Finance and Constitution Committee

Meeting date: Wednesday, February 1, 2017

Official Report 715KB pdf

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Scottish Fiscal Commission (Appointments)

Item 3 is an evidence-taking session with two individuals who have been nominated for appointment to the Scottish Fiscal Commission by the Cabinet Secretary for Finance and the Constitution.

I welcome to the meeting Professor Alasdair Smith and David Wilson. Members have received copies of the cabinet secretary’s letter of nomination along with the candidates’ application forms, which have been redacted to remove any personal data. Members have also received copies of the selection criteria along with a note from the clerks that sets out the procedural arrangements for the nominations.

Do the nominees wish to make opening statements before we move to questions?

I will make a very brief one, convener.

I have a long-standing interest in how fiscal rules help to guide an economy, a broad-based interest in public policy issues and very considerable experience in running a medium-sized university and dealing with all the challenges that are involved in that. I now work with the Competition and Markets Authority, which involves detailed scrutiny of competition and regulation cases. I have also learned a great deal from what I see as the interesting interaction between the members of the CMA’s competition panel—commissioners, if you like—who come from a background that is relevant to the authority’s work and the CMA’s professional staff.

As a result of serving on a number of pay review bodies as well as on the CMA, I have broad-based experience of working with bodies that advise but are independent of Governments. I have a great deal of interest in and experience of what independence means, how important it is and how it gets safeguarded.

Thank you for the opportunity to make a brief opening statement. I am sure that we will go through the criteria for the role, so I will just give you an overall picture.

I am executive director of the international public policy institute at the University of Strathclyde. At the institute, we are trying to develop an overall big-picture assessment of some of the challenges that we face in Scotland, the United Kingdom and internationally and to draw together the expertise that exists in Strathclyde on many issues that are relevant both to this committee and, more specifically, to the Scottish Fiscal Commission.

As for my background, you will know from my application that I worked for many years in the UK Government and then in the Scottish Government as a civil servant, initially as an economist and more recently as a senior civil servant covering a range of policy areas. I hope that that experience provides a very strong grounding for working in public life, and I think that my extensive experience of work on Scottish public policy issues, particularly economic policy issues, gives me a strong grounding for working on fiscal issues.

That was just an introduction. I am happy to cover any points in more detail.

Thank you for your statements. I note from your respective CVs that you both have extensive experience from a number of roles in the fields of finance and economics, but will you tell the committee whether you have specific experience of producing analysis of forecasts? Whoever wants to start should feel free to do so.

I will go first. I am an economist, but I am not a forecaster in the narrow sense; in other words, I am not a macroeconomist who is concerned with the production of macroeconomic forecasts. However, I have considerable experience of policy analysis.

As I see the work of the commission, it is as important to have an understanding of broader interactions between policies and the budget as it is to have a background in technical forecasting. It is useful to have commissioners who know quite a bit of technical stuff but, initially, it is the professional staff’s responsibility to have the expertise in technical forecasting and the commissioners’ responsibility to have a sufficiently deep understanding of the interactions that I mentioned. They can lead, challenge and guide, and that kind of interaction between the members of the commission and the staff can be very productive if it works well. You do not necessarily need the commissioners to have all the technical expertise.

Like Professor Smith, I made it clear in my application and the discussion at my interview that I am not putting myself forward as a professional academic macroeconomist. That is not my background. However, I have extensive experience of working in Government on a broad range of economic matters.

Earlier, I was thinking about how, 30 years ago, I started off in my first role working for Ian Lang on economic issues and how I worked on “A Smart, Successful Scotland” and the Government’s economic strategy in the period after 2007. Much of that involved quite extensive assessment of economic data, seeking to draw out the major issues and understand what was going on in what was an uncertain macroeconomic picture.

I have extensive experience of using, assessing and implementing the insights from technical forecasts. I have experience of more detailed forecasting from the work that I did—some time ago, but for about three years—as a transport economist modelling traffic flows and related information, which gave me a solid grounding in the use of statistical models in drawing out important issues for transport flows. I have sufficient experience to scrutinise, assess and validate technical forecasts, but I am not a technical forecaster by trade.

Professor Smith, I was interested to read in your application that you are

“interested in long-run fiscal sustainability and the importance of not being misled by public sector accountancy rules.”

Who is being

“misled by public sector accountancy rules”?

