Social Security Committee

Meeting date: Thursday, February 27, 2020

Official Report 608KB pdf

---

Scottish Fiscal Commission

Item 3 is evidence on the Scottish Fiscal Commission’s forecasts. I welcome Dame Susan Rice, who is the chair of the Scottish Fiscal Commission, and her team. They are Professor David Ulph and Professor Alasdair Smith, who are commissioners; Claire Murdoch, who is the head of devolved taxes and social security; and Claire Mellor, who is a senior fiscal analyst. You are all very welcome this morning. Thank you for joining us.

I invite Dame Susan to begin with her opening statement, before we move to questions.

Good morning, and thank you for asking the SFC to give evidence. I shall comment briefly on the maturing of the Scottish budget process in relation to the expansion of social security responsibilities in Scotland.

We have been calling this a new era for the Scottish budget because, for the first time, social security will make up a significant component of the budget in the coming fiscal year. As we all know, April will mark the devolution to Scotland of a further £3 billion of social security payments, which will add about 10 per cent to the Government’s resource spending.

That additional spending increases the size of the Scottish budget and it leads to complexity, for several reasons. First, it increases potential volatility because any differences between budget allocations, which are based on our forecasts, and the actual amount that is spent on social security, will have to be managed by the Scottish Government within the financial year, and that spending is demand-led.

In addition, while we forecast the spending in Scotland, our colleagues in the Office for Budget Responsibility forecast benefit spending in England and Wales. The Treasury uses those forecasts to estimate the block grant adjustments. Variations in the block grant adjustments will also have to be managed as part of the Scottish budget.

Yet another element to consider is that the majority of our forecasts for disability and carers assistance are based on existing United Kingdom Government policy. However, from what we have heard so far, we can expect spending to increase further when the new Scottish payments are launched. When the policy and operational details are clearer for those new payments, which we expect to see over the next couple of years, we will incorporate those changes into our forecasts. That means that the five-year forecasts that we make today are likely to change significantly over time, because the level of spending that we predict for the future cannot yet account for the Scottish Government’s planned reforms.

It is therefore reasonable to expect that we will see larger forecast errors with significantly reformed benefits. The forecasts are more uncertain because, with new benefits or new policies, we have to rely more on assumptions and judgements about what will happen. Our approach is to work closely with the Scottish Government, and to ask it to provide all available information on the new benefits—for example, on eligibility criteria, the application process, and communication plans. We also look at the experience of new benefits that have already been launched, such as the best start grant, to see what we can learn from them.

We review all that information, along with data on existing benefits, in order to consider how things such as take-up rates might change in the future. We use that information to produce our forecasts.

Overall, we expect some forecasts to be too high and some to be too low, as we aim to produce central forecasts. Forecasting is as much art as it is science. Effects will not always be cancelled out, particularly when a large benefit is changed, because a relatively small error in percentage terms could mean a big difference in cash terms. Such inevitable uncertainties are part of the new era for the Scottish budget.

What we can do, in this context, is explain transparently how we have produced our forecasts, and we can highlight the forecasts that look as though they will be more uncertain. By the time of our next forecasts, which are expected alongside the Scottish Government’s upcoming medium-term financial strategy, we will be only a few months into the financial year and, importantly, we will have relatively up-to-date information from the UK budget and OBR forecasts. We hope that we can, at that point, add clarity in respect of the position of the UK budget for 2020-21.

Fiscal devolution, especially of social security benefits, inevitably means greater uncertainty in the Government’s month-to-month finances, so regular monitoring of the budget during the year will be essential. It might therefore be a good idea to take stock again—perhaps after we have published our next forecasts.

We are happy to take the committee’s questions.

Thank you. Committee members will want to look in more detail at issues around having to meet in-year costs in relation to the actual spend rather than the forecast spend, and we will come on to that in a second.

I will start with the Scottish child payment. It is one of the things on which, I have to say, I would quite like the commission to be wrong. We all have an agenda to maximise uptake of the Scottish child payment, which be a positive thing, but it will have financial implications for the budget. The Scottish Government’s policy option paper of June 2019 assumed 83 per cent uptake of the Scottish child payment on roll-out, which would mean that it would go to 340,000 of the qualifying 410,000 children, at a cost of £180 million. The Scottish Fiscal Commission forecast a 72 per cent uptake that would reach 284,000 children.

Both forecasts would dramatically reduce child poverty in Scotland. Uptake would mitigate many issues, but the child payment has to be paid for. Is the Fiscal Commission clear about why it has arrived at one forecast but the Scottish Government has arrived at another?

We have given a lot of thought to that. David Ulph can say more about it.

I will make two or three points. First, as Dame Susan said in her opening remarks, we are aiming to make central forecasts. If there is a high number and a low number we are duty bound to go for one that is somewhere between the two. The reason for making a central forecast is that any underestimate or overestimate of benefits would result in costs to the Scottish Government.

