Finance and Constitution Committee

Meeting date: Wednesday, October 3, 2018

Official Report 778KB pdf

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Scottish Fiscal Commission (Appointments)

Agenda item 2 is an evidence-taking session with the Scottish Government’s nominees to the Scottish Fiscal Commission. We are joined today by Professor David Ulph and Professor Francis Breedon. Members have received copies of the specification for the role along with the nominees’ application forms and CVs. Before we go to questions from members, would either or both of our professors like to make an opening statement?

I am a professor of economics at the University of St Andrews. Most of my research has been on issues relating to public policy, including understanding the effects of taxes and benefits on individual behaviour. The first piece of research that I published when I was a lecturer at the University of Stirling was on the effects of income tax on individual labour supply.

I also have direct experience of forecasting tax revenues. Between 2001 and 2006, I was chief economist and director of analysis at the Inland Revenue initially, then at Her Majesty’s Revenue and Customs. In that role, I was personally accountable for the forecast of all tax revenues and for the production of the figures for national income. When I held that post, I saw the pressure that arose from tax forecasts when they were done for the chancellor through Her Majesty’s Treasury, and that experience made me a fan of independent tax forecasting bodies such as the Office for Budget Responsibility and the Fiscal Commission.

I also oversaw a major review of the way in which we forecast corporation tax revenue at the Inland Revenue. That forecast was initially done from a microeconomics base and then scaled up, but we switched from that to a more macro-based way of forecasting, which has turned out to be more successful, with fewer errors. I also oversaw some changes to the way in which we forecast income tax revenues to ensure that more account was taken of income distribution questions.

Finally, I have experience of giving independent advice to various bodies in a number of areas. I have been a member of the National Health Service Pay Review Body for three years now, and my appointment has been renewed for a further three. I have also been a member of the Competition Appeal Tribunal since last year.

I am a professor of economics and finance at Queen Mary University of London. In the early part of my career, I was very much involved in macroeconomic forecasting. I started off as part of the London Business School’s macro forecasting group and then moved to the Bank of England, where I headed up the forecasting group and co-ordinated forecasts that were done there.

My academic research has focused largely on finance but also on macroeconomic policy issues. I have also recently worked on issues such as quantitative easing.

With regard to policy background, the key thing I would highlight is my role on the States of Jersey’s fiscal policy panel, which is similar to but different from the Fiscal Commission. Like David Ulph, I have some experience in policy review. I have been on the policy review of local government finance and, for the Treasury, the policy review of foreign exchange reserve management. I have worked for the Central Bank of Iceland on its exchange rate policy as well as for the Norwegian Ministry of Finance on the allocation of its sovereign wealth fund. I also have broad finance and macroeconomic experience.

Thank you. I note from your respective CVs and some of the material in your opening statements that you have experience in the fields of forecasting, finance and economics. What experience have you had in production analysis or forecasting with regard to the Scottish economy or Scottish finances? Have you undertaken any other work that might be helpful in contributing to the Scottish scene?

For a while, I was an adviser to the committee that was taking the Scotland Bill through the Scottish Parliament. As part of that work, we scrutinised the evidence of various experts on the potential impact of devolving taxes to Scotland and worked with the Scottish Parliament information centre to produce our own forecasts of tax revenues in Scotland. I have some Scottish experience through that work.

I have to confess that I have no experience in Scotland. My experience is more broadly of the United Kingdom as a whole but also relates to other work.

That work is interesting, too. Can you highlight any other comparators—say, your Jersey experience—that might help us?

Jersey has been an interesting experience. It is very much devolved—indeed, it is its own world. As David Ulph has said, the role of an independent commission is very clear; it is less political and has more to do with dealing with a technical deficit and trying to improve forecasting techniques. That is one of the roles that I have in Jersey and which I would like to carry on in Scotland, working with a team on some more technical forecasting issues to make sure that things are done as efficiently and in the most up-to-date way as possible. That is an area of experience from Jersey that I would like to bring to Scotland.

Good morning. One of the issues that the committee has looked at recently is the divergence in the forecasts from the OBR and the Scottish Fiscal Commission, which has quite serious implications for the fiscal framework. Any such divergence leads to a gap that, when it appears, needs to be reconciled against outturn figures. One of the things the committee has considered, albeit somewhat briefly, is whether more can be done to align the forecasts of the OBR and the Fiscal Commission, given that both organisations are starting with the same raw data but seem to be arriving at different conclusions. That is presenting some challenges. Do either of you have any thoughts on that issue?

