UK have turned together into recession in terms of the unemployment figures which moved up in exactly the same month. Scotland and England have experienced exactly the same percentage increase in unemployment between January and October of this year. As I said earlier, Wales has done worse than Scotland, but Scotland and England, it looks to me, are pretty much moving in tandem. I have heard it argued by the Local Government Association that the towns in the north of England will be in a better position and more robust to weather this recession. When you look at the facts, they are not doing any better in terms of the increase in unemployment than other parts of the United Kingdom. Unemployment is increasing more slowly in London. That is counter to the kinds of stories that are being told. One interesting area which also affects Scotland is migration and the extent to which maybe the increase in unemployment in London is so small because a large number of migrants have moved back to their place of origin because they have lost their jobs.

Q28 David Mundell: Is there any substantive evidence on that?

Professor Bell: Not on the migration figures; the migration figures are pretty unreliable so it is difficult to make a definite conclusion but it is very interesting that the increase in unemployment in London has been much smaller than in any other major city in the UK.

Q29 David Mundell: Coming onto the second point I would like the organisations to address, are there bespoke measures for Scotland which the Westminster Government could take or the Scottish Government could be encouraged to take that would, specifically in Scotland, make a difference?

Professor Bell: I do not think there are short term measures. What I should have added to my last answer is that within Scotland unemployment is rising at the same rate in Glasgow, Edinburgh, Aberdeen and Dundee; there are not pockets where increases have been dramatic, so any solutions are in a sense for all of Scotland. If you want bespoke measures then I think really there are supply side measures. They are addressing the long term problems which the Scottish economy has had which are lack of productivity which in turn is partly the result of low levels of innovation, poor levels of research and development and not enough capital expenditure. I do not think there is a short run demand twist which particularly could be focussed on Scotland.

Q30 Mr Walker: I would have thought-and now obviously mistakenly-that where you have higher levels of public sector employment the growth in unemployment would be slower in the early stages of recession because governments, quite rightly, are reluctant to let people go and of course in times of rising unemployment you sometimes need more people working in parts of the public sector. It seems very strange that it is happening this way. Have you any idea why that is?

Professor Bell: Scotland does have a bigger public sector but it is not massively bigger than the rest of the United Kingdom; it is not massively bigger than the north of England, for example. If you take the north-east of England the public sector there is at least as big as it is in Scotland. I am at a loss to give you a clear explanation as to why unemployment in the South East has grown less rapidly than it has in other parts of the country.

Q31 Mr Walker: Does the TUC think that the private sector is being hit slightly harder in Scotland than it is south of the border? What is your thinking on this? Again, what does the CBI think?

Mr Boyd: Can I make a general point first off? I think far too much political and intellectual capital is spent in Scotland trying to measure whether or not we are doing marginally better or marginally worse than the UK as a whole. I think at this moment we are focussed in Scotland doing the best that we can and focussing energies on that. From talking to colleagues in the TUC-I sit on the TUC's regional development network so I sit alongside all the other representatives from the other unions-the developments in the Scottish economy I see as running, as the Professor has explained, in a very similar trajectory to those in England and it is the same industrial sectors that have been hit.

Mr McMillan: When we look at our industrial trends surveys which come out every quarter the results for Scotland and the rest of the UK are not dissimilar. However, what I would say is-I think this is very similar to what David said-that Scotland as a manufacturing part of the UK has changed out of all recognition in the past decade. Not only does manufacturing occupy a smaller proportion of the economy, but until probably two quarters ago it was remarkably resilient to some of the pressures it was under in terms of high costs of oil, high costs of commodity input prices and other costs out of their control. It might suggest that that journey from large commodity, low margin manufacturing to the higher value is well under way.

Q32 Mr Walker: Do you see the trends diverging? You say that right now unemployment trends and employment trends are going on a similar parallel; in a year's time do you see a divergence? Do you see any stresses and pressures in Scotland that would make it worse or indeed make a recession less harsh in Scotland?