We base our forecasts very much on our experience with the best start grant, from which we learned two lessons. The first was that take-up grows over time, so we now assume that it will be low initially but will grow later. The second was that take-up varies among different groups in the population. For example, families with children under six, who will largely already be in receipt of benefits such as the best start grant, will be familiar with the system and might already have access to charities and other bodies that will keep them advised of the availability of such payments. In making our forecasts, we have therefore assumed a high level of take-up in such cases, starting at 76 per cent and growing to 80 per cent over the forecast horizon. I stress that those are higher levels of take-up than we would assume for virtually any other benefit that we forecast, so we are aiming on the high side there.

For families with children aged between six and 16, our assumption is that, because they are less ingrained in the benefits system, they are less likely to be in touch with charities and other bodies that will advertise such benefits. For that group we have therefore said that initial take-up will be somewhat lower: it will start at 66 per cent, which is in line with the levels that we have seen for other benefits, and will then grow rapidly, to about 70 per cent, in the course of the forecast horizon.

We base our forecasts very much on the evidence that we obtain, our conversations with the Scottish Government and Social Security Scotland about their efforts to advertise and promote such benefits, our experience of forecasting other benefits, and the take-up rates that we have seen on those.

The committee will, of course, track your forecasts. If the Scottish Government does not reach its target of 83 per cent, we will ask why that did not happen. Likewise, we understand that the process is not an exact science. If the Fiscal Commission’s projections were a bit too conservative, we would ask similar questions. At the end of the day, we want to know what the Scottish budget’s financial exposure is on that.

It seems that, by 2023-24, the gap between the Scottish Government’s estimate of what it will pay for the Scottish child payment and the Fiscal Commission’s estimate could be £23 million. For a financial year in which there is a difference between the Fiscal Commission’s forecast, which is what has to be put in the budget, and the Scottish Government’s forecast, and the Government’s figure is the higher of the two, is the Government bound to publish contingencies for meeting that gap?

I will answer that from a financial perspective. At the moment we are forecasting for the coming year, which is 2020-21, and we are producing a five-year forecast horizon. In the course of this year, the Scottish Government will launch the benefit, and so we will get the first data, from which we will see how many people apply and what the take-up is, after which we will revise our forecast.

By the time of full roll-out of the benefit, in relation to all children under the age of 16, we should have more information about take-up and will then revise our assumptions. We hope that, by then, our forecasts are more likely to be accurate and so the forecast error should be smaller.

Okay; I understand that. It is still early days and it is a demand-led budget. I have raised those issues with the First Minister at the Conveners Group. We have a growing, demand-led social security budget and, by definition, we want everyone to get their entitlement. When there is a variation of forecast between what the Government is bound to put in its budget, based on the Fiscal Commission’s forecasts, and what outturn might actually be, there is no requirement on Government to say how it would source any additional expenditure as part of the budget process. That is just the day-to-day job of Government.

09:15  

Yes, that is the job of Government, and it may be that the Government looks more generally at social security benefits—you were talking about only one benefit. In that context, there are adjustments that Government can make if the spend is too high, but those would be its decisions. That is why we have stressed the need to monitor month by month what is happening with the expenditure, because the Government will have to plan to address those concerns if the differential is as you say.

Would it be helpful as part of on-going budget scrutiny if the Government were to be clear on that? Those are problems that we want to have—personally, I want the Government to say, “Oh my goodness, we’ve spent £30 million more than we’d estimated on the Scottish child payment. We have to find to find that cash, because it is for the families who most need it.” However, this committee wants to be absolutely clear that the Scottish Government can plan for that in its budgets. Is there an additional layer of the budget process that is required in relation to any of that, particularly given the significant increase in the social security budget in the years ahead?

The Government has the ability to borrow, if forecasts are significantly out. It would be looking at its revenue and output totals to make a decision on that. It has some levers—it could launch a new benefit on a different timescale or launch it with greater or lesser advertising. Those levers would be the Government’s levers in an operational sense. The Government would have to be cognisant of the issue that you raise, but there is not a formal mechanism that it has to report on.

One of the reasons why we have been trying to explain so clearly in our report that Scotland is going to be exposed to a new era of budgeting is that there are those risks involved. We say to the Government that it has to think about how it manages those risks in the budget on a month-to-month basis. There are things that the Government can do to manage the process: it can draw down its reserve—if it gets big Barnett consequentials as a result of the UK budget next month, it might want to pay into those reserves to give itself a cushion that it can later draw on; or it can use its borrowing powers.

The message that we have set out in our report this year is that the Government has to now start thinking about the process by which it will manage that, because there will be a month-by-month variation in expenditure.