It depends somewhat on how the tax forecasts are done. If you are just trying to produce a forecast that is a number—a point forecast—the problem is that that forecast will never have absolute precision. That was a problem that we faced when I was at HMRC.

What you do is forecast within ranges of accuracy. It is possible that, even if the underlying approaches are the same, you can come up with two different numbers; however, if they lie in the same range, you can, in some sense, be confident that the forecasts are the same. Without knowing in more detail precisely how the OBR does its work—I have not been part of the OBR to see how it does that—I think that it is hard to say exactly. With this stuff, the devil is in the detail. It might be that some of the things that it does in its forecasting are different from the Scottish Fiscal Commission’s methodology. Even if you start with the same data, you can come up with different numbers if you use it in slightly different ways.

I agree, however, with your general point: it is really difficult to manage the message if you have different numbers coming from apparently authoritative bodies.

It is a difficult area. It is important that the commission feels that it is completely independent—and, indeed, independent from the OBR—and that it is using its own skills, judgment and techniques. The ideal is that, if the commission does something better or different, there is discussion internally with the OBR and then agreement about how to proceed. There should be a presumption against forcing the parties to come together too early in the process. Ideally, they should be brought together before the work is complete, but there should be a degree of independent thought early in the process.

Good morning. As the Scottish budget has evolved and we have picked up more tax-raising powers—and because of the lag and delay in the publication of outcome data—the Fiscal Commission plays a crucial role in providing forecasts that lay the basis for some of the budget that is ultimately agreed by Parliament. The accuracy of those forecasts is important for the Scottish Government but if they change over time, they can become politically challenged. From that point of view, I welcome the explanations that you have given of your own forecasting experience in your CVs and your statements.

One area that is very important for accurate forecasting is reliable data sources, good data collection and the ability to feed that data into an appropriate financial model. What is your experience in managing those scenarios?

When I joined the Inland Revenue, I assumed that I would be walking into an organisation with a vast amount of accurate and up-to-date data from all the taxpayer returns. I found that that was true for some areas—in some areas that were computerised, there was some pretty accurate information—but in other areas, we needed to drill down into some of the data. We had to go down into the basement of Somerset house, get out stacks of paper records and transcribe those into our data sets before we could do the analysis.

Having good data collection systems is really important but, even then, things can go wrong. We had to pull the national income statistics for the United Kingdom for six months, because we found that the systems were not properly capturing data from, for example, people who had multiple partnerships. The system would capture the first page of the partnerships but skip all the other partnerships. At the level of national income, that did not show up at all, but because members of Parliament were very interested in what was happening in their constituencies, once we had drilled down to the constituency level and asked questions about what was happening to high-net-worth individuals in particular constituencies, we saw huge changes from one year to the next. That alerted us to the fact that the system was going wrong. We had to stop producing national income forecasts until we rectified the problem with the computer system, and then we had to go back and produce the national income forecast again.

Those kinds of problems are tricky. Even with the most sophisticated machinery around, you can find that the data sometimes gets lost in the computer programmes.

09:15  

My experience is more in the building of forecasting models. I started in the era of large-scale econometric models—the kinds of 500-plus equation models that are less popular now. It is interesting to look at what techniques have improved and what things we can continue to push forward with. Fortunately, data is no longer kept in cupboards and information is much more accessible. The large-scale estimation techniques, which can now go down to the levels of individuals, will come to the fore in the next few years and will allow us to forecast from individuals, something that we could not do previously.

When we ask about the budget, Scotland’s finances, revenue or whatever, we often hear the phrase “It is complicated” before we get any explanation. Under the heading “Essential and Desirable Skills and Experience” in the job specification, it says with regard to “Communicating and Influencing” that the commissioner must be

“able to communicate complex information in accessible language.”

How do you propose to do that? What would make it easier for non-financial people to understand Scotland’s budget?

First of all, it is a question of deciding the most important pieces of information that you need to convey. Often when you are doing some of these forecasting tasks, you have masses and masses of detail in the back of your mind, but a lot of it might not be centrally relevant to the main message that you want to convey to others. The first and most important thing, therefore, is to decide what the key message is, and then you have to work out the best way of getting that message across.

