Our second item of business is to continue our stage 1 scrutiny of the Scottish Fiscal Commission Bill by taking evidence from the Deputy First Minister, Mr Swinney, who is joined by Alison Cumming and John St Clair of the Scottish Government. I welcome our witnesses to the meeting and invite Mr Swinney to make an opening statement.
Thank you, convener. I welcome the opportunity to discuss with the committee issues in connection with the Scottish Fiscal Commission Bill, which delivers a long-standing commitment from the Government to give the Scottish Fiscal Commission a basis in statute.
The bill will secure a permanent role for the commission in strengthening the operation of Scotland’s devolved fiscal framework through scrutinising the forecasts and projections that support the Scottish budget. The Scottish Government recognises that it is critical to the effectiveness and credibility of the Scottish Fiscal Commission that it is structurally, operationally and visibly independent of Government. Legislating for the commission further demonstrates that by formally safeguarding its independence.
We have sought to learn from international experience in designing our legislative proposals and have reflected on the work of the Organisation for Economic Co-operation and Development and the International Monetary Fund. That work recognises that there is not a one-size-fits-all model for fiscal councils. We have also considered the responses to our consultation earlier this year and the evidence that the committee has gathered over two previous inquiries and at stage 1 of the bill. I thank all those who have contributed to a thoughtful and thorough discussion of the issues at stage 1. The Government will reflect carefully on all the points that have been raised with the committee and any conclusions that the committee arrives at.
As it is for the non-statutory commission, the core function of the statutory commission will be to scrutinise and report on the Scottish Government’s forecasts of tax revenues that are published in the Scottish budget. I have previously set out to the committee my view that the Scottish ministers should be responsible for the production of tax revenue forecasts and should be directly accountable to the Scottish Parliament for those forecasts. Although I appreciate that there is a range of views on whether the commission should prepare official tax forecasts, I believe that the balance of stakeholder and international evidence supports the position in the bill: that the Government will prepare and the commission will independently assess forecasts. That approach maximises the transparency of the forecasting process.
The bill will also give the commission full freedom to determine how it scrutinises those forecasts, and it protects the commission from any actual or perceived direction or interference from the Government in carrying out that scrutiny. If the commission chooses to do so, it can prepare and publish alternative forecasts. Nothing in the bill prohibits it from doing that. It is solely for the commission to determine whether it considers the production of such alternative forecasts to be necessary as a tool to support its assessment of the reasonableness of the Government’s forecasts.
The remit of the statutory commission is designed to reflect and be proportionate to the fiscal powers that are devolved to the Scottish Parliament under the Scotland Act 2012, but we recognise that the process of devolution is on-going and that it is important to provide flexibility to amend the commission’s remit in future to reflect any expansion of the Parliament’s powers. Respondents to the committee’s call for evidence have suggested potential additional functions for the commission under either existing or future fiscal powers. Some members of the committee have also made their own suggestions.
The Government will carefully consider all such proposals, but we are strongly of the view that the core purpose of the commission should be to maximise the integrity of the forecasts and estimates that have been prepared by the Scottish ministers to support the Scottish budget. We must also recognise that the commission is accountable to the Scottish Parliament and has a role in supporting Parliament in holding the Scottish ministers to account. Any proposals for new or different functions for the commission must be viewed in that context.
Taken together, the provisions in the bill and the resourcing proposals in the financial memorandum will create a statutory commission that is well equipped to assure the robustness of the tax forecasts that underpin the Scottish budget.
I look forward to answering the committee’s questions.
Thank you very much for that opening statement.
Obviously, you have been to the committee many times, so you will know that I will ask some opening questions and my colleagues will then have the opportunity to ask questions.
Let us consider how the Scottish Fiscal Commission has been working to date. When the SFC published its first report, on the same day as the 2015-16 draft budget was published, it described its approach to its non-statutory powers as
“one of enquiry and challenge, followed by response, followed by further enquiry and suggested improvements.”
In evidence to us, the Irish Fiscal Advisory Council emphasised that the challenge function should be carried out transparently. However, there is little detail, either in the SFC report or in the Government’s methodology paper, about how the process of inquiry and challenge influenced the Scottish Government’s methods in producing its 2015-16 forecasts. The committee will be interested in exploring that further as we progress our consideration of the bill.
Has the Scottish Government modified the methods for forecasting devolved taxes based on the SFC’s suggestions?
The whole process was designed to ensure that we had a robust approach and methodology in place. The methodology that underpins the forecast has been published, with a comprehensive and transparent explanation of the methodological basis for the estimates that the Government has made, which have been challenged and then given assurance by the Scottish Fiscal Commission. In essence, the approach has been to ensure that the commission has the ability to arrive at a conclusion—which is that the estimates are assessed to be reasonable—by a process of detailed scrutiny, challenge and engagement, to establish that there is a sound basis for publishing the forecasts. I think that that serves the public interest.
Transparency is an issue that the Finance Committee has discussed on myriad occasions. The figures for the initial forecasts were not provided, so it is not possible to ascertain how much they changed in response to the recommendations of the Scottish Fiscal Commission. If the SFC did not assess forecasts as being reasonable, what would be the Scottish Government’s response?
You raised two points, the first of which is about the publication of one or more forecasts. I cannot see how it would serve the public interest to have a multiplicity of forecasts—I just do not see what the argument is for that. The forecast on which we settle is the one on which the budget is predicated, and I do not think that it serves the public interest for there to be doubt and debate about the robustness of that forecast. I cannot see the rationale for having a multiplicity of forecasts.
On your second point, about what the Government would do if the commission was unable to certify a forecast as reasonable, the blunt answer is that the Government would have to change its forecast. I have rehearsed this ground with the committee. I would be in a pretty weak position if I stood up in the chamber and told Parliament that I did not have a certification of reasonableness for the forecasts that underpin the budget. I think that that would be the first line of weakness in any Government budget.
That is why my view is that the commission has, in essence, a veto over the forecasts of the Government. My view is that, until such time as the commission is prepared to certify a forecast as reasonable, the Government’s forecast cannot be published. I am only ever going to want to publish a forecast that I can say the commission has judged to be reasonable.
I appreciate the second part of your answer, but the first part was a response to a question that I did not ask, because I did not ask about a multiplicity of forecasts—I do not intend to do so, because I am sure that other members of the committee will explore the issue. My point was that, because the figures for the initial forecasts were not provided, it was not possible to identify how things changed.
Furthermore, it is not clear why the Scottish Fiscal Commission’s recommendation on non-domestic rates income led to a change in the forecast while other recommendations that it made did not. Was the need for a behavioural analysis discussed in the challenge meetings between the SFC and the Government? If it was, what was the outcome of those discussions? That all relates to the issue of transparency about how some decisions were arrived at and why other decisions were not taken.
I answered the first part of your question in the way that I did because if both a starting position and a concluding position were published, there would inevitably be two forecasts, and I see no merit in there being two forecasts. If a change had been made as a consequence of the interaction with the Fiscal Commission—that was not the case; the commission did not make a change to the forecast that the Government put forward as part of the 2015-16 budget process—it is inevitable that we would have published two sets of numbers. I do not see what value there would be in debating two sets of numbers, when the budget is predicated on a particular assessment of the forecast, which has been judged by the Fiscal Commission to be reasonable.