I will ask a final question, which is about that comment on the levers that the Government has at its disposal. I know that members want to ask questions in more detail on that issue.

I have not articulated properly the issue of that month-to-month variation between what the Fiscal Commission forecasts and what the Scottish Government forecasts. The Fiscal Commission figures are locked into the budget and then there is the real lived experience of people as they claim their benefits. How could our committee monitor that on an on-going basis? Could there be an outturn tracker, if you like, that the committee could use to see how things are going in real time, rather than waiting 18 months to see a report that was done six months earlier and then taking evidence on it? Does that make sense?

It does. You are triggering for us an understanding of the issues around how the committee carries out its responsibilities and stays close to the issue.

We are now producing the forecast for the budget and, as you say, those figures are locked into the budget. In May, when the Scottish Government does its medium-term financial strategy, we will produce updated forecasts for spending in 2020-21 and, if the budget is in December, as it has been in previous years, we will again produce an updated forecast, which will set out how much money we think is being spent. So, there are already two occasions on which we will set out the situation, and there is the question of how the Government uses our forecast and ties it in with its budget revisions process.

So, in normal times, there are two opportunities—in May and in December—for the committee, although this year’s budget is of course not at the normal time. That is helpful.

I have a question on that theme, which has been partially answered. Will we have a more regular tracking system, month to month, of how spending is going?

We cannot forecast with any precision how spending will go month to month. I speak from experience. When I worked for Her Majesty’s Revenue and Customs, we could forecast annual VAT expenditure to within 1 per cent error, but month-to-month forecasting, which people in HMRC wanted in order to manage VAT proceeds, was beyond our forecasting limits.

It was not so much forecasting that I meant as how the spending was going.

You should be able to get that from Social Security Scotland.

Yes, I think that you are right. Graham Simpson and I are both asking questions of the Fiscal Commission that we should probably direct to Social Security Scotland, as they are about the data that we can regularly get from Social Security Scotland.

I have another question, which is based on something that Professor Ulph said about Government processes. Are you satisfied that it has got those processes right?

All that I can speak of is our interaction with the Scottish Government. We have really fruitful meetings with the Scottish Government and Social Security Scotland to understand as much detail as we can about how they propose to launch, manage and advertise the benefits, and how they propose to put resources into delivering the benefits. All that information is enormously helpful to us in constructing our forecasts.

We have been emphasising the risks to the Scottish budget that arise from the big increase in social security responsibilities, but there are other risks behind that. As we discussed with the Finance and Constitution Committee a couple of weeks ago, there are risks that arise from income tax forecasts, particularly next year, when it looks as though a big reconciliation will need to be made in relation to income tax.

We have been trying to emphasise the fact that, because of uncertainties in the social security spend as a result of its being demand led, the Government might well be required to borrow if it cannot find expenditure reductions elsewhere. Therefore, it needs to think about its borrowing and budget risks more than one year ahead. The fact that there are substantial budget risks coming up next year should condition the Government’s decisions this year when it contemplates this year’s risks.

There has been a little bit of drift in our questioning. We were on the Scottish child payment, in particular, so perhaps other members will come in with questions on those uncertainties.

One area of interest is budget volatility. I was going to ask you about the impact of the UK budget and how it has affected your forecast but, from what you said in your opening statement, I kind of know the answer to that, and I can see that it has made forecasting even more complicated than it already was.

The Scottish Government has decided to defer the 2019-20 in-year reconciliation, which will now be applied in 2020-21. When we questioned Shirley-Anne Somerville, the Cabinet Secretary for Social Security and Older People, she was quite clear that, if spending was above budget, she would first look to the rest of the social security budget before looking to the Scottish budget more widely. She confirmed that the Government would have to look at that month by month. In monitoring the volatility of that budget and looking at the levers that are available to the Scottish Government, we would be concerned if the Government had to dip into its borrowing powers in the first years of managing the social security budget. Would that have other implications?

As I implied earlier, the Government probably needs to look to borrowing pretty actively because, as we have said, the social security budget, and not just the one element of it that we have been talking about, is demand led. When legitimate claimants make claims, the claims have to be met. When expenditure turns out to be different from forecasts, the scope for managing expenditure upwards or downwards is very limited indeed, and it is very hard to control expenditure. Although one can see why the Scottish Government would want to manage forecast errors within the social security budget, that might be hard in practice.

As you said, there are always uncertainties coming down the line. Forecasts can be wrong, for example, and the block grant adjustments that go into the budget are varied, and vary during the year. Those variations will probably be bigger this year, because the UK budget process has followed an unusual route, and the current block grant adjustments are based on relatively old UK forecasts. There are uncertainties that have to be managed, and it is hard to manage them by managing social security expenditure.

Those are issues for the wider Scottish budget and Scottish borrowing, which leads me back to the point that I made a few minutes ago. The Government needs to think about borrowing on a multiyear basis, because you cannot make your borrowing decisions year by year without thinking about the future implications.