If it will help, I can give you an example of where I did that at the Inland Revenue—although not in a forecasting context. There was a proposal coming up about the way in which people with offshore bank accounts were treated; we were going to send a letter out to taxpayers, saying, “If you come forward and confess that you have these accounts, the penalty will be zero instead of the usual 100 per cent.” When I first saw that, I went straight to the person in charge and said, “This isn’t going to work. Think what the probability of detection would have to be to make it worth while for someone to confess and give up the 100 per cent penalty. You’d have to think you would have a more than 50 per cent chance of being caught.” At that point, the average probability of being caught by the Inland Revenue was 5 per cent. Using that very simple arithmetical example, I convinced the head of the Inland Revenue that the proposal was not going to work, and we changed things in another way that brought in billions of pounds of tax revenue. It is just a question of deciding the message that you have to get across and using simple examples to persuade people of your case.

One of the most important things about delivering complex messages is to make them relevant to the person you are talking to. People have a very high capacity for taking in something quite complicated if they think that it is important to them personally, and quite often they switch off if they think that they do not really need to understand the explanation or if they do not find the information useful. We have to do a lot to make sure that the messages are as relevant as possible.

Another thing that I find works is putting everything in context. In that respect, an international context often helps. People get interested if you can say that we are at the top or at the bottom of the list in something. Putting things in some sort of context helps people understand. That is a very general response, but it is the sort of technique that I generally use.

My question is principally for Professor Breedon and relates to his experience on the fiscal policy panel in Jersey. If I understand it correctly, the panel has a slightly different remit from that of the Scottish Fiscal Commission in that it advises on tax and spending policy, whereas, although the work of the commission informs those kinds of policy decisions, it does not comment directly on policy matters. Is that an accurate understanding?

Sort of. Clearly, the States Assembly of Jersey makes the decisions, and we have a broad advisory role. We do not set the policy but we give advice on areas that probably the Fiscal Commission would not give advice on. Jersey is in the happy position of having a very large fiscal reserve, and the fiscal policy panel plays a big role when the reserve is added to or reduced. That is something that is specific to Jersey.

Given that tax avoidance is a major and controversial issue in the context and history of Jersey, can you tell us how the policy panel—or you—engage with questions of tax ethics? What is the relevance of that experience and how could it be brought to bear with the Scottish Fiscal Commission?

In the case of Jersey, we do not have any remit with regard to those issues. The fiscal policy panel’s focus is very much on sustainability, and we are interested in overall tax policy, but there are some elements of individual tax policies that we do not get involved with.

I know about the financial system in Jersey, but advising on that is not part of the fiscal policy panel’s remit. It is a political decision for the States of Jersey, and it would not be appropriate for me to comment on it.

The committee recently heard that estimates for things such as VAT that are assigned and attributed to Scotland will be done via surveys, and some members are concerned about the accuracy of such estimates. How can we improve the accuracy of the data on things like VAT or even on Scottish income tax payers? The message that we have heard to date is that the estimates seem to be pretty inaccurate.

At the UK level, the VAT forecasts were probably the most accurate forecasts that we had, but I can see that there is a problem with how some of the revenues are assigned to Scotland. Most of the information that is used to forecast VAT comes from consumer expenditure surveys. In fact, such forecasts will inevitably be based on surveys, because it is very hard to get any direct measures of consumer spending. You can get some through shops, but other than through surveys, it is very hard to get information about how much people in Scotland are spending. Over time, we might find ways to improve accuracy—and once we have a better understanding of the patterns, we might be able to find ways to identify spending that is genuinely and more accurately attributable to people in Scotland—but, for now, we are going to be reduced to using surveys for forecasting.

That said, good surveys can be quite accurate. As an economist, I was initially quite sceptical about them, but I became more of a fan the more I saw how they were used.

I agree. With surveys, it is all in the construction. The power of statistics is amazing, and even small numbers of people can be very informative as long as the survey is constructed very carefully. However, we are becoming more able to do something cleverer and fancier in future, and one of the things that we would want to look for is an opportunity to use new data sources and new approaches to these problems. As this is day 1 for me, I cannot give you anything much more specific than those ideas.

As committee members have no more questions, I thank both professors for joining us today. The committee will consider the nominations later in private, and then we will publish a report setting out our recommendations to Parliament.

I thank you for your attendance this morning, and I briefly suspend the meeting to allow for a change of witnesses.

09:24 Meeting suspended.  

09:28 On resuming—