There will be no immediate impact, as the committee will be aware, because the numbers in the forecasts are locked into the budget setting itself—it is worth reinforcing that point.
My second point is about methodology. The OBR and the SFC use different methodologies and have different approaches. I am the finance secretary in the middle who has to use the OBR’s forecast, because it is the driver for the block grant adjustment, and the SFC’s forecast for what can be drawn down from the Treasury. We all knew that the situation would be complex. There is complexity from the fiscal framework and complexity because of the forecasts. I get an end-of-process update from the chair of the SFC, Dame Susan Rice, and we have challenge meetings at which civil servants and our economists come to understand the SFC’s thinking and how it arrived at those numbers.
On first seeing the numbers, I was as surprised as the committee that there is such a difference between the December forecasts and what we see now. The SFC has described the change as an evolution of its judgment, and it explained some of that to you this morning. The SFC’s substantial report points out the risks of forecasting and how it is rare for any forecaster or economist to get anything absolutely right. However, we are reliant on SFC and OBR forecasts to lead to our numbers.
My first reassurance is that the Government always competently balances the books. As finance secretary, I assure you that I will balance the books and we will deliver sound, competent government despite the challenges that the economy faces. The UK and Scottish economies are subdued in the EU context, partly because of what we have discussed around participation, productivity and population.
It is curious that the analysis of the impact on wage earnings, which is a key issue, was not fully explained by the SFC. The SFC simultaneously says that its economic forecasts for GDP have not changed—in fact, they have gone up in some years—and attributes the 1.7 per cent downgrade in its income tax forecast to the wage earnings issue, which it has analysed. It is not necessarily the case that anything has changed in the economy, because, according to the SFC’s five-year forward look, GDP is broadly the same. Some people have described the OBR as quite optimistic and the SFC as quite pessimistic, and the gap between the forecasts increases the volatility that we are dealing with.
Another reason for me to be cheerful is that they are not the final forecasts. Near the end of the year, just before the budget, we will get the SFC’s and the OBR’s latest forecasts, which will drive the block grant adjustment and UK Government decisions. The OBR already has to revisit its figures because outturn is different from what it forecasted. We already know that the OBR has got it wrong, so it is just a matter of time. We will have the best, up-to-date information closer to the time of the UK and Scottish budgets, and we will have more hard data, which will be better than having just forecasts, which is what we have now.
I hope that that provides reassurance about the forecasting and the methodology.
How does a finance secretary respond? We have levers at our disposal. The currently devolved taxes can be managed in-year or the year after, because of their nature. For income tax, there are the outturn figures, which are for two years, and the knock-on effect of those figures in the third year. Taking 2017-18 figures as an example, it will be 2020-21 before any required change takes effect. The forecasts give us time to prepare, if that is what we are preparing for. The levers that we have at our disposal are to try to stimulate the economy and support economic growth. If required, we can use the Scotland reserve—the budget exchange mechanism, as it used to be known, for the carry-over. There are also borrowing powers that may be used, if required, to address a forecast error that is known about at the point of outturn. In all that, the GDP forecasts represent a growth outlook, although it is subdued, so there is still real-terms economic growth.
I have a final point to make on income tax. Notwithstanding the fact that the forecasts for LBTT, in particular, and landfill tax have improved, when the SFC revisits its forecasts, it must see any downgrade figure in the context of income tax revenues still increasing year on year in Scotland. As a consequence of the tax decisions that the Government—and, ultimately, the Parliament—took in the budget, we are £2 billion better off even according to the latest forecasts. That is an important figure, because it is the sum that we would have been down by if we had not made those decisions in relation to income tax. My important point is that, year on year in Scotland, income tax is still going up and GDP is still increasing.
The SFC is revisiting its forecasts, which means that I need to prepare for a range of scenarios, including the current forecasts coming to pass. However, I have a great deal of evidence to suggest that they will change before the budget.