In relation to the other points that you raised, for me the question is about the transparency of the methodology that we use. That is all published, so it can be scrutinised by anyone who wishes to do so. The Fiscal Commission will bring forward a variety of other challenge issues that will inform that methodology. Ultimately, that leads to the publication of the methodological statement, the publication of the estimates and the publication of the Fiscal Commission’s view that the estimates are reasonable. In my view, a pretty comprehensive amount of information is conveyed about the manner of the discussion that has gone on in arriving at a conclusion whereby the Fiscal Commission certifies the Government’s estimates as reasonable. I think that that is a pretty comprehensive explanation of the basis on which the estimates are arrived at.
But it is curious that the SFC’s recommendation on non-domestic rates income was acted on while others were not.
Some of the commission’s recommendations on the forecast will be immediate, but others might be of a longer-term nature. The element of the process over which I have and should have no control is the commission saying whether it considers the estimates to be reasonable. That is the answer that I need to get for me to be able authoritatively to communicate a budget estimate to Parliament. That is clearly the outcome that I want because, as I said in my previous answers, I would be in a very weak position if I were to say to Parliament, “I have a forecast that underpins my budget, but the Fiscal Commission does not believe it to be reasonable.” I invite members to consider how long I would last if I gave that explanation of the position to Parliament.
That is why the Fiscal Commission has a veto. It knows that I need it to say that the forecast is reasonable, and I must put forward a convincing argument to it that enables it to judge the forecast to be reasonable.
I am still a bit puzzled about why some recommendations are accepted and some are not. You accepted the SFC’s recommendation on non-domestic rates income, but you did not accept other recommendations that it made. For example, the SFC’s report questioned the lack of any behavioural analysis in producing the forecasts for residential land and buildings transaction tax. Given that the Government decided that it was going to make changes to the forecast based on the SFC’s recommendation on non-domestic rates income, I would have thought that it would have been better for the Government’s position in the round if, at the same time, it had explained why it thought that the SFC’s recommendations in other areas should not be pursued.
09:45
We have not said that. What we have from the SFC in relation to the 2015-16 estimates is an assessment that they are reasonable forecasts. There are other recommendations that are more about the longer-term development of the capability for estimating taxes, which the Government is taking forward. We have not rejected them—we are taking them forward. The SFC said that it considered the 2015-16 estimates to be reasonable; that is the basis on which I accepted its view.
Let us move on. Robert Chote of the Office for Budget Responsibility said that
“the whole point of independent scrutiny is to exert influence”,
and the International Monetary Fund noted that
“there is clearly a trade off between exerting influence and providing independent assessment.”
Where do you think the balance should be struck?
The questions of influence and independence are entirely related. The commission is free to exercise influence to ensure that a strong and robust approach is taken to the estimation of tax revenues and to the establishment of forecasts. However, it controls its independence—ultimately, it is the body that decides whatever it says about particular forecasts. The commission is in a position to push, challenge and influence to make sure that a robust position is established. If it is not satisfied that that is being done, its independence enables it to say, “This is not good enough.”
I understand the point that the IMF is making about the relationship between influence and independence. I do not think that there is any conflict between those two concepts. The influence and the challenge can be exercised but, ultimately, the commission alone is the guarantor of its independence and it can determine whether the actions that are taken are good enough as an acceptance of the views that it has expressed .
Thank you.
The SFC proposes in its submission that
“it would have no contact with the Scottish Government during the period when it is developing its forecasts.”
There has been a wee bit of an issue concerning whether the SFC could be seen to be too close to the Government in terms of providing advice, but at the same time we have just talked about its ability to exert influence. There is a bit of a grey area. When should the SFC stop having contact when forecasts are being developed? How early in the process should that be?
That is not a matter for me, convener—it is for the commission to determine what it considers to be appropriate. It would be wholly wrong for me to specify that. I do not think that there is anything wrong with the commission deciding whatever level of contact or communication it decides is appropriate—that is a matter for it.
On the question of advice, there is a difference here. I do not think that the word “advice” describes what the commission is doing—I think that the commission is challenging. My officials and I find the commission challenging, as we should. I do not feel that I am on the receiving end of advice from the commission; I feel that I am being challenged, as I should be. That is the purpose of the commission.
We need to avoid getting into a position where we say that there is something wrong with dialogue and conversation between the commission and the Government. In my experience, that dialogue and conversation is not cosy conversation; it is challenge, and we cannot have challenge unless we speak to each other. We could do it all by certified email but, given some of the complex issues that we are talking about, that is not really the best way. We have to be careful not to label the dialogue between the commission and Government officials and ministers as advice, because I do not consider it to be that; I consider it to be challenge.
I will let in colleagues in a minute or two, but I first want to ask about potential additional functions. The bill is intended to reflect the existing legislative competence of the Scottish Parliament. Obviously, the Scottish Government expects the functions of the SFC to develop substantially to take account of the new fiscal powers under the Scotland Bill. The committee has recommended that the Scottish Fiscal Commission Bill should be amended to widen the functions of the commission to include assessing the performance of the Government against its fiscal rules and assessing the long-term sustainability of the public finances. At this stage, it might not be competent to legislate for additional functions, but there has been broad agreement among witnesses that the remit should be widened. What is your view on that?
I do not agree with the widening of the remit to cover the aspects that you talk about. We have discussed these issues in committee before. Many of those questions are, frankly, the responsibility of the committee and Parliament. It is the proper preserve of the Finance Committee and Parliament to scrutinise the decisions that ministers take and to assess the robustness of the Government’s financial judgments. That is undertaken regularly, whether it is through the Parliament’s budget process, through the autumn or spring budget revisions—we will come on to the autumn budget revision later this morning—or through the periodic inquiries that are undertaken. To me, that is all the core responsibility of members of Parliament through the Finance Committee and the Parliament. I do not think that somebody else is needed to do that. In essence, that would be competing with the proper democratic role of members of Parliament in holding the Government to account.
I do not know that we look at the long-term sustainability of the public finances. The Royal Society of Edinburgh and various academics feel that the Scottish Fiscal Commission should have a role in looking at where the Parliament might be in four or five years. We tend to work on almost an annual basis. For example, this year, we are unable to scrutinise the budget until 16 December, when we will get the figures for the forthcoming year. Although we can touch on some of the finances going ahead following the comprehensive spending review figures, we cannot devote the time that perhaps the Scottish Fiscal Commission could to looking at the long-term sustainability of the decisions that are made.
The Finance Committee has in the past undertaken inquiries on the sustainability of public finances. It is open to the committee to undertake such inquiries if it chooses. It is not for me to determine that it should do so. The constraints that exist on the availability of financial information, such as those that the convener has highlighted in relation to the role of the Finance Committee in the current budget cycle, would also apply to the Fiscal Commission. Up until last Wednesday when the Chancellor of the Exchequer stood up, the commission would not have been in receipt of any more longer-term information on the United Kingdom’s public spending than any of the rest of us were. For me, the role of the Fiscal Commission is properly defined as that of focusing on the estimation of the Government’s taxation forecasts and reporting accordingly. Obviously, the bill makes provision to expand the remit and responsibilities of the commission commensurate with any wider devolved responsibilities.
Thank you. I will now open up the session to colleagues round the table.
As you know, cabinet secretary, we have spent a lot of time thinking about forecasts, who forecasts and who does not forecast and all those kind of things.