Mr McMillan: I compared and contrasted our estimate of GDP for this year with the Fraser of Allander estimate for Scotland. We estimate real GDP for the UK will drop by 1.7% next year and then grow by 1.2% in 2010. If you contrast that with Fraser of Allander they have a shallower drop next year of 1.1 compared with the UK's 1.7 but then less growth in 2011, so 0.7 against our 1.2 for the UK. It may be that Scotland's recession might be shallower and not longer but the climb out from recession might take just a little longer. You are talking about quite small differences and big numbers here but they are the best we have.

Q33 Mr Carmichael: That interesting forecast takes us into 2011 which is three years away. Who amongst you in 2005 was predicting that we would be where we are today?

Professor Bell: I was in the Fraser of Allander Institute when it was set up but in the mid-1980s I had given up economic forecasting. That was a very wise decision that I made.

Q34 Mr Walker: Mr Boyd, you wanted to say something.

Mr Boyd: The point I was going to make was that we are talking about the Scottish and UK economies following similar trajectories at this moment in time. I think we have to bear in mind that the figures do not yet reflect any contraction in consolidation in the financial services sector post the banking crisis. It will be interesting to see how that all pans out over the coming year. You asked who was predicting this crisis in 2005, I certainly would not lay claim to any great Nostradamus type claims, the actual detail of what has transpired over the last year, but we were certainly warning of the dangers of de-regulation in financial services for the best part of the last decade. The growth in household debt and company debt over the last decade we have long argued that it was not sustainable and was bound to bite eventually.

Q35 David Mundell: As well as going back to the question that Professor Bell answered which I think everyone has touched on, it is a case of additionality in terms of anything bespoke that could be done in Scotland. I was quite encouraged earlier this year when the Secretary of State for Scotland and the First Minister got at least some of you round the table together for a discussion. I was a bit disconcerted when, earlier this week, I read that the Secretary of State for Scotland was going to set up his own council of economic advisors when the First Minister has a council of economic advisors. Do you share my concern that we are perhaps heading in the wrong direction here? Rather than the possibility of working arrangements between the Scotland Government and the UK Government on Scotland's economy, we are actually going to have divergent opinions and in fact we are not going to get a definitive answer to Scotland's economy but we are just going to get more of the same bickering between London and Scotland which has been the norm in recent years?

Mr Smith: Both Iain and myself welcomed the fact that we had had the opportunity to have that discussion with the Secretary of State and with the First Minister and look forward to having further dialogue. It was certainly our view that having the trades unions and one of the key employers organisations sitting with governments both north and south of the border talking about some of the key challenges facing the Scottish economy was something that was welcome and we look forward to having further discussions of that nature. I have not seen details of the Secretary of State for Scotland's plans on having a council of economic advisors. Perhaps he was given some advice in that regard and certainly we go down the first road as the First Minister's council of economic advisors and certainly a reflection on what that council produced by way of an annual report was disappointing to say the least in terms of what it offered as possible solutions to tackling some of Scotland's not just immediate economic challenges but longer term economic challenges. Frankly the issues that were being presented as solutions by that council were issues that have been debated in Scotland amongst the stakeholder organisations (ourselves, the CBI and other employers' organisations) and government for some time. If the Secretary of State is thinking about having his own council then certainly having one which is significantly different in remit and composition from the one the First Minister has would be, in my view, advisable. Whether or not the principle of it is of value is another debate altogether.

Mr McMillan: I think I would agree with that. I think the Secretary of State would have to be asked himself as to the objectives of his new body. My understanding from what I have read is that this is not another economic advisory council of the shape and form of the Scottish Government's, but it is there to do something else around issues of poverty which are very important as well. I am not as gloomy as Graham is. What the council of economic advisors recommended is very similar to what mainstream business organisations like the CBI have been calling for. When the council of economic advisors appear to endorse what we have been calling for, we take that with gratitude.

