We are all present and correct, so I reconvene the meeting. Our next item of business is evidence from the third of the Scottish Government’s nominees for appointment to the Scottish fiscal commission—Professor Andrew Hughes Hallett. I intend to allow up to 30 minutes for the item. Members have received copies of Professor Hughes Hallett’s CV and his completed questionnaire. I welcome him to the meeting and invite him to make a short introductory statement.
First, I apologise for not being here last week. Some of you might know that that was because of a long-standing commitment to what I might call my personal sustainability, which meant that I had to be elsewhere. That is all okay.
I will set the context a little, but if members know all about this, I apologise if I repeat things. Among many other things, I have worked on the use of fiscal policy councils—Scotland will have a commission—for quite a long time. It is of interest to me to look back. I started doing that work for a European proposition 12 years ago—I looked at how such a council would be used at the European Union level.
At that time, in 2002, we debated at great length whether the body would be at the EU level or the member state level. We went for the EU level—many of the functions have migrated into the European Commission—because we thought that the stability pact would manage to restrain member states and that the problem was likely to be at the EU level, where fiscal policies would get out of line, which would undermine or conflict with the monetary policy for the European Central Bank. We thought that, at the euro level, the Commission would use the stability pact to bring member states back into line, but we were wrong—the stability pact was not enforced. It was not designed in the way that I would have designed it, so perhaps it was a bit wrong in that sense, but the key point is that it was not enforced.
At the time, it was made clear to me that there was no way that member state Governments would be persuaded to have fiscal policy councils. However, things move on, and the financial crisis has changed member states’ minds. A fiscal policy council is now needed at the member state level and, in this context, at the regional Government level—I say that without making any forecasts—to watch the fiscal policies that are under Governments’ control and to monitor the sustainability and quality of the forecasts for the fiscal policies.
In that sense having a fiscal policy council cannot be avoided, and in another sense it cannot be avoided, because the International Monetary Fund and the European Union require it at the member state level. Most countries now have such a council in some form or other, although the forms vary widely. Such councils are not required of regional Governments, but they are preferred, and a number of places have established them. Whether to have a council is not a referendum issue, because it is necessary with any degree of devolution. If there is no devolution, that is another matter.
On the other hand, the idea is a bit experimental. Fiscal policy councils elsewhere vary quite a bit in how they operate. We will need to feel our way through that.
A key feature of such a council is that it is forward looking about fiscal policies—that is the forecasting part. Another is that the council and its members should be independent, so they get to set the remit to a degree—that will be a simple matter for the Scottish fiscal commission to start with, as it will have only two taxes to worry about, but the issue might be more complicated later.
Fiscal policy councils get to set their mode of working, and they make their choice of forecasting models to use. They can determine the assumptions and data that they put in and their use of outside expertise, if need be. I can foresee some instances later—but not now—where that might be the case.
10:30I suggest that the fiscal commission is subject to outside review to ascertain whether it is performing well. That need not be continuous; it could be every five or seven years, say. It is responsible and accountable to Parliament, rather than to any specific Government.
The commission has a functional independence, which matters as much as political and personal independence—perhaps I should go further and say that it matters more. It is a bit different from considering the independence of, say, the Bank of England monetary policy committee for monetary policy purposes.
That said, the key thing is that the fiscal commission does not have any decision role or executive authority. It cannot tell people what to do. Furthermore, it does not advise in a proactive sense, telling people, “You should do this.” In bad circumstances, it is possible to make comments like that, but the commission cannot formally advise. It cannot engage in policy advocacy, in any sense. Importantly, it must restrict itself within the targets and priorities set by the elected Government of the time. It is not going to usurp democracy.
That is basically the background as I see it. My statements in response to the questionnaire—including all the typos that I found this morning—give some indication of my experience, albeit not on fiscal policy councils or commissions, as I have never been on one. My experience has been in a general policy advising sense, commenting on policy, rather than telling people what to do. One or two cases have been slightly more direct than that.