I was struck by your comment that there is not a one-size-fits-all model for fiscal councils. Is it your feeling that we should launch the Scottish Fiscal Commission, that we and the commission should review the situation after a certain amount of time and that there might be a change of emphasis or priorities as we go ahead?
We should certainly be open to reviewing the Fiscal Commission’s performance. I make it clear that that is part of the provisions, but I certainly think that we should be open to reviewing the arrangements that we put in place. We are obviously in new territory and we should be open to considering the implications in due course.
A couple of us visited the equivalent body in Ireland. My feeling is that it started off not doing any forecasts, but it has gradually started to do a bit of forecasting as it has felt necessary as things have developed, which strikes me as quite good. The situation is not totally black and white—the Irish body does a bit of forecasting if it feels that it needs to. Would you feel comfortable with such a model?
I am not sure what you are suggesting.
I am suggesting that the Fiscal Commission might do a bit of forecasting when it feels the need, but that we do not need to say right now in black and white that it must forecast or that it must not forecast.
I have tried to reflect two things in the bill. The first is the need for the Fiscal Commission to respond to the forecasts that are made by ministers, because I believe that it is right and proper that it is the role of ministers to make the forecasts of tax revenues and the role of the commission to challenge and to provide assurance about those forecasts. The second is the need for the commission to be able to undertake the additional work that it decides that it should undertake. Those are essentially the twin purposes of the commission. It would be up to the commission to determine what falls into the latter category.
The budget for the SFC seems quite generous in comparison with the budget for the equivalent bodies in Ireland and Sweden, which are both independent countries with much wider powers than we have. Ian Lienert made the point that the
“estimates are generous relative to comparable small IFIs elsewhere”.
Are we being a bit overgenerous with the finances, or do you think that the figures are justified?
I seem to remember that the last time I was here I was criticised for not being generous enough.
Not by the same people.
Probably by the same people.
We have engaged in dialogue with the commission. At the outset, when the commission was a non-statutory body, we formulated what we thought was a reasonably tight approach—maybe “tight” is the wrong word for a finance minister to use—as a reasonable starting point for it, and I got a fair amount of criticism that it did not appear as if we were giving the commission enough resources to enable it to exercise its functions properly. I have responded to that and, in discussion with the commission, have formulated a proposition that is there to be tested.
On the first question that Mr Mason asked, there is obviously the opportunity for review if that is judged to be necessary in due course, so we will be able to see whether the resources that we have put in place are actually required to fulfil the commission’s functions.
To be frank, I was one of the people who thought that £20,000 was a little bit on the low side, but I wonder whether £850,000 is a bit on the high side. The point has been made that, if the commission took on more responsibilities, the budget might increase further, and yet it would still have fewer responsibilities than the bodies in Ireland and Sweden have. I suppose that I just want to put down a marker that I would not want the budget to go much higher than it is.
I am acutely aware of the challenges in public expenditure terms, so I do not take any of these decisions lightly. I give the committee the assurance that I will look carefully again at the financial estimates for later years. The estimate for 2016-17 is pretty much of the order that we will have to deliver, but I will look again at the estimate for 2017-18.
10:00
Section 6 of the bill, which is quite short, concerns the independence of the commission. The committee has discussed with witnesses the degree to which we can legislate for independence and the degree to which the issue concerns having people on the commission who can openly challenge the Government and build up a reputation for independence. Do you think that we can legislate for independence or do you think that the issue concerns the reputation that the commission builds up over time?
I think that the issue is a combination of a number of things. First, it is important that section 6 contains the explicit statement that
“In performing its functions, the Commission is not subject to the direction or control of any member of the Scottish Government.”
That is an important protection for the commission. If it is ever necessary to do so, the commission can say to a member of the Scottish Government that section 6 applies and that they have no ability to direct or control the commission.
Secondly, there is the question of the wider approach to appointing members of the commission. For example, with regard to creating an atmosphere of independence around the commission, I took the view that it would be better for the commission members never to be dependent on a minister for reappointment. I took the view that it strengthened the credentials of the commission for the members never to have to think about their reappointment, because they could not be reappointed. That was my thinking—I volunteer that to the committee. I thought that that would really assure the wider community about the independence of the commission. However, I have seen some comments to the effect that that approach does not allow for a build-up of expertise in the commission, because it means that people cannot be there for more than one term. I set out the intention behind the approach in the bill, but I quite understand the view that giving people a couple of terms would allow for a build-up of expertise. However, it might constrict or constrain the atmosphere of independence.
Thirdly—this is the key point—we have to appoint people of capability and authority, whose reputations in their wider fields depend on their ability to exercise independence in the commission. For them to be successful in their other fields of activity and involvement, they have to be able to demonstrate that they have exercised independent judgment in the commission. That is, perhaps, one of the best safeguards that we have.
You have mentioned appointments. Would the commission be more independent if, instead of ministers appointing people and Parliament effectively having a veto, Parliament made the appointments and ministers had a veto?
No, I think that that would be much worse. How on earth can I veto what Parliament wants to do? I do not think that that would be a healthy relationship. The arrangement that we have in place enables ministers to be involved in recommending propositions to Parliament and enables Parliament to undertake scrutiny and have the final say.
You mentioned the issue of second terms. I totally agreed with you at the beginning of this process that having commission members serve only one term underlined their independence. However, we heard that in Ireland it was felt that there was not a huge degree of expertise out there—or, if there were people with expertise, they were perhaps not available because of other commitments and so on—and that having people serve only one term restricted the pool of candidates unnecessarily. That was one of the arguments for having a second term. Am I picking up that you are perhaps open to that argument?
I have set out honestly what my policy intention was, but I accept that it might have an unintended consequence. The point that Mr Mason makes is fair. A range of people could sit on the commission; whether they are available is a different matter. I have set out the basis of my thinking on this matter, but I am quite happy to consider what the committee concludes on it.
Thank you.
On staff, there is a question about whether the commission members should have complete freedom as to who they appoint and how, and about how much involvement the Government and the Parliament should have. Section 18(3) says:
“The Chief of Staff and other staff are to be employed on such terms as the Commission may, with the approval of the Scottish Ministers, determine.”
Why did you involve the Scottish ministers in that regard, instead of giving the commission members complete freedom?
That was simply to enable ministers to be assured that the approach to employment policy that we consider appropriate for a non-ministerial department—which will be the status of the Scottish Fiscal Commission—is properly in place. We have to be satisfied that employment policy is consistent with what we would expect and with public pay policy.
You used the word “reasonable” in your answers to the convener. In section 7, which is entitled “Access to information”, the words “reasonable” or “reasonably” come up quite a lot of times—four times in subsection (1), I think. The commission will have
“a right of access at reasonable times to any relevant information that the Commission may reasonably require”,
and it
“may require any person who holds or is accountable for relevant information to provide at reasonable times any assistance or explanation that the Commission may reasonably require”.
The word “reasonable” can be interpreted in different ways, so are the provisions solid enough? Does section 7 give the commission enough clout?
I think that it does. When you quoted from section 7 you laboured the word “reasonable”, if I may say so—I know exactly why you did that. If I was looking at paragraphs (a) and (b) of subsection (1) together, I would focus on the word “require”, which is a hard word in legislation.
The commission will have
“a right of access at reasonable times”,
but to request, at 9 o’clock at night, a complete recasting of methodology by 8 o’clock the following morning would not be reasonable. However, the commission will be able to require information—I stress “require”. When we look at the two paragraphs together, I think that we can see a strong foundation for the commission to be able to get the information that it requires.