Q36 Mr Davidson: I apologise if some of these points have been covered because I have had to go out. My constituency is actually one of the constituencies which has still got a fall in unemployment and part of it comes back to the question of manufacturing and part of it is obviously because of Ministry of Defence orders coming to the ship yards in particular. I wondered, because of that, whether or not you thought that so much of Scottish manufacturing being involved with the defence industry was likely to act as a pendulum, a momentum that is going to keep things a bit more stable. As to migrants, there was always a disproportionately large number of migrants coming to my constituency because they were competing for low wage jobs and a lot of them have now gone home. Silverburn, the development, where there was a deliberate focus on making sure that locals got into jobs, has actually made quite a difference. I wonder if I could have your observations firstly on the point about the military and secondly the extent to which having intensive efforts to get local people into jobs could in a sense help keep the unemployment figures lower than they might otherwise have been, or is that just simply displacing others?

Mr McMillan: I think your first point, Ian, is a very good one because certainly the defence industry is hugely important to manufacturing in Scotland for a number of reasons, not just for the defence of the country but also the jobs there, particularly nowadays, are very high value add jobs. Ship design and ship manufacturing is very advanced manufacturing nowadays. You will know better than me the qualities of the Type 45 destroyer that is being built in your constituency, the two aircraft carriers will follow that and then there will be other replacement programmes for surface ships and so on. I think they are very important to Scotland and of course very important to your own constituency. On the other point about employing local people, you mentioned Silverburn. Silverburn is just a fabulous facility out there in Pollock. If that is employing local people and giving them earning power and getting them jobs, then good, I agree. However, I would not necessarily go so far as to say that we must ring fence this area and anybody outside it should not be capable of being employed there.

Q37 Mr Davidson: You do not stand for election there.

Mr McMillan: Absolutely, I do not have that advantage, but it is a fair point and it is a good facility.

Q38 Mr Davidson: Do you think that those sorts of efforts simply result in displacement or is there any overall benefit? Our view to some extent is actually a net gain because you have got people earning and generating money in a community who would not otherwise do so whereas if they were all in other areas then it would not necessarily spill over, particularly as so many of them are relatively low income communities, they are much more likely to spend than to save. I wondered whether or not you had any information that would back up my prejudices.

Mr McMillan: I do not think I have any solid information that I could give you on that just now but I think in terms of economic theory certainly it is not a zero sum game and that kind of development is part of growing the economy. You are right, it puts earning power into people's pockets and that is the virtuous circle of economic growth.

Mr Lonsdale: It is a model that is becoming more prevalent. If you look at the new urban regeneration companies in Scotland, they are looking to have an aspect of this in what they do. Glasgow City Council have divided their area up into five or six different areas and are trying to maximise the opportunities from new development for local people to get those jobs. It is something that is out there and is actually happening on quite a regular basis but certainly I would go with Iain's points about the risks involved.

Mr Boyd: I would just like to endorse Iain's comments on the importance of the military procurement. The Defence Department procured jobs in Glasgow manufacture, in fact I would go even further and quote his boss Richard Lambert who, over the course of the summer, referred to manufacturing as being a force for social cohesion in a way that services are not. I do not think you can underestimate the importance of those well-paid and skilled jobs in places like Glasgow shipyards et cetera. They are of absolutely fundamental importance to the local economy. Today we have discussed in the main how we can address the recession that is on us in the short term. I think we have to be looking forward to how we come out of this recession and how we re-balance the economy moving forward. I think there is much more that can be done at Scottish and UK levels to boost manufacturing industry. We have had reasonably productive discussions with Scottish ministers about this, about Scottish investment bank and additional support for the manufacturing advisory service. The second issue about procurement and local jobs, I concur with the views absolutely. We have a longstanding dialogue with the Scottish Government about these issues and I have to say we come up against institutional fear towards all things European and the possibility that stipulating that jobs must be safeguarded for local people is possibly infracting European legislation and therefore there is a sort of reticence at all levels of the government about perhaps being bold in this area. There is a lot of good work going on. You have mentioned Silverburn and there are others. There is a lot of good practice and good jobs in the local community. I think the benefit for those areas is very, very tangible.

