Thank you very much indeed, convener. It is a great pleasure to be here.
By way of introduction, I note that, as you said, the most recent set of forecasts, details of which I know the clerks have circulated, were published alongside the autumn statement on 23 November. The next set of forecasts that we produce will appear alongside the UK budget on 6 March, so we have not done any updates of the material since November.
Needless to say, if we look at the differences between the forecasts that we published in March last year and those that we produced back in November, we find that the big-picture story of an outlook of relatively steady but—certainly by the standards of periods of growth after previous recessions—unspectacular growth remains in place. The continuing major uncertainty around those forecasts, which applies to the work of anybody who is doing an economic forecast over a period of five years or so, is the outlook for productivity. The defining puzzle of the present economic recovery has been that productivity, which is the amount of output from every hour that an individual works, has grown much less quickly than has historically been the case. That situation, which is not unique to the UK but is probably more pronounced in the UK than elsewhere, has led to a greater sense of pessimism about the medium to long-term growth prospects of the economy.
The most newsworthy thing that happened between March and November was, of course, the referendum vote for the UK to leave the European Union, which creates its own set of uncertainties around the forecasts as regards both the on-going response to the vote and what will eventually emerge from the negotiations. It is important to remember that the uncertainty surrounding Brexit has not displaced or replaced the existing uncertainty about the outlook for productivity and the outlook for the global economy; it has come on top of that. It is easy to forget the underlying sense of uncertainty by focusing too much on Brexit.
Over the coming years and decades, the long-term growth performance and productivity performance of the economy will surprise people on either the upside or the downside, and interminable PhD theses will be written on whether that was to do with Brexit or with the resolution or evolution of the underlying productivity puzzle. It is important to remember that.
People are very focused on what the flow of new economic data that is coming in tells us about the immediate response to the no vote and whether the economy is holding up. There is a great temptation for people to fixate on the weak bits of data or the strong bits of data depending on whether that supports their argument, but at this stage I would be extremely cautious about placing too much weight on the monthly and quarterly numbers that we get from the Office for National Statistics on the performance of the economy. We are dealing with very early drafts of economic history, and experience shows that they can be substantially rewritten.
Over the next few quarters, there will be a particular focus on the performance of business investment. If we look back to 2009, we see that there were huge variations in not merely the forecasts for business investment but the estimates of what actually happened after the event. In the second quarter of 2009, the estimates of the change in business investment on the previous quarter ranged from an increase of 1 to a decrease of 11 or 12. The figure is now put at -5, which gives you some sense of the changes there.
It is occasionally tempting to treat economic forecasting as a spot-the-ball competition, but it is not like that—or, if it is, it is a spot-the-ball competition in which you have to be prepared for the judges to change their minds repeatedly about where the ball is, often many years after the closing date of the competition. Therefore, it is necessary to have a sense of wariness.
I would like to make one remark on the devolved taxes forecast before we move to questions. We produced our forecast in November, and it has now been possible to compare it with the forecast that the Scottish Government produced in December in the draft budget. If we look at the largest of the devolved taxes, which is income tax, the differences between our forecast and the Scottish Government’s forecast are small in comparison with the uncertainty surrounding either of those forecasts over the horizon that we are looking at. I would not regard those differences as being significant or worrying. They will reflect things such as differences in the modelling approaches, differences in some of the information that people have been able to take on board and different assumptions about the performance of growth and earnings over the next few years.
There are rather larger differences on land and buildings transaction tax, but that is only to be expected given the nature of that tax. The same is true for the equivalent in the rest of the UK. It is by its nature a much more volatile tax as there are bigger movements in housing transactions and housing prices than we get in wages and salaries. From our point of view—I know that we share this objective with the Scottish Fiscal Commission—the key thing is to be able to look at the numbers and highlight for people why there might be differences in them. As I said, one must expect such differences; they are not something to worry about. They are simply another symptom or manifestation of the uncertainty around economic and fiscal forecasting that I mentioned earlier.