Thank you.
I want to follow up some of the convener’s questions, because I think that some information remains to be teased out. The convener asked about what happens if the commission deems the Government’s forecasts not to be reasonable. Let us say that the commission says that a forecast is not reasonable, so the Government has to make a change of some sort and present it to the commission again. Is it the intention that the initial forecast, the changes and the final forecast will all be published?
No.
What will be published?
The final forecast.
Just the final forecast?
Just the final forecast.
How is that in tune with the idea of transparency, if disagreements between you and the Scottish Fiscal Commission are never made public?
What matters is whether the Scottish budget is underpinned by a reasonable forecast of the tax income that will be generated. That is the piece of information that the public and the Parliament require. Therefore, the commission must be able to test and challenge the Government to the extent that, unless it is prepared to use the word “reasonable”, the Government knows that it cannot publish its forecast.
I come back to the point that I made to the convener, which I have made to the committee previously: I do not see the value in there being a multiplicity of forecasts. I have yet to hear it argued that that would be helpful or in the public interest. I cannot understand why that would be of interest. What the public want to know is how much of the budget is underpinned by assessments of the tax revenue to be generated and whether they can have confidence in that number. I think that people are looking for that, rather than looking for a multiplicity of numbers floating about and thinking, “It could be this. It could be that.”
Let us take as an example the issues around the OBR forecast for land and buildings transaction tax. For the last wee while we have been round the houses on that in Parliament—I am looking for a piece of information, but it seems that I do not have it with me. Essentially, in the space of a few months the OBR has taken its estimate of the amount of tax to be generated from land and buildings transaction tax in Scotland from £560 million in July to £427 million in November. My estimate all along was £381 million. What is the value of having a multiplicity of forecasts floating around when the one that matters is that the Scottish budget is underpinned by my forecast of £381 million, which has been verified as reasonable by the Fiscal Commission?
I can tell you what would have happened if we had all taken decisions based on a forecast of £560 million that we now find is £427 million—and I do not think that many members would have been queuing up to say, “Thank goodness for the OBR.” Rather than debate possible scenarios, I am trying to get across to the committee the importance of what underpins our budget, because that is what public expenditure depends on.
I will resist the temptation to ask what would have happened if we had based our finances on £7 billion-worth of oil revenues.
We could have all sorts of distractions, Mr Brown.
Let me stick to the point, then.
I am making a serious point, which I ask the committee to consider. What is the point of having a variety of forecasts when the budget has to depend on a particular number? Which number do I settle on? My view is that I should settle on the number that the Fiscal Commission, established by statute, says is the number.
The point for me is one of transparency. The policy intention is not to publish anything other than the final result. Would you be hostile to or indeed block the publication of those discussions or initial forecasts by the SFC?
I will have a quick look at the bill because I suspect that I might be in conflict with section 6 if I was to block such a proposition, although I would argue strongly against its desirability, for all the reasons that I have just put on the record to the committee.
Sure. We disagree, but I will not dwell on the point.
I was heartened by something that you said earlier, if I have written it down correctly. If the SFC wishes to, it can prepare and publish forecasts. Is that a fair summary of what you said?
That could be covered by section 2(3).
10:15
I am heartened by that.
Just for clarity, given what the Government and you personally have said about forecasts in the past, can you tell us whether you would be against section 2 being amended, through an amendment lodged by either the Government or a member that said in essence what you have just said—that, if it wished to do so, the SFC could prepare and publish forecasts? Would you be hostile to such an amendment?
Yes, because I do not think that it is necessary. I think that it is already covered by section 2(3). That is my explanation of the basis of the provision.
Given that you have said on a number of occasions that you do not want other forecasts, and that—as you have said again today—you do not see the rationale for additional forecasts, do you not think that stating that in the bill would give clarity?
No, because I think that the clarity is in section 2(3).
Let us go back to what happens in practice. I am concerned about the transparency issue, as I have indicated.
The SFC published a list of the meetings between you and it for last year’s budget process. The report was finalised in the week beginning 6 October, which was the same week as the draft budget was published. In the week beginning 29 September—the week before that—we see the following item:
“Meeting with the Cabinet Secretary to present draft report and discuss logistics for release of the final version”.
What was the nature of the presentation that was given by the SFC to you during that week?
That presentation of the report in September was designed to do two things. First, we wanted to fact check the contents of the report. It was the first time that it had all been done, and the Fiscal Commission was anxious to make sure that the report was factually correct. Secondly, because it was the first time that we were going through the process, we had to have a conversation about choreography—to put it bluntly, we had to determine how it was to be done. What happened was what we agreed would happen. The Fiscal Commission’s view—the reasonableness test—was published contemporaneously with my budget statement, but it was published by the Fiscal Commission, not by me. As I recall, they were published at the same time.
We are in a budget process at the moment. Will there be a similar meeting in the week before the budget this year?
There will be a meeting with the Fiscal Commission on Tuesday next week.
Is that meeting purely to fact check, as in the Audit Scotland process?
Yes, and for the commission to raise any issues that it wants to raise with me.
Let us move on to reasonableness. I am sure that you have read the evidence from our previous evidence sessions. Dr Angus Armstrong of the National Institute of Economic and Social Research said:
“I think that reasonableness is quite a low threshold, because there is a lot of uncertainty.”
He went on to say:
“Our first point is that the threshold of reasonableness is inappropriate—it is too difficult to say that something is unreasonable, because that is quite a strong requirement.”—[Official Report, Finance Committee, 18 November 2015; c 22.]
How would you respond to Dr Armstrong’s comment that reasonableness is a pretty low threshold?
I think that it is an appropriate term. If we start going up the list of terminology, we get to terms such as “appropriate” and “reasonable”—which I would say are much of a muchness—or “precise” and “definite”. If anything was to be put to our friends at the OBR’s on LBTT, “definite” would be nowhere to be seen.
I am not going to sit in front of the committee and say that I will be able to forecast precisely the revenues that I will generate. I will make a reasonable stab at getting it right. That is all that any commission will be able to say about the issue. If the committee thinks that there should be a higher threshold, I am willing to consider that, but if we were to go up from “reasonable” to “precise” or “definite”—those are perhaps the choices—it would get very difficult for anyone to sign up to that. I could not sign up to saying that something was a precise estimate.
That takes us on to my next point. Another point that Dr Armstrong and Professor Jeremy Peat made was that, rather than just choosing a different word, as you suggested in your answer, if the commission had the ability to forecast and then compare its forecast with yours, that would give a much better indication of the likely differences and challenges that we might face. Dr Armstrong said:
“the rigour of going through a forecast is important because, the more we look at the data, the more we realise where all the nooks and crannies are. Until we play with the data, it is hard to understand where a lot of the uncertainties lie.”—[Official Report, Finance Committee, 18 November 2015; c 22.]
You said that you cannot see any rationale for having different forecasts. That rationale was put to the committee by an economist, so I wonder how you respond to that.
I completely disagree with it. What matters is that there is a forecast that underpins the budget, because public expenditure depends on that forecast. The value of the Fiscal Commission and the extra scrutiny that it can provide is in exactly the point that Dr Armstrong made about getting into the “nooks and crannies” of the model. That is what the Fiscal Commission can do. It has an absolutely unimpeded opportunity to go wherever it wants to go on the methodology, the thinking, the analysis and the preparation of the forecast that we have come to. It can look at any bit that it wishes to look at. The public interest is best served by having that strength of independent analysis that the commission represents challenging and agitating about the Government’s forecasts and the methodology that has been used to get there, so that whatever number comes out has been tested to such an extent that we can be as confident about it as we can be about any number.