Mr Smith: To add one very quick point about procurement and the role it plays, it is not just the creation of jobs and procurement and that lever should be used to improve access to training. That is something that government could do at a time of recession, when employers may well seek to cut training budgets, and use procurement as a way of encouraging employers to continue invest in training I think would be good short term sense and good long term sense.

Mr Davidson: I think it would be helpful if we got a brief note from the STUC in addition to what they have said here about how in fact we could use procurement to encourage employers to invest in training. That would be very helpful to us.

Q39 Mr Walker: What is the scale of potential fall out from the problems in the financial service industry? How many jobs potentially are at risk?

Mr McMillan: Certainly as banks and other financial services organisations try and rebuild profitability they will seek to improve their business models and their efficiency. That generally does result in a reduction in head count. What will happen in Scotland? I do not know. The leaders of the banking industry in Scotland have been asked this question and at this stage they claim not to know in terms of broad order of magnitude either. I think there will be some job losses undoubtedly but I would not want to tempt fate by trying to quantify it at this stage.

Q40 Mr Walker: It is significant.

Mr McMillan: It could be significant.

Mr Lonsdale: It is unreasonable to think that financial services will make the same contribution to economic growth in Scotland as it has in the past and that may explain why Fraser of Allander and presumably Professor Bell are even more cautious in their forecast for the uptick in the next four or five years.

Mr Clark: As has been mentioned already, so far we have not really seen the real effects of what has been happening in the financial services sector and what may happen over the next year and feed into figures such as unemployment, such as GDP growth figures in a way we have done, for example, for the construction sector in Scotland. It is very difficult to estimate what the overall effect will ultimately be.

Q41 Mr Walker: Would you agree with me that it is important that Edinburgh retains its position as a major financial services centre in Scotland.

Mr Clark: Absolutely, for many reasons and particularly because there is such a high concentration of key skills in Edinburgh, in the Lothians and in Glasgow and other parts of Scotland as well in the financial sector. It is important to retain these high quality jobs which are making a huge contribution.

Q42 Mr Walker: I have a question for the TUC: are the employers, ie the banks, talking to you? Are they involving you in discussions? I imagine many of your members are very concerned about their future employment in these institutions with mergers, acquisitions et cetera. Do you feel that people are actually engaging with you as well because there is a big piece of work to be done here regardless of what happens?

Mr Smith: Certainly the feedback we have had from our union affiliates is that they are having a dialogue with the employers about these issues. Obviously there is an on-going dialogue about the HBOS/TSB merger which is important, but I think on an on-going basis unions are talking to employers not just in the financial services sector but across the economy about how to handle redundancies when they arise and also, more importantly, to try to prevent redundancies arising in the first place.

Q43 Mr Walker: Many of these will be highly skilled people.

Mr Smith: Absolutely.

Q44 Mr Walker: It would be a shame to lose those skills.

Mr Lonsdale: There are efforts to try to improve the attraction of the financial services sector in Scotland, to improve the level of skills north of the border.[5] I do not know whether the STUC are involved in that in any particular way, but there are initiatives there. There is obviously some doom and gloom about jobs and there is a serious look at trying to improve the situation for the medium and long term.

Q45 Mr Davidson: Can I just clarify whether or not you think the current difficulties in the financial sector are likely to increase or decrease the amount of offshoring that there has been? Clearly if offshoring were reduced substantially that would go some way towards mitigating job losses in Scotland, but I am not clear what the evidence is.

Mr McMillan: I am not sure. I am not familiar enough with the bank's business model in detail to be able to answer that question I am afraid.

Professor Bell: I do think the offshoring activities have been going back and forward as different companies have found the offshore centre to be up to scratch or not. Of course the reduction in the value of the pound will to some extent help with the competitiveness.

Q46 Mr Davidson: Is there any evidence as yet.

Professor Bell: No, there is no evidence as yet.