In commenting on policy in a European context I advised that it would be a good idea to have debt targets. It took six years to persuade the European Commission to take that on board, mainly because of political difficulties. That was not a case of telling people how to do something and what exactly their policy must be, but that was the bit that was missing from the design of the European currency union.
I could go further but, if you have read my written submission to the committee last summer, you will know that I have a fairly well-developed idea of what I think the fiscal commission should be doing, and you may take that up by all means.
Thank you for that opening statement. I will ask a couple of opening questions, and I will then open the questioning up to colleagues.
You touched on this a bit in your initial remarks. Can you talk us through how you see the Scottish fiscal commission evolving? It is embryonic in terms of what it is going to be responsible for at the moment. However, one would expect the Parliament to have additional powers at some point in the years ahead. Where do you see the Scottish fiscal commission going?
That is certainly true. To start with it will be a comparatively simple matter, with just two taxes to consider—and they are not enormously big taxes. Because those two taxes are rather specific, how you forecast the revenues is not exactly the same as what you would do if you were considering the next one down the track, which will involve whatever part of income tax is devolved at the time.
The work of the commission will open up naturally from those small beginnings. It would be important to think about how far the commission wants its remit to expand, and about the cycle on which you want the various reports to come through. That means setting the rules of the game in advance. You will probably learn a lot about how best to do that from the experience of the two simple taxes. It is when the Scottish income tax component comes in that it will really open up.
A lot of other forces will impinge on that. It is not just a matter of calculating alpha times income levels, which are affected by other events in the economy. One has to take a slightly wider view. The rules of the game will evolve quite rapidly at that point. That would be useful as, if there is further devolution beyond that point, which is a possibility, you will have learned a lot about how to operate from the initial examples.
In response to question 5 in the questionnaire, you emphasise:
“I am a member of their Council of Economic Advisors on the condition that my independence would be protected, as it has been when opinions differed.”
You make it clear that you provide advice or commentary only if
“the independence of my analysis and advice can be honoured and guaranteed.”
I agree with what I said.
Yes—I was just wondering if you had anything further to add.
I do not mean to be facetious, but it is an important point. It is important in this context and it has been important in other contexts. You are quite right to ask that question—if I were in your position, I would ask it, too.
I emphasise the question of functional independence, as well as personal independence. If I am on the fiscal commission and I need to examine the revenues from such and such a tax, how they might develop in future, what is driving them, what can make them fluctuate and whether they are going to be embarrassing in the sense that they are going to collapse just when you need the money coming in, I want to be free to be able to do that in any way that I want. That is best practice.
I am happy to explain at any time how I have calculated something or why I think that such and such a point is a key feature. It requires a bit of a talent to explain that. It will probably not be very complicated for the existing taxes, but it will be very complicated for some of the others. If the income tax rate is changed, for instance, we have to explain whether the incentive is to work more to earn more, or whether it is to take leisure time. Those are income and substitution effects, to use the technical language. It is a matter of explaining to the outside world why we think that something is going to happen.
The models that you use may be very simple or a bit more complicated, and they have to be able to capture such things. I need to be free to use them.
I am skirting round one awkward thing: the OBR does not have quite the same freedom.
That said, those issues of independence are important. After that, everything is on a bit of a take-it-or-leave-it basis, unless life is getting really serious—which it will not for two small taxes, although it might do further on.
We point things out and the Government of the day can revise, change or ignore them. If the Government ignores that advice but we think that things are getting serious, we might say a lot more. That is a bit awkward in one sense—albeit not for the first few taxes. If you are monitoring a whole batch of taxes, you do not want to make incendiary statements such as, “If you do that, you’ll be bankrupt by next week,” because that will precipitate a financial crisis. You need to have the means to explain, if need be—first privately and then in public—why it is important to adjust things. All those things require commission members to be independent.