To show the danger, let me play back the problem with the OBR’s LBTT analysis, which is that it takes a subdivision of the UK market and arrives at its number. We take a different methodology that is based on actual housing transactions as charted by Registers of Scotland over many years, which builds up a profile of the housing market and the transactions market in Scotland, to which we apply a variety of economic variables. They are two different models. Unsurprisingly, they came up with two very different answers. One of them, six months ago, gave a figure of £560 million, whereas my one says £380 million, which is a difference of £180 million. That is a difference of nearly 40 per cent from my core LBTT estimate.
I do not see the value of having two competing models, because that is where we would end up. I would rather have a model that is absolutely shaken to bits by the Scottish Fiscal Commission—which is what happens—to get us the strongest number so that I can say to Parliament that that is the number that we should go for.
Can the SFC in effect take the model away or have access to it at any time to run all the numbers and change the parameters, or does the commission have to ask you to run the model? Does it have full and independent access to the model at all times?
It has copies of the model, yes. The point that Mr Brown is raising has to be looked at on two levels. First, do the members of the commission have access to the model in their own time to put in whatever numbers they want to put in? Yes, they do.
Secondly, and more importantly, the Fiscal Commission has the ability to interrogate and challenge the detail of the model: not just the variables that are put in—the numbers that are put in, where the thresholds are put and where the numbers are put—but the workings of the model.
As regards the points that I laboured about how the model has been constructed, the commission members can explore and examine them all. I do not think that they can do that at their own behest, because we have to own the model so that it remains the model. However, the Fiscal Commission is able to ask, “Why do you not look at this, that or the next thing?” It is entirely appropriate that it should do that.
The commission’s role has to be seen not just in relation to its ability to look at different variants of what scenario A looks like against scenario B, but in relation to what it is all founded upon, which is the more important point.
I have just a couple more questions because I am sure that other members want to get in. The convener asked about the changes that you made to NDR as a consequence of comments from the Fiscal Commission, but you did not appear to make any changes in relation to behavioural impact, which was another point that the commission raised. Have you now changed the model, or changed your methodology, so that behavioural impact is factored into any forecast?
That remains a work in progress. There will be developments in the model that are designed to reflect that, but our understanding of behavioural factors will, in itself, be a developing part of our thinking.
We introduced a new tax in year 1. We know that there has been a forestalling effect as a consequence of changes in the UK regime, which will have created behavioural impacts. I would be very nervous about configuring the model based on that particular behavioural impact, but I accept that there will be other behavioural impacts that will be relevant. We have to remain open to developments and changes that could be reflected as a consequence of behavioural changes.
Finally, why can the Fiscal Commission not just look at the overall forecast for non-domestic rates as opposed to looking at the buoyancy assumptions? Non-domestic rates are treated very differently in the bill, but the OBR will look at them in the same way that it looks at other taxes for the UK Government. Why can the Fiscal Commission not just look at the non-domestic rates forecast in the same way that it looks at other forecasts?
The key variable is about economic performance, where the commission can add value. Some of the other issues that underpin the NDR income forecast—appeals losses and debt—are issues that are essentially driven by performance in relation to payment of non-domestic rates. Those are less matters of judgment and more almost matters of fact about what underpins the changes in the design of the non-domestic rates system, so they are of a different character from the economic determinants, which is the area where we think that the Fiscal Commission has to challenge the Government’s judgment—and challenge it independently.
Is it your view that the Fiscal Commission could not add any value by looking at the overall forecast?
The element that we have identified is the area where I think the Fiscal Commission can exercise that independent challenge effectively.
10:30
Some of the points that I wanted to raise have been teased out, but I want to ask again about clarity. When we were in Ireland we learned that they are absolutely comprehensive in keeping the detail of meetings, conclusions, figures, forecasts and so on in the public domain. They said that the reason was that if a freedom of information request comes in they have no work to do, because any information is readily available and can be produced at any point. There have been suggestions that things are not quite as clear as they might be and I wonder whether you are satisfied that that would be as easily done here?
Yes, because the FOI legislation will apply.
The FOI legislation will apply, but are we content that the structure that we have provides clarity about what the Fiscal Commission does, when it meets, what conversations it has, its workings out and whatever, so that that can all be accessed very easily?
Yes. The Fiscal Commission published a comprehensive report on the process that it went through to verify the estimates that we made for the 2015-16 budget; that was a comprehensive piece of work that was proactively put in the public domain at the time that they provided me with the assessment of the reasonableness of the forecast. That was done in an open and transparent way. There will obviously be full scrutiny of the implications of that decision as we move forward. The commission is structured to be accessible in that respect. I come back to my point about section 6 of the bill—a lot of those questions are for the commission to determine. It is not for me to specify how they organise and communicate.
It may be a matter of semantics, but Ian Leinert was curious about the idea that the SFC was an independent assessor as opposed to an adviser. I remember an earlier meeting at which you were absolutely committed to the fact that, whatever the SFC outcome was, you would accept it. It seems to me that, because of your determination to accept the commission’s forecast on your modelling, with all the challenges that it provides, you accept its advice.
We come back to some of the territory that I discussed with the convener earlier in the meeting. I do not consider the SFC to be an adviser—I consider it to be a challenger and an assessor. That is different from being an adviser.
I want to convey to the committee the nature of the relationship between the Fiscal Commission and the Government. The Fiscal Commission is there to challenge us, to push us and to make sure that we are coming to the correct answer, and its members will verify whether they think that we have come to the correct answer. I do not view the commission as an adviser and I would be very surprised if it viewed itself as an adviser to the Government. I think that it considers itself to be a challenger to the Government, as it should be.
The lack of published findings from the commission in the public domain does not allow anybody else to be aware of what the outcome of those challenges was, because you automatically accept them. What if the commission is wrong?
What if it is wrong? The forecast is my forecast, so I own it, and the Fiscal Commission is able to challenge that. I have been clear that, to get to the point of satisfaction at which I could set out the numbers to the Parliament, I would have to address the issues that the commission had raised. We appoint people to a commission because we believe that they have the capability and strength to provide that challenge function.
Would you ever challenge the Fiscal Commission?
I have accepted that it essentially has a veto over my forecast. That is why I appointed it—to do that—so I have to accept its ability to challenge me to ensure that the numbers are robust and I have to accept the conclusions that it arrives at. I cannot foresee circumstances in which I would prefer to go to the Parliament and say that I think that the view from the commission is wrong and that my view is better.
If the figures are never produced to the Parliament, how could it ever challenge you and say that they were wrong?
Because I would not have a certificate of reasonableness from the commission. I need to be able to stand up in the Parliament and say, “I have formulated an estimate of land and buildings transaction tax, I have put it to the Fiscal Commission and it considers that estimate to be reasonable.” If I could not say that, I would have a problem on my hands and I would have to think carefully about going to the Parliament. I cannot envisage marshalling an argument that, in essence, I was dissociating myself from the commission’s view. I appointed its members because of their expertise and to give us that challenge function.
Thank you.
I would like to pursue that point a little bit further, because it is not just about semantics. It is interesting to consider what you would do in those circumstances.