Q47 Mr Carmichael: Can I pick up the point that Stephen made about having to look to the future shape of the Scottish economy. My concern about HBOS is more than the loss of jobs from the banks, significant though that is going to be. It is about what shape of banking industry/financial services industry we have in Scotland when we eventually come out the other end of this recession which inevitably-hopefully-we will. What impact do you think having this behemoth bank of Lloyds TSB/HBOS is going to be on competitiveness in the banking sector? How do you think that is going to impact on your business members in the CBI and the Scottish Chambers?

Mr McMillan: I think that clearly there is going to be one less high street bank if on Friday the HBOS shareholders vote in favour of the merger. However, it does seem to me that there is quite a lot of competition there, certainly in the big cities. There is still the Royal, there is the Clydesdale, there are some other banks there as well. As far as jobs are concerned, I think it is probably worth looking at the public statements of Eric Daniels, the Group Chief Executive of Lloyd TSB who has said that it is not possible to quantify job losses at the present time but he has also said that he thinks that some of the numbers in respect of job losses are an exaggeration. To be honest with you, Alistair, I think we just have to wait and see what does come out at the other end of the tunnel. Clearly there is some duplication in the operations of two banks; nobody can expect them to exist in parallel after the amalgamation takes place.

Professor Bell: I would like to say that I think it all depends on how the regulations are set once the system stabilises which may be a couple of years out. Then there is the question of whether it is possible for new entrants to get in to increase competition. Maybe, following the financial crisis, that would be possible.

Q48 Mr Carmichael: It will not be a Scottish bank though, will it?

Professor Bell: No, it will not be a Scottish bank.

Q49 Mr Carmichael: It will be the Bank of China or the Bank of America or somebody else seeing the gap in the market; these will be the boys that can compete with the Lloyds TSB/HBOS.

Mr Lonsdale: We saw HSBC come in with a statement the other day about 20% increase in their lending capability over the next 12 months. It depends whether you classify them as a UK bank. It does provide an opportunity for others.

Mr Clark: As I said earlier, this problem is going to be solved by a restoration of competition within the banking sector. Clearly there will be one less significant player, as Iain has said, in the high street.

Q50 Mr Carmichael: One massive player.

Mr Clark: Yes, absolutely, but there is no shortage of other banks out there and we would certainly hope to see a restoration of competition sooner rather than later.

Mr Boyd: Can I just make a general point about the banking sector that we hope to see emerge out of all this at the end of the day? Certainly from our point of view we would hope it is one that is far more focussed than it has been in the recent past, supporting the productive sector. Graham has already mentioned that we believe firmly that there should be a Scottish investment bank to pick up that market. Professor Bell earlier in the discussion identified the factors that underpin most Scottish productivity, no R&D and no innovation et cetera. I would argue that much of this can be retained to the very low level of retained profits in the UK firms by retaining profits low because investment risings are so short because the cost of the capital is so large. If we can address these types of measures and if we can regulate finance in order that it is far more supportive of this long term patient funding of our growing companies then I think the real economy will benefit substantially in the longer term.

Chairman: I believe one of our witnesses, Professor Bell, has to leave. Thank you very much for attending here today.

Q51 Mr Davidson: Following on the point about banks, we have heard a lot-indeed it came up in Prime Minister's Questions today-about the banks who have been taking public money and not being as helpful as they ought to individuals, businesses and everything else. Is the position any different in Scotland in terms of degrees of magnitude? Are they more helpful or less helpful or just as unhelpful in Scotland as they are down south?

Mr Clark: Speaking to colleagues in British Chambers of Commerce the position seems to be pretty similar, from the anecdotal evidence we have heard certainly. We have had a lot of evidence from across Scotland, as we were discussing earlier, of rates being increased for both loans and overdraft facilities and that is something which colleagues south of the border have recognised as well.

Mr Smith: We have spent a lot of time analysing the differences between north and south of the border. We are aware that there are serious difficulties in access to finance for companies in Scotland and that is something which needs to be addressed.

Q52 Mr Davidson: There has been a lot made of the way in which what is happening might result in these Scottish institutions-the Royal Bank, the Bank of Scotland and all the rest of it-but what I am not clear about is whether or not at the moment, in a time of difficulty, there are actually any benefits to the Scottish economy and businesses from them being Scottish or being much more Scottish. If they are behaving exactly the same way across the UK as a whole there is an issue about whether or not the place of domicile actually makes any difference.