That said, the real reason for that independence, apart from the one that you are thinking of, is that the effectiveness of the commission depends on—how shall I put it?
The perception that you have credibility?
Credibility—thank you. I was going to say having known intellectual standing, credibility and impartiality. I am not saying that for any personal reason—that is the case for genuine reasons. That is what gives the fiscal commission effectiveness. Short of that, it might give very good statements to which nobody pays any attention.
I have a final point to make before opening out the questioning to colleagues around the table.
Initially, there will be a budget of only £20,000. Is that sufficient? Will that budget have to grow if your remit grows?
I am not in a position to tell you what to do. In the initial phases, it is fine. However, in a year or a year and a half, as the full force of the Scotland Act 2012 comes on stream, we would probably need to open it up a bit.
All three of us—I say “us”, but I mean the three people—have other functions in life, and we do not have enough capacity to do a really large exercise if things become much more complicated. The important thing then would be to have a bit of budget that could be used to get some expertise from outside. That will be technical expertise, for example to run certain sorts of forecasts. We would specify some assumptions, the outside experts would turn the handle or switch the computer on, and we would then produce the interpretation and recommendations, such as they may be. Many fiscal policy councils work like that. They are relatively small and use outside help on the technical aspects. The budget will be important from that point of view and will expand at that stage. I can cost it for you but I will not do that right now.
Professor Hughes Hallett, I will ask about how you envisage the fiscal commission should operate. In your questionnaire, you say:
“The first step has already been taken: the Commission is accountable to the Scottish Parliament, not to the Scottish Government.”
You touched on that point in your opening remarks. Why is that important?
You go on to make an interesting point:
“The second step is the Commission should operate according to comparative advantage.”
You say a little bit more about that but, for the public record, will you say what you mean by that?
It is important that the commission is accountable to the Parliament rather than the Government. It is in the track record of fiscal councils elsewhere. Some of them are responsible to the particular Government but, of course, that allows the Government to put more pressure on them to take a particular line in the worst-case scenario.
For example, the Swedish one, which runs effectively, had a confrontation with the Government at one stage and won the argument. I know the people on it and would want to talk to them about their day-to-day experience. That instance is an important example of why the commission should be responsible to the Parliament rather than the Government. The Parliament represents the whole of Scotland whereas the Government may represent or get to represent a rather more narrowly focused agenda.
A fiscal commission cannot put the agenda on the Government—it must stay within the priorities that the Government sets as it is the elected Government—but, at the same time, it wants to be responsible for trying to carry out its responsibilities to the Parliament as a whole as best it can. If there is any difference of opinion, the opinion of the Parliament would matter rather than that of the particular Government.
I am afraid that “comparative advantage” is one of those phrases that I keep throwing out. When I got married, I had a long argument with my wife in which I argued that we should do it according to comparative advantage: I am better at earning the money; she is better at looking after the dogs. I mean the same in relation to the commission. There will be only three people involved, so it is important that they bring their own areas of expertise so that we can capitalise on them as best possible.
As I pointed out, one of the nominees is a modelling expert, I am the more general policy overview person and the chairman has specific experience of, and feel for, the business community and the financial markets, which is crucial, as it will be important in the commission’s assessments, in the responses of the business community and the financial markets to those assessments and, indeed, in explaining the assessments to them and to the population as a whole, although that is slightly more open.
That is why I talked about comparative advantage. In principle, the set-up captures that. That is sensible. If, in 10 years’ time, the thinking has expanded, the Parliament might want to look more closely at it and decide that it wants some other areas of expertise in the commission, but that is a long time ahead and I make no forecasts.
In your answer, you touched on engaging with other fiscal commissions. In your questionnaire, you say:
“It would be valuable to establish regular contact with”
such bodies. Why is that important and how could such regular contact be established?