I preface my question with a comment. You are saying very carefully today that the Fiscal Commission would “essentially” have a veto. In a response that she made at last week’s First Minister’s question time, the First Minister said that it would have a veto. Can you point me to where in the bill it says that the commission has a veto?
It has a veto in the sense that we have established it to challenge and assess our forecasts. Essentially, the power in section 2(1) of testing the reasonableness of the forecast is where the commission has its veto.
But it does not, with all due respect. I have read that very closely. It talks about the commission preparing reports and setting out its assessment of reasonableness, but it does not then say that the commission has a veto if the Government disagrees.
My reading and interpretation of what section 2(1) means conveys to me the concept of the veto that I have shared with the committee.
As far as legislation is concerned, concepts and interpretation cause problems for people in the future. If you mean the commission to have a veto, it should be there in black and white. Do you intend to lodge an amendment to clarify that point? As written, the commission does not have a veto.
I think that the section adequately conveys that point.
We will need to disagree, because there is no mention of a veto at all in there. I genuinely believe that you should spell it out in black and white if that is your intention.
My next question is about this veto and how it would be exercised. You said that you would think carefully—I would expect nothing less from you—but are you saying that, if the commission disagrees, perhaps not with the methodology but with the forecast, you would put off the budget process, and its strict timetable, indefinitely until you arrive at agreement?
No. I would reach agreement so that I delivered a budget that had a certificate of reasonableness.
I must be able to stand up on 16 December with a letter from the Fiscal Commission giving a certificate of reasonableness. I have a budget to deliver: I cannot stand up and say, “Sorry folks, we will have to come back next Wednesday”. That is the veto: the commission knows that I have to get there, which is why section 2(1) conveys the point.
Leaving aside the politics for the moment, there is a practical point. If the methodology is not right, are you saying that, within the space of a week, you can change the methodology to reflect the concerns in order to get a certificate of reasonableness? People outside the Parliament, who are experts in the field, would have some trouble agreeing to that.
That is not what would happen.
What would happen, then?
The Fiscal Commission has been looking at the methodology for some time. We will get to a point at which the commission has no more issues to raise and we are agreed on the methodology. That process has been going on for some time; it went on last year in the formulation of the model.
We get to that point of agreement on the methodology weeks before the budget, and then we introduce the numbers. I say, “This is what I want to do”. The commission tests that to see whether the numbers and propositions that I am suggesting, when applied through the methodology that has been prepared, are robust.
The convener gave the example of the caveat on the LBTT methodology in relation to modelling human behaviour in the face of a changed market. Though the commission said that the assumptions made were reasonable, it did caveat that by saying that it was unconvinced by the assumptions made about behaviour.
As far as we were aware, there was silence from the Scottish Government as to whether you accepted or rejected that point. I understand that you said earlier this morning that you had accepted it and are doing further work. None of that was self-evident.
I can check what we have said publicly about that.
The key point is to make the distinction between that and the most important part, as I said in my answer to Mr Brown, which is the commission interrogating and challenging the model to make sure well in advance that it is a robust model for generating the numbers that need to go into the budget.
I accept that. But where the commission caveats its response to that model—the case of LBTT is one example—there does not seem to have been any corrective action. What I am trying to do—
Well, if there had been some factor of significance that the commission judged to be of sufficient merit, the commission should not have given me the certificate of reasonableness.
Perhaps it will bear that in mind next time.
It did caveat that certificate of reasonableness by talking about behaviour. What is interesting is that it would appear that the commission has been proved right.
It would be very useful to understand how the Government is going to reflect and negotiate with the Fiscal Commission if it says that it is not reasonable or it caveats the certificate of reasonableness in the way that it did with LBTT.
I do not follow the point that Jackie Baillie makes about the commission being proved right.
It would take us down a side track but I am happy to talk to the cabinet secretary afterwards—
Where comments of that sort are put on the record and I challenge them, it is not appropriate for the point not to be explained.
It can be explained. In relation to LBTT, as you probably know, there are a number of people sitting in larger properties with a particularly significant value who have decided not to sell.
Their behaviour has been a consequence of changes made to LBTT. Whether we agree with that or not, it is happening. That is what the commission pointed to in saying that there was no modelling of behaviour. I hope that that is sufficient explanation.
10:45
I do not think that the evidence bears that point out. We will have much more debate about those particular points. Essentially, the commission judged our forecast to be reasonable, and it must have felt that it was sufficiently clear to be able to offer that in 2015-16.
So, in summary, you would keep putting off finalisation of the budget until you had that forecast, or an agreement that the forecast was reasonable.
I have said nothing of the sort. I said that I have a budget date of 16 December, upon which I have to sign a budget. The veto that the Fiscal Commission has over me lies in the fact that it knows that I have to set out a budget on 16 December—it cannot be delayed. I have to come to some form of agreement with the commission, to its satisfaction. That is the veto that the Fiscal Commission has. There is a budget date a fortnight today, and the commission can look at everything that I have put on the record about the fact that I cannot come before the Parliament without an assessment of reasonableness from the commission.
There is still not a veto in the bill. I am sure that we will debate that further.
I wish to follow up John Mason’s question. John spoke about the Parliament appointing and ministers having a veto. I would chop the end bit off. What is wrong with the Parliament appointing? The Parliament already appoints in a number of areas without ministers having to recommend and it does so in accordance with all the frameworks that have been laid out. Has that been rejected for a particular reason?
The difference lies in the fact that the Government has a particular involvement. The Government has no involvement in some areas of activity with regard to many of the parliamentary appointments that Jackie Baillie talks about, whereas the Fiscal Commission has an integral part to play in the Government’s budget process and it has to verify the estimates of taxation that are made by the Government.
The Government plays an integral part in the process. We have to have the confidence that the people who are put forward for approval by the Parliament have the necessary capability to perform a function that is absolutely material to the budget process.
The Children and Young People’s Commissioner Scotland, for example, has a clear role in commenting on legislation and practice regarding children and young people, which is the preserve of the Government. Why is that substantially different?
The Children and Young People’s Commissioner has a much broader policy perspective, which is not just about the Government. The role of the Fiscal Commission is to examine the Government’s estimates of taxation. It is on that basis that the Government must be confident in the capability of those who are selected and approved by the Parliament to undertake that role.
I do not want to put words in your mouth, but are you in effect saying that you do not think that the Parliament is up to ensuring that the people who are selected would meet the tests that are set out?
Those are most definitely not my words, and they are most definitely not to be put into my mouth. What I am trying to say to the committee is that this is a shared area of activity, where the Government has a legitimate interest in ensuring that technical capability is in place. That is why the Government should be making the nominations for the Parliament to approve.
Let us move on to forecasting, an area that has been touched on by many members of the committee. I think it is the case—I am sure that the cabinet secretary will point it out if I am wrong—that there are no avenues of independent, alternative forecasting in Scotland. We just do not have the institutions that do that, as would be the case elsewhere, notably in Ireland. Does the cabinet secretary think that it is useful for benchmarking purposes to have that kind of basket of different forecasts? If he does not find that useful, could he point to any other fiscal commission anywhere in the world that has a lack of access to alternative forecasting?
I do not have an encyclopaedic knowledge of every other jurisdiction in the world—
Is there not one such commission—anywhere at all—that you can point to?
—so I will not comment on that.