Mr McMillan: I do not think it does, Ian. I think the best way to describe the banks in Scotland is that although they are proud of their Scottish heritage they are international organisations that happen, for historical reasons, to be headquartered there. When lending guidelines and criteria are being developed in banks they are being passed through the organisation as a whole, whether it is a branch in Wick or the branch near Lands End.

Mr Smith: We do not think the banks in general have been any more helpful to Scottish companies as opposed to UK companies in providing the type of long term patient finance that companies need. The banking sector that we hope to emerge not just in Scotland but across the whole of the UK is of the model that Stephen articulated earlier on.

Q53 Mr Davidson: A more helpful sector?

Mr Smith: A banking sector that is focussed on what the banking sector should be focussed on rather than some of the speculation that has been a feature of banking over the past decade or so, which has created the type of banking crisis that we have to face up to.

Q54 Mr Davidson: It follows on from the point that the First Minister made that the banks have been destroyed by spivs and speculators, but the spivs and speculators were actually running the banks in these circumstances. Can I ask whether or not you have a view on the suggestion that I know has been made in the United States that those companies, like the banks, that have taken huge amounts of government money should not actually be paying salaries larger than that of, in our case, the prime minister, and that that would be evidence of a change of attitude were we to have such a self-denying ordinance. Iain, would you like to tell me the CBI's view on that?

Mr McMillan: Not really!

Q55 Mr Davidson: We come across people like you when we are canvassing and I am not clear whether or not you are a "don't know" or a "won't say".

Mr McMillan: I think the market place by and large should determine salaries but I am not saying that it should be free and unfettered. I think we may well find that because of the large stakeholdings that the government has taken in a number of the British banks that some sort of guidance will be given to boards as to what the government expects in terms of salaries.

Q56 Mr Davidson: If a rule went out from the government, a suggestion that no banker should be paid more than the prime minister, that is not something you would throw up your hands in horror about.

Mr McMillan: I think if I were the chief executive of a bank I might.

Q57 Mr Davidson: But you are not. Particularly given that they have been bailed out, banks that would have collapsed had it not been for the government riding to their rescue surely they should not continue to pay themselves huge amounts of money when many of them would have been getting P45s had it not been for the tax payer.

Mr McMillan: For those who have been rescued, the men who were being paid larger sums of money have gone or are going. Those who are running the banks in their place going forward need to be good people and pretty unusual people to run an enterprise of that size. They have to be rewarded or else they will go somewhere else. I think it is pretty simplistic to say that the leader of a bank should earn the same salary as the prime minister; I think it is more complex than that, to be honest with you.

Q58 Mr Davidson: Does the STUC have a view on that?

Mr Smith: There is absolutely not doubt that CEOs of banks and FTSE 100 companies have been overpaying themselves for a long, long time. There have been considerable increases, even this year, of the CEOs in the FTSE 100 companies and indeed those in the companies just below that. Average salaries of around £3.5 million in anybody's language is excessive and something certainly needs to be done to control that level of pay. There is no doubt that those types of incentives that were offered to CEOs, particularly in the financial services sector, were part of the cause of the problems that we got into in relation to unacceptable and irresponsible risk taking which has created the difficulties that we are now all having to face up to and indeed are having to pay for.

Mr Walker: I just want to say that I will offer Ian my support in his campaign if we can have a go as well at the people who buggered up the Post Office who are earning over a million pounds a year out of the public purse. They have got rid of Christmas chocolates in my sorting office as a cost cutting exercise; it is just shocking behaviour by these people.