I imagine that it will take place at a much more individual level in the sense that, because we know people in another commission, we can talk to them about how they operate and whether they have learned something about operating procedures from which we might benefit in the Scottish fiscal commission. We could also ask them about their assessment not of their domestic economies but of the outside conditions—the world conditions. If we were going into a financial crisis like that of 2008, I would particularly want to know what some of the other commissions were thinking and how they assessed it.
I had those sorts of contacts in mind when I wrote that. It is easy, because it is not a big world. We know people.
That implies informal contact. Do you envisage some sort of formal arrangement?
This is a personal opinion, so it might not be adopted, but the obvious formal contact would be to use some people from those other commissions for the review that I mentioned taking place every five or seven years. They would have no particular interest or axe to grind in a Scottish context, but they would nonetheless have experience of how such things run, and of what is successful and what is not. They would know how to interpret the remit, and they could ask whether the commission has done what it should have done. They may be able to make some recommendations for operating in a different way.
10:45At a formal level, that would be useful. It is a kind of accountability. The committee, or its successors, would obviously want to hold the commission to account, too, but you do not have the direct experience. You might find it useful to call in a couple of people to do that.
I have done such work, not for a fiscal commission but for the Dutch central bank. I was called in to review the way in which it operated and used its research, which was important in that case. The bank found an outside view to be very useful. That work was carried out at a formal level.
I was going to ask whether there was a precedent, but I suppose that you have answered that now.
That work did not involve a fiscal commission—we were talking about monetary policy—but the problems that the committee is considering are not a hundred miles apart from that.
Returning to question 3, on how you think the Scottish fiscal commission should operate, you state in point 4 of your response that
“as the financial crisis has made clear, fiscal deficits and difficulties often arise from pressures outside the fiscal arena”
and that you want the commission to have
“a watching brief over those factors”.
You also say that you want the commission to look at the OBR forecasts. Do you set great store by those forecasts?
That is a leading question.
It is, yes.
The OBR is better than it was. Does that answer the question? When the OBR started, it was a bit off the map. I do not have a track record of the OBR’s forecasts compared with the actual outturns—the OBR has been going for only three or four years. Obviously, the OBR will not be right, because all forecasts are by definition wrong. The question is by how much they are wrong, and whether there is a bias in them.
I know that the Treasury’s record prior to the OBR’s establishment was not stellar, which is why the OBR was created. It would be enormously helpful to know, privately, that the OBR is better than the Treasury was.
We can know some things. For example, the OBR made its first forecast for what it thought the revenues from the Scottish income tax would be; I refer to the publication that it produced in 2012. I know of only two such forecasts, and that was the first one. You can work out on a very simple basis what would need to go into the model to get those forecasts, and that implied that the OBR thought that the Scottish economy was going to grow 1 per cent faster than that of the rest of the UK. I would be delighted to see that, but I was not entirely convinced that that was reasonable. I must pass on making a judgment, because I am not really in a position to judge, but it is a good question and a good thing to look at—I might do so in my spare time at some point.
If the OBR is forecasting what is happening in the rest of the UK, it will have a lot of influence over what you would imagine will be the outcomes in Scotland and the revenues that are generated in Scotland. It is important to know that, but we cannot do anything about it. We might phone up and say, “Are you sure that number is the right one?”. That is one of the inputs, which goes slightly wider than the two taxes that we are talking about right now as an exercise for the commission.
If I want to annoy a public audience, I put up a little formula so that they cannot get away without any algebra. There is an identity that tells us that the savings investment gap must equal the sum of the fiscal gap, which is spending less revenues, and the current account on trade—exports minus imports. Those are two things at each end—the savings gap and the trade gap—that will have an impact on the fiscal position.
Keeping a watching brief means taking note of what we think is happening in that regard, because it will have an impact; there will not be a whole lot of impact as far as the landfill and stamp duty taxes are concerned, although perhaps there will be an effect on the stamp duty one because it will have an effect on interest rates. I imagine that that would be comparatively small.