The short answer to your question is that, although I can see why you would rather not have borrowing take the strain, realistically, we have to think of borrowing as the area where forecast uncertainties have to be dealt with. That is one of the reasons why the Scottish Government has borrowing powers.

It is helpful to understand that, where the Government draws down that particular lever, it needs to plan for a number of years, and not just one year.

What implications—over three or five years; I do not know what the period would be—would there be if the Government were to use its borrowing powers to deal with the Scottish budget demands?

One implication goes back to something that David Ulph said. It is possible that, after the UK budget, the Scottish budget will get substantial Barnett consequentials. Although we have to wait and see what the UK budget looks like, if there are Barnett consequentials, in the current circumstances of the uncertainties about social security spending and income tax reconciliation that are coming down the line, the Government needs to think carefully about whether we regard those consequentials as relaxing this year’s budget constraints and focus on spending more this year, or whether we book them against possible future borrowing needs. You might get a sense of where David Ulph and I would go on that.

Yes—there is a tricky decision to be made.

The other point to make on borrowing is that the Government has borrowing powers of up to £300 million per year driven by forecast errors. It is not as if, if it uses them one year, it cannot use them next year; it gets to use the current level of borrowing power for forecast errors. That is another factor that you need to bear in mind.

I appreciate that there is more than one lever; the Government could draw down its reserves and—hopefully—there will be Barnett consequentials. I also take the point that we cannot look at it only for this year; we have to look ahead and ask whether, overall, we have enough money to deal with all the demands on the budget.

If the Government were to use its borrowing powers for that reason over a period of time, would the repayments have an implication for the overall budget? I am not looking for a figure—simply a general answer.

As you correctly said earlier, the Government can borrow up to £300 million a year and has to pay it back over three to five years. It chooses the term of the borrowing at the point of drawing down.

In relation to its plans to borrow next year, the Government has said that it will repay over five years. That means that there is a lower resource to spend over the next five years, as that borrowing is repaid.

Thank you.

09:30  

I suppose that it eventually reconciles itself to a degree. As the Fiscal Commission changes its forecast, the Scottish Government has to allocate actual money in the budget each year towards what the Fiscal Commission believes will be spent. It is not a case of the forecasting of uptake spiralling out of control. The Government has to allocate money from other portfolios. It is not an open-ended exposure, as I understand it. It may have consequences for spending in other portfolios, but the Government is bound by the Fiscal Commission and, as your forecasts mature and become more accurate, that gets locked into the budget process annually.

Yes; that is a good way to describe it.

I will be meeting Bruce Crawford, who is convener of the Finance and Constitution Committee, in the weeks ahead, because we see the importance of working closely together, given the demand-led aspects of this portfolio. Hopefully, we will get a bit more nuanced in how we do our scrutiny of it.

Alison Johnstone has the next line of questioning, but Keith Brown wants to come in. Keith, is your question on the point that has just been discussed?

Yes, it is.

Dame Susan Rice said that the convener’s account of how this works was an accurate reflection. It is more like Alice in Wonderland.

We were talking about the Government’s budgeting for forecasting errors, and I want to ask about forecasting. We always hear about the revised forecasts of different economic institutes. We never hear what the original forecast was, or about how far out it was—I am not speaking of the Fiscal Commission in that respect. The value of forecasting is important in your statutory role. What is the value of forecasting, especially in a situation where the UK Government cannot get its act together to produce a budget on time, thus introducing further uncertainty?

You have mentioned different things that the Government can do to mitigate an overspend. That is normally just called “government”; it is what Governments do. They have a lot of finance people who can do that.

Dame Susan, you said that forecasting is as much art as science. There is a lot of art that I would rather see than a second-rate forecast. What is the real value of forecasting?

You have just asked forecasters what the value of forecasting is. [Laughter.]

There are two ways to answer that question.

The first is about the value of having a budget process—a whole system—in which independent forecasts have to be used. That is very important. The value of having an independent fiscal institution such as the Scottish Fiscal Commission is, in a way, to keep a check on the genuine ambition and desire of the Government that happens to be in power. We bring an independent perspective to what might be raised in taxes or spent on benefits—yes, I would say that, but I think that others would as well. There is a benefit to having independent forecasting that begins to put things into a range.

On the overall benefit of forecasting, I have two experts on my left, as well as on my right, so one of them might like to speak up.

Suppose that you are trying to design a policy on social security. It helps to know how that is likely to turn out, in terms of budgetary cost, in the years ahead. As it is in the years ahead, you do not know today what that is going to be. The only thing that you can rely on is forecasts.