It is easier to talk about the past, so I will do that. In the past, the UK Government made fiscal decisions that were driven by accounting considerations rather than by long-run economic considerations, of which the best example is the private finance initiative. There are strong arguments in favour of public-private partnerships and I am not opposed to them at all, but there is little doubt in my mind that, in the past and perhaps even now, some Governments have embraced PFI because it looks better in the books. It does not show up as borrowing so, when people are looking at fiscal issues, they can say, “The deficit isn’t growing and we’re not building up repayment obligations for future taxpayers.” However, PFI projects build up repayment obligations for future taxpayers every bit as much as Government borrowing does. It would be good if, when Governments assess appropriate ways to fund public investment, the assessments are done in a way that is not biased by the fact that one future burden will show up in the books and the other is rather hidden away.

The Office for Budget Responsibility—in the second leg of its work—has done good work in looking at not just the costs of PFI but the long-term costs of the English system of student support. Public sector pensions is the other area in which there can be a big long-term burden that is not quite as explicit as the fiscal burdens that are born through borrowing. That is the general area in which it is important for Governments to be guided by statistics that give a fair picture.

That is a helpful response. Recently, the committee looked at the Scottish Government’s non-profit-distributing model with regard to some of the issues that it has led to with reclassification under European accountancy rules and what that has meant for the public sector finances. Across Governments, are we getting better at understanding the accountancy rules that you mentioned?

We are getting better, but there are strong pressures that pull in the opposite direction. Governments continue to be tempted by short-term cash flow issues rather than looking at long-term sustainability issues.

I will give you a UK Government example on the sale of public assets. Mr Osborne, as Chancellor of the Exchequer, said that the more Lloyds Bank shares were sold, the more debt would be paid down. I am not commenting on whether selling Lloyds Bank shares is a good or a bad thing. It might well be a good thing, but it does not pay down the debt. The public sector swaps one financial asset, Lloyds Bank shares, for another, cash in the Treasury. That does not improve the long-term fiscal position. There is still a long way to go on that.

That is interesting. Do you see your role as commissioner as being to shine some light on those areas and ensure that the Government is going in the right direction?

09:45  

It depends on how the commission’s remit develops. As I understand it, we have a well-defined task to do with the scrutiny of the budget, and we are at the beginning of that task. It is important that the commission builds up credibility and does its initial job well. In due course, it will be not for us but for politicians to decide how the commission’s remit should develop.

Personally, given what I disclosed about my interests, I would have some professional enthusiasm for taking a strong role if the commission’s work developed in that direction. However, it is not for me to determine how the commission’s role should develop, except to say that I am strongly of the view that we need to do our current task well and establish our record before we move on to wider tasks—however attractive they may be.

Thank you.

I want to follow up on the convener’s initial question about forecasting. More than ever, the forecasts are crucial, because it is not just a question of looking ahead to the future. The forecasts will be used in the block grant adjustment and ultimately they will feed into the actual moneys that are allocated to the public purse, so it is crucial that they are accurate and that we as the Finance and Constitution Committee—and Parliament in general—have confidence in their accuracy.

You both acknowledged that you are not technical forecasters. There is a team that works on the detail of the forecasts. How can you demonstrate to the committee that you have enough in-depth, hands-on knowledge to be able to interrogate the forecasting process and ensure the integrity and accuracy of the numbers?

There are two important points to recognise at the outset. First, the commission is not starting with a blank sheet of paper. Extensive work has already been done within Government to build up the modelling capability to develop forecasts and assessments across the range of devolved taxes and also for gross domestic product modelling, and that will transition to the commission.

Secondly, the commission has had an excellent start in producing the reports that it tabled following its scrutiny of the budgets for the current year and the coming year. It is building on a strong start, which has identified that, precisely because of the importance of forecasts as part of the overall fiscal framework, it is now even more important to ensure that the assessments are as authoritative, clear and appropriate a judgment on those forecasts as they can possibly be. Like all forecasts, they will never be 100 per cent accurate. However, they need to be developed in a transparent way and to carry authority as the best and most impartial forecasts that are available.

I hope to be able to make a very strong contribution to that work alongside Professor Smith and the other commissioners and with the team that is being built up in the Fiscal Commission. In particular, that might mean drilling down and getting inside the models that have been developed and are being further enhanced, in order to identify the granular, detailed issues that could cause uncertainty about the forecasts. The commission has already made a strong start on that.

There are issues to do with the Aberdeen economy. For example, the challenging situation that the oil and gas industry is facing is a key issue that has been looked at. The commission will have to assess the uncertainties and make a judgment on the considerable lack of data in some areas, and that work is under way. Our strong contribution to that will be to shape and build the information base, the data and the understanding that is available on each of those issues.