On income taxes, however, we would want to worry about these things: the conditions in the financial markets and the foreign trade sector. In Scotland, of course, however small or otherwise the North Sea oil revenues are, they still exist. That will matter at a future date. It does not matter for the taxes that we will consider at the moment, but it will come up, so we want a watching brief on that.
When I say “watching brief”, I mean some understanding of what we would use to make the forecasts of revenues or changes in those sectors. It means not taking someone else’s forecasts to pieces, but having some understanding of how reliable the revenues are and what direction they are moving in. It is not for the commission to challenge that—except in some really bad circumstances, in which it might want to make some comment—but to know what we think we should expect from those pressures on the fiscal balance.
Given that there will be only three of you and a budget of £20,000, will it be possible for the fiscal commission to be more robust in its analysis, and therefore provide a better model, than the OBR?
Oh, I should like to think so. It would be difficult to do it in detail. It is comparatively simple to get pretty robust forecasts. The problem is—again, you will think that I am being facetious—to know whether they are right, which means that one has to examine things in a little bit more detail, look a bit deeper and challenge one’s own calculations, which, in the circumstances, would be fairly back-of-the-envelope calculations.
Some of the numbers that appear in my evidence for the next agenda item are not forecasts but back-of-the-envelope calculations. I reckon that they are probably pretty good but, to be really sure, I would need to go into greater detail. That is where the problem comes. That is why I said that, in more complicated circumstances, the commission might want to buy in some expertise from outside.
Question 5 in the questionnaire asks:
“Do you hold any other roles … which might give rise to or be perceived as being a potential conflict of interest”?
How do you deal with having a role on the Council of Economic Advisers, where you advise on a number of issues, including—according to the annual report—economic levers while, at the same time, having a scrutiny and challenge function on the application of at least some of those economic levers?
As I said in response to the convener’s question on the same matter, it is right and important that you should ask that question. I do not perceive any particular conflict of interest in the sense that, on the Council of Economic Advisers, we might discuss certain policy options in a general sense, but we do not set a policy. We do not say what tax rates should be. We do not even say that we should use one tax rather than another. We might say that it would be advantageous to consider the possibility of using a certain tax more generally.
The areas in which conflicts of interest might come up have not come up. That is the way that the council operates. The advice takes the form of asking whether the Government has thought about a particular approach rather than anything prescriptive or proactive, so I do not envisage there being a conflict.
Because the council is independent, it knows that it is independent and it is agreed that it is independent, the advice is given on a take-it-or-leave-it basis. We ask, for example, whether the Government has thought about the possibility of supporting research and development in the high-technology sector, which is one of the ones with which I was concerned. We do not say to the Government, “You must do it like this,” so it is not that we say definitively that, in our judgment, the Government must follow a particular policy.
We are independent and it is difficult to imagine how somebody who is independent can have a conflict of interests, because they would not then be independent. The council is not beholden to anybody, nor do I imagine the commission would be—anyway, I would not want to be.
As I said before, the fiscal commission does not and should not involve any policy advocacy either—that is separate. I regard the roles as much more complementary. Whether or not I am in the Council of Economic Advisers, somebody on the council needs to have the forecasts. If the advice is that there is a need to think about how taxes are unfolding because, if we go too far, they will get unsustainable, or something of that kind, the council needs to have an understanding of the forecasts that have gone into that. I would feel rather uncomfortable if there were not people on the Council of Economic Advisers who were able to provide that or who had that information with them.
It is not so much a conflict, in which the person concerned feels that they might have to say one thing at the council and another at the commission. It is sequential. That is what makes the roles complementary, and that is how I view them.
There have been cases—not in Scottish matters—where I have been involved in this kind of policy analysis framework, and where conflicts have arisen and someone’s independence has been challenged. The receiving party said that something must be changed—calculating the conversion factors for currencies going into the euro—and that led to a parting of the ways. If someone gets locked into a case where there is a conflict, they must decide which way they are going to go. Will they keep one role, keep the other or, possibly, not do either? I do not foresee that happening at all in this context, but that would be the outcome if it did.