As Dame Susan has said, the next question is who does those forecasts. In Scotland, we have decided that the Scottish Fiscal Commission, an independent body, will produce them. Having had experience of working in a Government where it was not an independent body that produced them, I think that there is real value to having independent forecasts.

My comment would be that the check on an ambitious Government should be the electorate, rather than another body, but that is a difference in philosophy. Thank you, convener.

I am indulging both new members of the committee this morning, because Tom Arthur wants to ask a supplementary question as well. I ask him to be brief.

Thank you for indulging me, convener. I will ask a very brief supplementary question.

How do your forecasts for social security spend inform your forecasts for economic performance? The Scottish Government sees social security as an investment in the people of Scotland. For example, if there is additional spending in Scotland, do you factor that into the equation of economic performance? Due to increased demand, people would have more disposable income, and it would support people into employment or allow them to be healthier for longer and stay in work.

The link between the health of the general population—especially as people become older—and economic performance is real, and economic policy makers should take it seriously. It does not play a significant role in our forecasts because, when we do our economic forecasts and look at, for example, levels of participation in the working population in Scotland—which are a bit below where one might like them to be—and at things such as productivity, in the long run we would expect a healthier population to have higher levels of labour force participation and a better-educated population to have higher levels of productivity, but those are long-run effects on a horizon that is beyond the horizon in which we make our economic forecasts.

In our forecasts, the overall level of Government expenditure drives expenditure in the economy—hence our gross domestic product forecasts. However, we do not go down as far as expenditure on social security. That is just part of the overall Government expenditure.

That is helpful. Thank you.

In the first instance, I will ask questions on child disability assistance. The projections for disability assistance for children and young people are based in part on what the Fiscal Commission describes as a continuation of the historical trend towards lower payments of child disability living allowance Why has that been the case? Is it because of variation in the level of disability over time? Has it been a UK Government approach to make lower awards?

As we understand it, the main driver of the reduction in the average level of award is to do with a change in the kinds of disabilities that are covered. Fewer recipients of the benefit require help with mobility, so they do not receive significant mobility elements, which affects the average level of the award. Therefore, when we look at claimants who are not claiming because they are immobile, the average award becomes lower. We assume that that will be a continuing pattern with the new benefit. We identify that that is a risk to the forecast because, as you might detect from my words, that is our interpretation of what is going on; it seems to be what is happening. It might be a long-run trend and, therefore, the pattern that we have seen might continue but those things can change.

Thank you. On the theme of disability assistance for working-age people, the Fiscal Commission and the Scottish Government have reached an agreement that projections for disability assistance for working-age people will be produced at a later date, when more information is available on the design of the benefit and the way in which eligibility for it is assessed. What are we waiting to learn? What major aspects of the detail and the assessment does the Fiscal Commission need to know in order to make forecasts?

By way of background, I say that we will make a judgment when we feel that we have enough information to do a respectable forecast. We make a judgment not to forecast when the information is too scanty, because it will not be a useful one and might confuse decisions and what is out there. Perhaps Claire Mellor could answer that in some detail.

The difference with the information that we have for the child disability payment and the Scottish child payment is the draft secondary legislation. As the Social Security (Scotland) Bill was passing through Parliament, it was acknowledged that a lot of the detail about the underlying support would be in the secondary legislation. We will be keen to see the draft legislation for the disability assistance for working-age people, because that is where we get to see more about what is set out for policy and what is proposed.

With regard to diverging policies, the Fiscal Commission’s projections for disability assistance for working-age people are based on current Department for Work and Pensions policy, because the Scottish Government has not yet finalised its policy proposal, but the Scottish Government is committed to reducing face-to-face assessments to the lowest possible level. I am very grateful for that. There is a legal requirement not to conduct such assessments when the information already exists elsewhere. Do you expect that to have an impact on expenditure in Scotland?

I was talking about policy change when I talked about secondary legislation, but that is not the sole part of what we look at when we produce forecasts. The other area that we are really interested in is how it feels for people who make an application to Social Security Scotland and go through an assessment process, and how that might be different. That is not always set out in the legislative detail, so it is a case of us working with the teams in the Scottish Government and Social Security Scotland to find out more about that.

There was less need for us to consider the assessment process for the child disability payment, but when we come to look at working-age disability, we expect changes in the assessment process to have an effect on spending, and we will use the information that is available to inform our forecasts.

It is worth thinking about the timing aspect. We do not expect disability assistance for working-age people to come in until very near the end of 2020-21, so any effect on the coming year’s budget is likely to be small. Therefore, it makes sense for us, as Claire Mellor has said, to hold off on making a forecast until we have more information about how the system will work in practice, from the point of view of what the regulations will look like and what the practice on the ground will be like.

The financial impact, whatever it is, will be small, simply because of the timing, so we have put more emphasis on waiting until we can make reliable forecasts, instead of rushing out forecasts that will not have much effect on this year’s budget.