Q59 Pete Wishart: I note the very positive work that was given by most employers' organisations and I think there were a load of sensible, well thought out, constructive suggestions about the way that Scotland can be put forward. Even today the Scottish Parliament made an announcement on infrastructure projects and I am glad that the A9 is securing all these great upgrades and bringing forward this measure and the move to have it all the way up to Inverness. That is fantastic. One of the things that the council of economic advisors identified and one of the problems that the Scottish Government has is the fact that we have no borrowing power. Even local authorities have the ability to borrow in order to try to bring forward some of their capital spending. I do not know if the employers' organisations have a view about that, but giving the Scottish Parliament the essential tools to help us deal constructively and properly with the situation as it emerges in Scotland and I know there is frustration amongst my colleagues that they do not have the levers and powers to help Scotland manage the worst of this recession. I do not know if you have a view about that at all.

Mr Smith: The STUC, as part of the work that we have been doing in relation to the powers of the Scottish Parliament going forward-a contribution has been made both to the Calman Commission and the National Conversation-have proposed that the Scottish Parliament should have borrowing powers. The point has been made that we have local authorities that have potential borrowing powers; other institutions have the ability to borrow and we believe that the Scottish Parliament should have a similar power. Treasury rules and overall UK Government position on borrowing is something which would have to be part of that consideration of how that power was to operate. The point I made about the council of economic advisors is it is supposedly the greatest intellectual capacity in economics which has ever been brought together in Scotland and all it comes up with are the issues that we have been talking about for the past five years, that is hardly something to shout out about.

Mr McMillan: Borrowing power is an interesting one. Graham is right when he mentions local authorities. Local authorities of course impose the council tax and I think by and large the borrowing powers should go with some tax powers so that if a political entity does borrow more money to spend today then it has the tax leverage to repay that money in the future. I think that these things need to go hand in hand.

Q60 Pete Wishart: You mention the Calman report and the results of that being most depressing in that there is very little in the way of forward thinking, but I would say that this is an opportunity for the Calman Commission where significant new powers can be given to the Scottish Parliament to help us do these things and I hope I am not going to be depressed at the end of the Calman Commission's recommendations and that there will be some substantial powers. There is a disappointment with what the economic advisors suggested and that could be a lot to do with the fact that there is very little that can be done to change and macro-manage the Scottish economy because all the tools are down in Westminster.

Mr McMillan: Pete, I am not going to get into a discussion with you about these levers of power and the nationalist agenda and so on; I am not going there today.

Q61 Chairman: I think we can move on then to housing. How far do you think the Scottish housing market will follow the pattern in England and Wales?

Mr Lonsdale: Our locus on this issue, I guess, would be from our members' perspective, those who are involved particularly in house building. In terms of prices I guess Professor Bell would have been in a better position to answer that, but obviously we have seen very hefty increases in house prices north of the border but not to the same extent as south of the border.

Q62 Mr Walker: He did say that your housing market was holding up better than any other in the United Kingdom at the start of the evidence session, did he not? I think he did. The Professor said that the Scottish housing market is proving to be much more resilient.

Mr McMillan: That does not mean to say that the Scottish housing market is in good shape, it is not.

Q63 Chairman: This local income tax which was the great idea from Liberals and Scottish Nationalists replacing council tax, it has been tried in Scotland as poll tax and do you not think it will be equally damaging for hard working families? They seem to believe that they have to pass on the three pence in income tax, but all the studies show that people might have to pay up to six pence and eight pence to fill the gap in the hole between council tax raising and local income tax. I just want to have the view of every one of you; let us start with the Scottish Chambers of Commerce.

Mr Clark: Our members, certainly across the country in terms of the Chambers of Commerce across the country, are unanimously against any proposal to tax Scotland in excess of the rest of the United Kingdom. That is exactly what would happen under a local income tax.

Mr Lonsdale: There are concerns about cost to businesses in implementing this, the complexity involved, as Garry said, sending out the wrong message to individuals outwith Scotland and also firms outwith Scotland who may want to invest north of the border. There are also issues to do with the funding, how would the funding deficit be paid for? Would it be taken out of budgets for Scottish Enterprise or for transport infrastructure? These are questions we have not had answers to and our members are pretty firmly opposed to it I have to say.

Mr McMillan: I cannot add anything to what David said; he speaks for the CBI as well.