In your role on the Council of Economic Advisers, have you ever advised the Government or discussed with it the setting up of the Scottish fiscal commission?
Yes. I refer to the paper outlining what fiscal commissions in the rest of the world do and what I thought the framework should be. It is up to the Government to accept it or not. That sounds like a take-it-or-leave-it basis. In this case—as I am here—the Government obviously took it.
It is like giving a sketch. I am sorry for being pedantic, but it is like asking a student what the problem is, how they would solve it and what the advantages are, and then asking them to provide an outline of how their solution might work. It is entirely up to the Government whether it likes it or not. The model that the Government had in mind is not exactly the same, as it turns out, but it is the Government’s prerogative to do that. I am saying how we might imagine the arrangements might work and I am providing a set of examples of how things work elsewhere. That provides a range of possibilities, and the Government chooses.
The word “conflict” suggests that there is an adversarial arrangement, but there is not. The arrangements are in evolution. That is how they work.
Can you see how there might be a perception of a conflict between somebody advising Government on economic levers and somebody having the challenge function on the application of those economic levers?
The fiscal commission can challenge the forecasts that are being used. It can say that if the work had been done properly, that would have produced different numbers, which should be taken into account, as opposed to saying that the policies that the Government plans to pursue are wrong for some reason and that it ought to be pursuing other ones. The commission will not ever do that. There is no role for policy advocacy; it is a matter of asking whether certain things have been thought about.
I do not find that to be conflicting with what the Council of Economic Advisers might say. It might say that, on the basis of a certain factor, there is a possibility that the economy will be damaged if a certain policy is pursued, so it could ask whether other possibilities had been considered. It is up to the Government to take that up or to reject it.
I will leave it there.
You say that the Council of Economic Advisers does not set policy, but were you not on the working group that came forward with the advice on monetary union?
There is a distinction between the policies and the framework, and this is a framework issue. I am talking about institutions and monetary arrangements, in that case. We are not in a position to say what the Government should adopt. We might say that, on the basis of the analysis that we or most other people would carry out, one option seems to be the most sensible one and that the Government should think about doing that. It is entirely up to the Government to take it or leave it.
11:00
I observe that your group is the primary source that is invoked when that policy is defended.
Right, but you have to read carefully what we say. I take Mr Brown’s point. Other people might think that we say other things.
I do not know whether you have seen Bill Jamieson’s rather long article about the issue this morning. He talks about the two roles as
“running with the hare and hunting with the hounds”,
which I suppose is another way of expressing Gavin Brown’s point. There are obviously significant concerns.
There is a perception there. You must be a little bit careful not to view this as Lenin would have done: that those who are not with us are against us. In the current atmosphere, that happens rather easily. My argument is not about hare and hounds; the roles are complementary. One uses information from the other; each is independent and uses it in the way that they think is best.
I certainly do not want to be compared to Lenin, which would not be very desirable.
It is not you—it is about the perception.
Your fundamental point was about functioning independence being more important than political or personal independence. You can see why people might be concerned about the latter as well as the former.
Sure. I do not want to underplay that. When I say that, I am doing it to emphasise the functional independence, as that is the unusual part in this context. In another case, the emphasis is on the personal and political aspects. It is not that they do not matter; it is just to make the point.
Is Bill Jamieson wrong to call you “a prominent SNP sympathiser”?
I take no view. I should make it clear on that particular issue. I anticipated that you might ask, and you have not done so, but you have got close to it. I take no view—I just consider the economics and I say what the logic says.
We will come to today’s main evidence session in a moment, but you would accept that your views are rather more aligned with the SNP’s views than with those of people who are opposed to independence.
I would accept the view that my views are a little bit more realistic than many others.
We shall pursue that further.
I am sure you will.
Is there anything else that you wish to say before we wind up this session?
No—that is fine with me at this stage.
11:02 Meeting suspended.