I appreciate that—thank you.

Professor Smith, I was interested in your response to Alison Johnstone’s first question. You suggested that there has been a change in the regulations on DLA for children. That is not my understanding, so I would be interested to get a bit more information on that. I understand that the regulations on DLA for children have been fairly static for the past 10 to 15 years. Therefore, any reduction in the payment of DLA for children has nothing to do with the policy. What was your comment based on?

I am sorry—maybe I was not clear enough. It is not a matter of there being a difference in policy; as we understand it, it is a matter of there being a difference in the types of disability in the beneficiary population.

Are you saying that there are fewer children with disabilities?

No. There are fewer children with mobility disabilities and a higher proportion of children with other forms of disability that attract lower levels of assistance.

I want to follow up on that, because I am not sure that I totally pick up what you mean. Are you saying that, over the past few years, the number of children in Scotland with a medical condition that affects their mobility has decreased and there are now more children with learning difficulties or other disabilities?

It is not a matter of absolute numbers; it is a matter of the share within the beneficiary population. There is a smaller proportion of children with physical mobility disabilities and a higher proportion with other kinds of disability.

I can contact you directly about this, but I would be interested in obtaining that information, if you have it. Perhaps you could share it with the committee or more generally. That is an interesting trend, which I have never heard anyone else talk about. Maybe the committee could look at that in the future.

We have that information. It is based on quarterly statistics that are published by the DWP, and it is specific to the child recipients. Over time—it is a long-term trend over a long period—the amount that children receive has decreased. As Alasdair Smith alluded to, when we delve into the issue a bit further, we find that fewer children are receiving the mobility component. There are two components, and they are receiving the lower-rate one. That is the best information that we have to go on at the moment. There has been that trend for a long time, and we assume that it will continue. Each time we produce a forecast, that is a key assumption, but we continually revise it.

09:45  

I would be grateful if you could provide that information for the committee.

Yes. That is fine.

I will change tack completely and go back to the wave 1 benefits. Obviously, we do not yet have the actual spend, but I think that I am right in saying that our papers say that there has been a variation in the forecast of about £4 million. It would be interesting to know what lessons you have learned on forecasting. In theory, the wave 1 benefits were fairly easy benefits to deal with from a forecasting point of view, yet we have a £4 million variation. As we go forward, we will be dealing with more difficult benefits that involve larger amounts of money, which will lead to bigger variations. What has the commission learned? What things might you want to tweak?

We have learned a number of things. One lesson is that we have to listen very carefully to what the Scottish Government and Social Security Scotland tell us about the way in which the benefits will be advertised and promoted at an early stage and how they will be delivered subsequently. That information is very important to us, and we give it a lot of attention.

As I said earlier, another lesson that we have learned is that take-up will change over time. As people learn about benefits, take-up rates will grow. However, it is important to take a more nuanced view on take-up and to think about take-up varying across different subsections of the population. Some parents and families might respond to benefits more quickly than others.

Those are the general lessons that we have learned from our early experience.

This is a learning process for everyone. Social Security Scotland is carrying out brand-new work. How it advertises the new benefit, the timetable that is used, how far in advance the work is done and when in the fiscal year the benefit is taken up will all affect the take-up rate. We are all learning over time, and we are staying very close and discussing learnings.

Given that we are all learning, perhaps all of us should answer Jeremy Balfour’s question. I will throw in a couple of further points.

We have learned that, because take-up rates are inherently difficult to forecast, it is crucial to get speedy information about the outturns of the new benefits. For example, we adjusted our forecasts for the best start grant quite quickly when we found out from experience that the take-up rates were different from those in our initial assumptions. We work with Social Security Scotland to ensure that we get as much up-to-date information as possible about expenditure, so that our forecasts can be revised.

We have also learned that, even when responsibility for a benefit is handed over from the UK Government to the Scottish Government and the formal eligibility rules do not change, there is a bit of publicity and a bit more recognition of the benefit, which, in itself, can have an impact on take-up rates. That learning has gone into our forecasts for the Scottish child disability benefit. Our forecasts assume that there will be an initial spike in take-up, primarily because although it is not really a new benefit, it is a newly administered benefit, and that will have a behavioural effect on potential claimants.

I want to be absolutely clear. In our papers, there is a table that shows the updates in forecasts over the year and the changes that have been made to the 2019-20 forecasts since December 2019.

What was the SFC’s initial forecast for the wave 1 benefits? We ended up with a figure of £4 million, but what was the SFC’s figure at the start?

What was the total for the five benefits in the 2019-20 budget? I am repeating the question in the hope that one of my colleagues will have the answer by the time I get to the end of my slow sentence.

You should have been a politician, professor—that is what we do. I will also speak slowly so that we can get that answer.