Mr Smith: Not many people think that any sort of tax is fair. Maybe we should shift the debate around about tax and talk about responsibilities in relation to tax. We are not in favour of a local income tax. We are not sure exactly how, for example, the SNP's proposals can be considered local. They have, up until now, as far as we are aware, been collecting the tax centrally and allocating it locally rather than a genuine local income tax. That differs from the Liberal Democrats' position. We believe there should be a balance in the taxation system; there should be an element of property tax within our taxation system and we favour that type of approach and that is why we are opposed to local income tax.

Mr Boyd: I have nothing to add.

Q64 Mr Carmichael: Is it the position of CBI Scotland, Chambers of Commerce and apparently the STUC that council tax is fair?

Mr Clark: We do not have a view as such.

Mr McMillan: We take the same view as the STUC that there is a place for a property tax. Where I would agree with the SNP is on the decision to freeze the council tax. The reason I say that is because in the past 10 years the amount of council tax in Scotland has risen at double the rate of the retail prices index and it has outstripped average earnings. That, in my view, is why the council tax has fallen into disrepute; it is its rate of growth and not the basis of the tax itself. It was not unacceptable when it was brought out at first.

Q65 Mr Carmichael: So you want revaluation.

Mr McMillan: I did not say that.

Q66 Pete Wishart: What surprises me is that the STUC and the Labour party were supporting the council tax and I think it is unforgivable given the difficulties in my constituency. It is not fair and it can never be fair. I am really surprised that the STUC think that there is an element of fairness within the council tax. Surely the principle of the STUC is about the ability to pay progressive taxation. What is wrong with that?

Mr Boyd: If it is a tax on earned income how can that be progressive?

Mr Smith: So people who earn their income entirely from shareholdings will not have to pay any income tax.

Q67 Chairman: Can I now thank the witnesses for their attendance today. Before I declare the meeting closed, do you wish to say anything in conclusion, perhaps on areas which we have not covered during our questions?

Mr McMillan: I think, Chairman, we have had a good debate. We will not always agree on everything but, as I said in my opening remarks, I think the work of this Committee is hugely important to Scotland. It has certainly been a pleasure for David and I to come here again and engage with us and thank you very much for inviting us to be here.

Mr Smith: On behalf of the STUC thank you for inviting us to participate in this discussion. It has been very interesting. It has gone in a direction that perhaps we did not envisage. I think it would be good to think that we could have an on-going dialogue with the Committee, particularly about how we move forward and raise issues about how we rebalance the economy moving forward. Obviously there are a number of issues that we need to tackle in relation to dealing with the current recession but I think the Committee has an important role to play in talking to us and dealing with us in terms of how the economy should be shaped moving forward.

Chairman: If the STUC or the CBI think of any issue we should be conducting an inquiry about then if you put it in writing we will be happy to read it.

Q68 Mr Carmichael: I have just rejoined this Committee in the course of this year and we run the House of Commons Select Committee procedures but in fact, unlike most select committees, we do not have a department with substantive executive functions to scrutinise and there may be an opportunity for us to think about how would do our business differently to keep that on-going engagement with people like yourselves. This has been one of the most useful committee sessions I have had since I have been in Parliament.

Mr Smith: It is a long time since the STUC has actually come to Westminster to give evidence to a committee, let alone to the Scottish Affairs Select Committee and we would certainly wish to have an on-going dialogue with the Committee.

Q69 Mr Walker: Garry, do you want to say something?

Mr Clark: Just to add to the comments of my colleagues, it has been great to have the opportunity to speak directly to this Committee and we would welcome more engagement in the future.

Chairman: Thank you all very much.

[1] Note by witness: I was mistaken in stating that the extra capital spending in England and Wales would result in £160 million in Barnet consequentials. It is now my understanding that the value will be £260 million.

[2] See footnote 1

[3] Small or Medium-sized Enterprises

[4] Note by witness: Sir Peter Burt was appointed by the previous Scottish Executive.

[5] Note by witness: I refer to efforts such as the Financial Services Skills Gateway initiative led by CBI Scotland's Chairman.