You have said a lot about the process, which is important, and about how you, as a commissioner, would drill down into the issues. Will you give us a practical example of how you would do that? It is important that the committee is confident that you do not see your role as simply being to rubber-stamp the process and the forecasts. We are interested in how you will interact in your role.

I will give you an example that is of particular interest to me, which builds on work that the commission has already started on the Aberdeen property market and, by implication, the labour market in Aberdeen and the surrounding area.

In the evidence-taking session with Lady Susan Rice and the other commissioners and the session with Robert Chote, Murdo Fraser picked up on how Scottish earnings are developing and will develop in future. There is a particular issue about how the current situation and trends in the Scottish labour market will impact on future forecasts and outturns of income tax take. The commission has recognised that a distinction might be emerging between earnings forecasts for Scotland and those for the rest of the UK, and the variability of tax take is perhaps the critical issue going forward because of its impact on the overall Scottish budget.

I would bring considerable experience to that area, given my understanding of labour market processes and trends. I can also utilise the mechanisms that we are building up of consultation and dialogue with business organisations and external parties. If we understand the situation on the ground, it greatly helps to provide colour and better information for the forecasts that we will ultimately make.

I will stick with the same example. Income tax forecasts depend on what we can think of as classic economic forecasts of how the Scottish economy as a whole is doing. That is an important aspect. Income tax forecasts are sensitive to the distribution of income because, at different points on the income distribution, people pay different levels of income tax. Income distribution differentials between Scotland and the rest of the UK will be part of the explanation for how the Scottish tax revenue develops and they will increase our understanding of how economic performance is changing, in relation not only to the overall Scottish economy but to what is happening to income distribution.

In the past seven or eight years, we have seen significant changes in the relative fortunes of different parts of the labour market. I have taken an interest in that area in the past. Good work is already being done on forecasts of the Scottish rate of income tax, and I would be very keen to pursue and scrutinise that kind of work and help to take it forward.

The criteria require you to demonstrate an appreciation of the strategic fiscal landscape in Scotland. What are the main issues that we are facing in the medium to long term?

In the medium to long term, the main fiscal issue that is facing Scotland is the same as that which is facing the UK and all advanced economies: the impact of demographic change and the ageing population, and the increasing relative health and social care costs of the older part of the population. That is a big challenge, because we all want to ensure that appropriate resources are put into areas such as health and social care, but balancing that need against putting public resources into the needs of the younger generation is going to be a tougher and tougher challenge. To be frank, it means that politicians in all countries will face tough decisions.

One of the reasons for having independent commissions such as the Scottish Fiscal Commission is to provide the challenge and pressure that politicians need. None of us likes to ask hard questions, but having people who ask hard questions and face politicians with tough decisions is a desirable feature of a healthy political system, and the toughest questions are about the interaction of demography and the public finances.

I strongly agree with everything that Professor Smith said about the long-term challenges. Scotland and the UK face an uncertain picture in terms of economic performance and economic developments over the coming years, particularly with the prospect of Brexit. We do not have time to go into how that will play out over the coming period, but it clearly adds a level of uncertainty to the already considerable uncertainty about how the post-recession recovery is developing.

On the key issues for the commission in all of that, what happens in the wider UK picture will happen, but two areas will be of considerable importance to the commission. First, it is critical that we understand differential economic performance and the reasons for it, and that we develop understanding and an assessment of how any differential economic performance between Scotland and the UK will play out in terms of forecasts. The commission’s statutory duties are such that, if there is differential performance, we will need to forecast it as it is happening. The commission plays a crucial role in recognising and understanding as early as possible how GDP in Scotland may develop vis-à-vis the UK. Understanding economic performance is critical to the wider fiscal framework and the differential funding that may become available to the Scottish Government.

Secondly, with regard to our forecasts, if the Scottish Government continues to take decisions under its discretionary tax powers, it will be crucial to have a sense of how that might play out in the tax take. Additional rates of tax are already a live issue, and having the capability to properly forecast the Scottish Government’s chosen policy will be key for the commission.

Thank you.

Are there any other questions from members?

Members: No.

Ash Denham covered the area that I wanted to go into.

This is an unusual appointment process—it must be the largest recruitment panel that anyone has ever been in front of. [Laughter.] I thank both witnesses for answering our questions. The committee will consider in private—under agenda item 5—the evidence that you have presented to us, before we publish a short report setting out our recommendations to Parliament.

Thank you very much. I will suspend the meeting briefly to allow a changeover of witnesses.

09:59 Meeting suspended.  

10:03 On resuming—