We individually compare all our forecasts with the forecasts that we made last December. I am not sure that I can add up all the wave 1 benefits quickly in my head, but the forecast for 2019-20 was £4 million lower than it now is, if that makes sense.

Yes, it does. I was trying to get into my head a trajectory of the forecasting changes from the starting point to the £4 million.

The forecast has increased by £4 million.

Yes.

That is essentially because of the data that we have seen in the course of the year, which we reflect in our forecasts. Some of the forecasts are now lower—the one for carers allowance has come down slightly—while some, such as the one for the best start grant, have gone up slightly.

Our recent document says that social security portfolio spending will be £437 million in 2019-20, so that £4 million increase is on a total of £437 million.

From the commission’s point of view, how do you feel about the accuracy of your forecasts? You have talked about some of the lessons that you have learned as you have moved forward, but are you happy with the overall accuracy, given where the forecast has now landed?

Oh yes. A £4 million forecasting error on a total of £437 million—

It is not bad.

It is more than not bad; it is very good, but we should not overclaim about that, because the £4 million is the bottom line of the forecasts. Some of the numbers were positive and some were negative.

If there had been only a couple of negative numbers, the position would have been very different. It is about how everything balances out.

If all the numbers had been positive, the forecasting performance would have been the same but the bottom line would have looked much less favourable. It would be wonderful to have 1 per cent as an aspirational target, but our experience suggests that in the longer term, when benefits have settled down, we might expect forecasting errors in the area of 3 per cent.

The outcome for 2019-20 is probably particularly good because the forecasts include some for relatively new benefits such as the best start grant and best start foods, for which we initially made rather speculative estimates that we changed during the year. We currently face a big forecasting challenge with respect to some of the benefits that we have been talking about. As the new benefits come in, before we have experience of the take-up rates, it is challenging to make forecasts. It would be good if we could deliver the same level of forecasting performance on the larger number of benefits next year.

One reason why we have a 1 per cent error on last year’s forecast is that there are five or six different benefits and the errors go in different directions and cancel one another out to some extent. A lesson for next year is that we will have £3 billion of additional benefits, largely for disabilities, which will come in three big benefits. It is far less likely that the errors will cancel one another out in the same way and, even if the magnitude of the errors is relatively small, on a bill of that size the absolute costs will be large, as Susan Rice said in her opening remarks. I would not take what the table of changes to forecast spend for 2019-20 shows as a useful prediction for next year, because that cancelling out of errors is far less likely to occur.

If I understood correctly a point that was made earlier, one lesson that you could learn is about some of the behaviours of different population groups in claiming the current benefits, which could indicate that there will be similar types of behaviour among similar population groups in the future.

That is a reasonable assumption to make.

It is worth adding that we have a statutory duty to evaluate our forecast. Somebody made a comment about never knowing what the original forecast was. It is possibly unfortunate for us, but we have to say what we originally forecast and how things turned out in the end. We publish that information every year. We constantly self-evaluate, and we publish that information publicly to show people how well we have done.

I have a couple of supplementary questions on that but, before I ask them, I say to members that I have no other bids for questions. If folk have any to ask—I am sure that they will do—please let me know.

I looked at table 4 in the Scottish Parliament information centre’s briefing, which contains information on changes to the SFC’s forecasts for the wave 1 benefits. I have to say that a £4 million increase in the forecast spend since the draft budget is pretty good going. Professor Ulph made the point that the overforecasting on some benefits is evened out by the underforecasting on others, with the result that the margin of error is relatively small.

The main reason that is given in the SPICe paper for the change of £4 million in the forecast for discretionary housing payments is that

“Changes to pension age and new rules for mixed age couples could increase numbers to whom bedroom tax applies.”

Is it correct to say that that is because of the UK Government’s policy to take pension credit away from mixed-age couples? In other words, that UK Government policy has a direct financial impact on the Scottish Government’s budget, because it has to mitigate the effect of UK cuts on people in Scotland. Have I understood that correctly?

Our modelling of bedroom tax mitigation starts with who is eligible because of the removal of the spare room subsidy. In the initial stage of modelling—this is very much a modelling change—we look at who is defined as being in the pensioner population, which is not subject to that tax. In doing that, we take account of the increase in the pension age and the rule for mixed-age couples who are on universal credit, which you rightly mentioned. Over time, the change in position from where we were this time last year has come through in our modelling. It is a small change in terms of the overall size of bedroom tax mitigation costs, but it more accurately reflects who we think will be eligible for support.

In percentage terms, £4 million might be a small change, but it represents a significant amount of money in the pockets of constituents. Do you have a breakdown of how much of that £4 million change is because of the increase in the pension age and how much of it is because of the rule for mixed-age couples?