There are institutions in Scotland that look at different areas of public policy and estimation of the public finances. The Fraser of Allander institute is one such example, as is the institution that Professor David Bell is involved in. I can think of numerous other examples around the academic community where such expertise lies. Of course, some of the members of the Fiscal Commission are appointed to it because of their expertise in the area of fiscal predictive activity.
It is those very experts, some of whom you pointed to, who suggested that having access to a basket of forecasting that is independent would be quite useful for benchmarking purposes. As you cite them, I assume that their evidence has validity, too.
My position is pretty clear—I think that the budget must be predicated on a reliable and robust estimate of what is likely to be generated from the taxes that we levy, and that that must be scrutinised and challenged to the maximum degree. Those are exactly the legislative arrangements that I am putting in place.
I have a final question, for the purpose of clarity, because what is written in legislation does not always mean the same thing to different people. Section 2(3) talks about the commission being able to
“prepare reports setting out its assessment of the reasonableness of such fiscal factors (other than those mentioned in paragraphs (a) to (d) of subsection (1)) as it considers appropriate.”
In layperson’s terms, are you saying that section 2(3) explicitly allows the Fiscal Commission to commission forecasting for benchmarking purposes? In response to a similar question, you referred my colleague Gavin Brown to that subsection.
I think that section 2(3) speaks for itself when it comes to the scope that the commission has to decide of its own free will what reports it wishes to produce. Given the contents of section 6, it would be inappropriate for me to specify what the commission should decide to do under section 2(3).
I am not asking you to instruct the commission to do anything; I am asking you whether section 2(3) confers on the commission the ability to forecast independently, if that is what it wishes to do.
I think that it could probably do that under section 2(3) or under section 2(5).
I am looking for an answer rather than a reference to another bit of the bill, which I have read through.
He has given you an answer.
Forgive me, convener—I have just referred the member to sections 2(3) and 2(5), which would provide for exactly what she is talking about.
What I am looking for, for the purpose of clarity, is an indication on the record—it just requires a yes or a no; it is that simple—whether section 2(3) would explicitly allow the Fiscal Commission to forecast for benchmarking purposes.
If Jackie Baillie wants a specific on-the-record comment, I say to her that she would be better off looking at section 2(5), as I have said already.
I have done. Section 2(5) is one line that talks about something different.
Well, that is my answer, convener, and I have given it courteously several times.
I have got the impression during the bill process that there seems to be a view afield that the absence of an institute for fiscal studies or similar body outside the sphere of Government has led to a yearning on the part of some people for the SFC to fill that vacuum by producing a forecast that they can look at alongside the work that the Scottish Government produces. Is that a fair reflection of where we are? Would there be any merit in that?
The commission members seemed to suggest that if the commission were to produce forecasts, that would lead to some difficulty in respect of their challenge and scrutiny role, because they would be wedded to those forecasts rather than being able to provide a sober analysis of what the Scottish Government had provided.
There is a fundamental issue about the Fiscal Commission’s purpose. It is not to become an IFS. There may be an appetite for such a body in Scotland, but that is for others to sort out: it is not for me to sort out and it is definitely not for the Scottish Fiscal Commission to undertake such a role. The statutory role is set out clearly to enable the commission to prepare reports on the reasonableness of the forecasts that the Government makes and on which its budget is predicated.
Last week, Lady Rice spoke of
“forecasting with a capital F and forecasting with a little f”—[Official Report, Finance Committee, 25 November 2015; c 45.]
She said that, although small-scale forecasting would be done to test the robustness of the models that the Scottish Government had produced, that was different from producing the entire forecast that will lie behind the Government’s budget. Is it a question of terminology and how it is applied, rather than of the role that the Fiscal Commission will undertake of probing the model and ensuring that the figures are reasonable?
That is the function that the commission must undertake because the function that Parliament and the public interest require is that we have a robust estimate in which we can place a great deal of confidence. I want the commission’s expertise and capability to be deployed to ensure that that number is the most robust number it can be. If the commission spends its time developing another forecast, I will be left wondering what the right forecast is. I want the commission to challenge our forecasts so that we get to the number upon which Parliament’s budget can most reliably be predicated. I do not understand—this underpins all my evidence to the committee this morning—the point of having another number out there because, when that happens, it creates confusion. It also creates the potential for estimates that others make to damage our public finances and the judgments that we make.
The bill specifies no term length for commissioners. Will you expand on the reasoning behind that? Staggering the terms so that not all the commissioners serve the same term length from the same starting point has been suggested. Is there a reason why the bill does not specify minimum or maximum term lengths?
I said earlier that one of the purposes of independence is to ensure that individuals are able to say what they like and to make inferences as they want without fear of how that might affect their reappointment. I feel that the best way of guaranteeing that is to stagger the length of service of individual members of the commission over time so that new people would be brought in and we could retain continued expertise in the commission. The code of practice for ministerial appointments to public bodies says that no individual should hold public office for longer than eight years, so I suppose that that is a maximum. However, we will work to try to minimise the degree to which individuals’ terms of office do not work in sync in order to ensure that we maintain expertise in the commission.
Another point about the length of term and reappointment—forgive me, but I cannot remember where the evidence came from—involved discussion around trying to ensure that the electoral cycle does not coincide with appointment periods or interfere with them, in order to ensure that the Fiscal Commission can sit outside the politics of potential future changes of Government. Should it just be taken as read that that approach will be taken or does it need to be underpinned either in the legislation or in the guidance that lies behind it?
11:00
I am sure that we can organise that in a fashion that does not require that it be put on the face of the bill.
I have two very quick questions. First, there has been some debate about whether the SFC’s report should go to the Government a few days before its publication or on the same day as it goes to everybody else. Do you have any strong views on that?
I think that an approach that is consistent with the basis on which we receive reports from Audit Scotland would be appropriate—if memory serves me right, we get them about four days before publication.
So, the Government should get the report about four days before publication.
Yes.
For clarification, I take it that you would not expect to have much dialogue with the Fiscal Commission about the content of the report and that it would simply be a matter of the Government receiving it for information.
Yes.
I do not want to labour the point about forecasts because it has been debated before, but do you accept that in other countries—for example, Sweden—there are a multiplicity of forecasts, which does not seem to diminish the quality of analysis of the economy, or of debate in Parliament but, rather, seems to enhance it?
I certainly acknowledge that different approaches are taken in other countries. I question the value of having several forecasts, because we need to make a judgment based on the most reliable forecast for our public finances.
I shall spare the cabinet secretary from having to go back round the houses on this issue.
You might, but I will not.
That concludes questions about the Fiscal Commission, but I want to wind up on forecasts, which I did not touch on in my opening questioning because I wanted colleagues to have the opportunity to explore the issue more deeply, which they have done.
I listened carefully to all that you said, cabinet secretary. You made it clear that you do not want “a multiplicity of forecasts” and that there is no point in having another number. However, a key point that a lot of witnesses have made is that if there is going to be only one number, it should not come from the Scottish Government. For example, the Royal Society of Edinburgh is
“firmly of the view that the SFC should be able to originate its own independent forecasts of the future fiscal revenues”
and that
“to fulfil its functions the SFC will need to be able to produce independent forecasts.”
The Scottish Property Federation suggested that if the SFC
“is only able to verify Scottish Ministers’ assessments then it may be difficult to convince the wider world that it is truly an independent body.”