I should say for the benefit of new committee members that the committee was deeply concerned about the changes to pension credit for mixed-age couples—it was united in believing, on a cross-party basis, that those changes should not happen. According to the figures that we had, around 5,300 families might lose up to £7,000 a year because of them. The committee has an on-going direct interest in that issue. As well as those families losing out, an additional burden is being put on the Scottish budget to mitigate the situation. We have a figure of £4 million. Do you have a breakdown of that?

We are working with the DWP on that. Currently, our forecasts are based on information on housing benefit recipients. We have requested from the DWP information on the number of universal credit recipients who are impacted by the bedroom tax. That is not published at the moment. We are looking to obtain that information, which would enable us to provide a further breakdown. At the moment, our forecasts are based on the information that we have for housing benefit recipients and the split of that group between working age and pension age.

So we cannot disaggregate the £4 million—

For universal credit.

It would be helpful if you got that information, because the committee has an on-going interest in the issue.

We are also about to report on a benefit uptake strategy, and one of the things that we have looked at is the idea of policy spillover. I will not rehearse all those arguments, but that is an example of policy spillover whereby a UK policy change has a direct impact on the Scottish social security system. As a committee, we need to better understand that, because it takes money out of the pockets of others who could otherwise receive it.

Mark, do you have a question?

On policy spillover, the convener mentioned that a policy change by the UK Government has increased the Scottish Government’s spending on DHP by £4 million. Would that not be defined as a spillover that the Scottish Government could potentially charge back to the UK Government through a block grant adjustment?

10:00  

What is or is not a spillover is politically contentious and is always very tricky to determine, and I am very pleased that it is not the Fiscal Commission’s responsibility to make decisions or even to give advice on what is or is not a spillover. That is up to the two Governments. If the Governments decide that there is a spillover and they need the Fiscal Commission’s advice in determining the fiscal consequences of the decision, that is the point at which we would come in. However, fortunately, we do not have to get involved, and therefore we do not get involved, in what is or is not a spillover.

I thank Mark Griffin for asking that question, because there is a double financial whammy that we did not pick up when we were protesting against the changes. It is not just £7,000 that households are losing out on; the Scottish exchequer is losing out on £4 million. That is a double detriment to Scotland. There was cross-party consensus when we considered that previously, and I hope that that will continue in the committee.

Are there any other questions?

I am really pleased that the Fiscal Commission publishes previous forecasts. Is there a discrete document that gives all the previous forecasts? If not, I am sure that the Scottish Parliament information centre can provide that.

I want to go back to the question that my colleague Tom Arthur asked. I was quite taken aback by the fact that the economic input of social security spending is not really accounted for. In your report, you talk about productivity and other inputs, and you assess the effect of public sector pay and pay increases in general. I think that the view of all members of the committee—although I cannot speak for its new members—is that we see social security expenditure as also an economic input that will have an effect on productivity and economic activity. Is it your view that it is not the proper business of the Fiscal Commission to consider that? Is there somebody else who would be able to look at that and give us an assessment of it?

I will let Claire Murdoch talk about forecast evaluation before I come to your point, Mr Brown.

We have not published that information, but we can easily do that. When we come to our forecast evaluation in September, we will definitely look at how our forecasts are tracked and changed over time. Currently, we do not have a long forecasting history on social security, but we will in time as we get more history. We will look at not just the forecast that we produce for the budget but how our five-year forecasts are changing.

We are not saying that that is not there in the data. The extent to which there is a healthier population will show up in our figures in the number of people who end up in employment. The expenditure in the area that boosts Government demand will go into our modelling of the economy. We do not strip out separately spending on social security from spending on health and education as a determinant of the overall level of GDP in the economy. We are not saying that it is not there; we are simply saying that we do not track it separately when we model the economy.

It is not technically sensible to put some direct health and education feedback into a five-year economic forecast, because five years is a very short time period in which to see long-term effects. That does not mean at all that we do not think that that is important. There is a huge amount of evidence that the health and education of the population have big economic effects—that is what the history of the wealth of nations tells us about—but the fact that that is very important in the long run does not mean that it can somehow be built into the forecast time horizon that a body such as the SFC has in producing five-year economic forecasts for our purposes.

As committee members have no more questions, does anybody want to make any closing remarks? We have a little time. It is good to have time; we are not trying to lose the time that we have gained. Does Dame Susan Rice want to make any closing comments?

Thank you for the chance to do that.

The committee has asked some very good and pertinent questions, which is really important. Now that social security is growing in importance as part of the budget process, keeping an eye on it is a huge responsibility. It is also part of the bigger scene.

As it must do, the committee looks at the individual benefits, but one also needs to keep a sense of the whole family of benefits and how that works in relation to the rest of the budget, which is an interesting challenge.

I thank Dame Susan Rice and her team for giving evidence.

I suspend the meeting briefly, before we move to the next agenda item.

10:05 Meeting suspended.  

10:09 On resuming—