You will recall, Deputy First Minister, that at First Minister’s question time, the leader of the Opposition made—in my view—a quite disgraceful slur on the individual integrity of Fiscal Commission members by calling the commission “a pup”. Clearly, though, if the Scottish Government is producing forecasts and others—namely, the Fiscal Commission—are commenting on them, we are likely to hear that kind of rhetoric in the future.
Professor McGregor and Professor Swales have said that it
“would seem sensible ... to aim gradually to build internal forecasting/analytical capability”
in the SFC.
Professor MacDonald prefers a similarly evolutionary approach, and believes that the SFC should initially use the Scottish Government’s forecasting model rather than seek to develop its own, but should take on responsibility, as its role evolves, for producing official forecasts.
Given the evidence that we have received and the politics around the issue, if there is to be only one forecast I foresee the commission being continually derided by Opposition members as being, in effect, a subset of the Government, irrespective of whether it is or not. Given all that, would it not be better—in the Scottish Government’s interests and in the interest of producing robust financial forecasts—if the official forecasting body was the SFC?
Let me walk my way through all of this, if I may, convener. The starting point for answering your question lies in the central choice that has been exercised by the Government in the bill. The choice was whether the forecast of the revenues to be raised should be undertaken by the Government or put out to an independent body such as the Fiscal Commission. Who should produce the forecasts and tell the Government what they are?
The Scottish Parliament information centre report on the Scottish Fiscal Commission Bill—I cannot see a date on it—has a very handy graphic that shows the number of countries in which forecasts are originated by an external body. There are three: the United Kingdom, the Netherlands and Belgium. In another column, the purple blocks show all the other countries where an independent fiscal institute assesses the official forecasts. They include Australia, Austria, Canada, Croatia, Denmark, Finland, France, Ireland, Italy, Sweden, Spain, Slovenia, Slovakia, Serbia and the United States—a load of them.
It is evidenced by international judgement that you can go either way on the question—a Government forecast or a forecast that has been farmed out to an independent fiscal institute. The choice of principle that we made on that question is to have a Government forecast that is challenged by an external institute. We then had to see how best we could be confident that that institute has the expertise to challenge the forecast by the Government. We have been over the appointment process—how members are chosen and their skills and capabilities.
Because of the nature of the statute that we have put in place, the Fiscal Commission’s purpose is to be absolutely focused on testing to make sure that the forecast is reasonable, because that forecast will go into the budget and our public expenditure will be dependent on it. That should give the public and members of Parliament reassurance that we have recruited capable external opinion to challenge the Government’s forecast, and that the commission will, ultimately, be able to say that it does not think that the forecast is reasonable. I cannot be clearer than to say to the committee that, if the Fiscal Commission were to say that it thinks that our forecast is not reasonable, I would have to produce a different forecast.
I am trying to convey to the committee the importance that I attach to having a strong challenge function on what the Government sets out in its tax forecasting proposition.
I accept that and I am sure that many of my colleagues accept it. Do you not accept, however, from the evidence that I read out to you, that the perception will be somewhat different, regardless of the high standing and integrity of the individuals in the commission, if it comments on the Scottish Government’s forecast rather than producing its own forecast as an official forecaster, and that that will be detrimental to how it is perceived outside these four walls? Do you not accept that it would be better for the Scottish Government, for Parliament and for all concerned if the Scottish Fiscal Commission were to produce the forecasts, because that would mean that there could be no mudslinging claims that the commission is part of the Scottish Government and not independent or, as we heard at FMQs, “a pup”—as unfair as that is?
No. I think that I have given the committee a lot of reassurance on that point. I have gone through it in detail.
The IMF’s written evidence to the committee in October 2015 said:
“There is no need for the SFC to present its own forecasts. The key requirement is that it is able to provide an independent assessment of the official forecasts.”
I would have thought that the International Monetary Fund’s strength of authority would give reassurance in addition to what I have said to the committee this morning.
I will allow Jackie Baillie to come in briefly on that point.
We are painting the situation as a decision between two options: either you forecast or you do not. There is a third way—yes, I dare to say that—that would involve enabling the Fiscal Commission to commission forecasting against which to benchmark the Government forecasting.
I have laboured the point considerably: there is nothing to prevent the Fiscal Commission from commissioning forecasts if it wishes to do so. However, with regard to the statute that is to be put in place, it is important that there is a Government forecast that the commission can use its energy and resources to challenge. That will give the public—who, we must remember, depend on our judgments being correct—confidence that the commission’s expertise is being deployed to provide the maximum possible assurance about the reasonableness of the estimate.
John Mason wants to come in with a brief comment.
Is there a danger that there would be a great deal of duplication and waste of resources, were the SFC to forecast? We are a relatively small country and we have only devolved powers. It seems that some people—I do not know whether you will agree with this, cabinet secretary—just want us to ape the UK and copy the OBR because they are in thrall to what goes on in London. What we want is something different. Ireland is a much better model than London for us to copy.
There is a real danger that there would be duplication and that misconceptions would be created. I can, for example, confidently say that the OBR’s estimate of £560 million to come from land and buildings transaction tax in July is excessive and will not be realised. I do not know what good it serves to have that number floating around out there. Of course, it has been revised down by more than £130 million in the space of four months.
I am trying to convey to the committee that the public finances require rigorous challenge of the number that we produce, because our public expenditure depends on it. The Fiscal Commission will provide the independent authority to enable that challenge to take place.
To be fair, the duplication issue was covered by the Chartered Institute of Taxation and the Institute of Chartered Accountants of Scotland, which take the same view.
Mr McDonald, are you wanting to come in with a brief supplementary?
I will, if you will be lenient enough, convener.
You will be the last one.
I wonder whether another point has been overlooked. If we had gone with the OBR estimate at the outset, that would have dictated the block grant adjustment that would have taken place. In other words, if we had gone with a significantly overoptimistic estimate at the beginning of the process, there would have been knock-on consequences for the block grant as well as consequences further on for the public finances in terms of income from LBTT.
Mr McDonald is correct. I am pretty sure that I have the numbers correct in my mind, but I do not have them right in front of me, so I ask the committee to forgive me if I am wrong. The estimate that I had for the devolved taxes to be generated was at that time £461 million. The OBR estimate was £526 million, and the UK Government initially took the view—I was going to say that it was keen, but that is perhaps not fair—that it should go with the OBR estimate for the block grant adjustment.
The former Chief Secretary to the Treasury, Danny Alexander, accepted—to his credit—that we had a potentially valid alternative estimate, so we settled on a block grant adjustment of £494 million, which—if my recollection of the numbers is correct—is mid way between the two numbers. Mr McDonald is absolutely correct: we could have had a much higher block grant adjustment; that is one of the key points. It matters that we put all our resources into trying to get the most reliable estimate possible, because our public expenditure depends on it.
I was going to add a further comment, but I will ask just one other question instead. It is on a different subject, which I touched on in my opening questions.
The fiscal framework will set out the role and responsibility of the Fiscal Commission and the OBR with regard to devolved taxes. Has a wider remit been discussed as part of the negotiations on the fiscal framework?
Wider issues could emerge from the fiscal framework, which may have implications for the contents of the Scottish Fiscal Commission Bill.
Thank you for answering questions, cabinet secretary.
The cabinet secretary will join us again for the next evidence session. I suspend the meeting briefly to allow for a change of witnesses.
11:16 Meeting suspended.