Let us get the show back on the road. We will now take evidence on the draft budget 2016-17 from the Scottish Fiscal Commission. We are joined by Lady Susan Rice and Professor Campbell Leith. Professor Andrew Hughes Hallett had hoped to join us from the USA by videoconference but unfortunately that is not possible due to technical issues, and Jim Johnston was unable to lend us his private jet to get the professor over here in time for the committee meeting. I welcome our witnesses to the meeting and I invite Lady Rice to make an opening statement.
Thank you very much for having us back so soon after our last visit to the committee. On behalf of the commission, I offer you all good wishes for the new year. I also offer Andrew Hughes Hallett’s apologies; he really wanted to be with us. I assure the committee that the three of us spent many hours on a phone call yesterday, so Campbell Leith and I are very current with Andrew’s thinking. As with the run-up to the writing and finalisation of the report, if there are questions that we think are in his area of expertise, we will let you know that he might be able to add something further.
Since we last met on 25 November, the commission has published its “Report on Draft Budget 2016-17”. We concluded that the forecasts were reasonable and made a number of recommendations. We note in particular that the forecasts are now being made on a five-year basis, which is good as it makes them consistent with other forecasts in the UK. In our eyes, it also perhaps adds some urgency to making some enhancements to the Scottish Government’s forecasting methodologies that would make them more suitable for that five-year time frame.
You will have seen that our report has evolved: it is longer and fuller in explanation and background, and it contains appendices showing not just our activities over the year but the minutes of our challenge meetings with the Scottish Government. We started producing those minutes in August when we had the resources to do so. As minutes of meetings should be, they are agreed by all participants. As I said, the report has evolved—it even has a cover and paragraph numbers. I say that tongue in cheek, but we expect it to continue to evolve over time.
Our way of working has also evolved, and we hope that that is apparent to some extent in the report. We value our engagement with the Finance Committee and we have taken steps, such as producing the minutes, to provide evidence of transparency and independence—two themes that have come up in our discussions with the committee over the past year.
We note that the Finance Committee has published its report on the Scottish Fiscal Commission Bill; clearly, once the bill is finalised, it will lead to further evolution of the commission over time.
In our report, we have made some promises for the future. We have promised to develop a protocol in the coming year on how we work and how we interact with the Scottish Government. We have begun some early thinking on that. We state that we will do our own analysis of the outturn numbers once we have a full year’s worth of outturn numbers for the devolved taxes. That is really important. We know that the Scottish Government will do that as well and clearly we will need to see where that takes us.
We also state that we will begin a programme of producing some technical papers and we are just starting to think about what they might comprise. We do not have any in the hopper at the moment so please do not look for them in a week or two, but they will come.
To conclude, I will state succinctly our key concerns in this year’s assessment and scrutiny of the Scottish Government’s forecasts.
On LBTT, we were pleased that, in looking at the tax for additional properties, the Scottish Government at least speculated and talked about behavioural factors. We think that those are important for all aspects of LBTT transactions, particularly given the five-year forecast time horizon. To our minds, it is increasingly urgent that the modelling for LBTT moves on and begins to incorporate appropriate behavioural factors.
There was discussion in the earlier evidence session about policy—today’s policy and tomorrow’s policy—and we are all keeping an eye on whether the Scottish Government’s policy on landfill is having the effect that it is expected to have. The landfill tax is an area of real focus.
Non-domestic rates income is Andrew Hughes Hallett’s key area of focus. As you will see in the report, we think that we have to bottom out the nature of the impact of buoyancy through the cycle—particularly what happens cyclically in terms of buoyancy. Once we have our arms around that, we can begin to pull in and look at wider and broader economic factors.
There is no real data on the additional properties tax. For that segment, we have very little to go on in Scotland, as we do not know a lot about who owns additional properties and how many they own. There is speculation about what the pool of properties might be, but some further work must be done in that area as well.
Finally, it is about outturns, which I just mentioned. We need to see what really happened in relation to previous forecasts.
Those are the areas of concern that we have expressed in the report. We have also expressed them verbally to the Scottish Government. We expect the Scottish Government to get back to us, as promised, with its views on our recommendations, outlining its plans and how it intends to react to those recommendations. We have stated in various fora, and I state again, that we believe that the Scottish Government will likely need to enhance its forecasting resources in order, for instance, to develop the LBTT model further. That is what we expect from the Scottish Government.
I invite the Finance Committee to give any feedback that it has on the report in addition to asking its questions.
Thank you very much, Lady Rice. Professor Leith, is there anything that you wish to add at this point?
No, thank you.
The report is excellent and comprehensive. It fulfils the transparency criteria because you have given great detail on all the meetings that you have had, with Scottish Government officials for example, and what was discussed at those meetings. Let us get into the report itself. I will open with some questions and my colleagues will come in subsequently.
I am intrigued by your statement in paragraph 1.21 that
“in the analysis of residential LBTT, the Commission proposed that the forecasters might benefit from a review of the work of Best and Kleven (2015), which examined the impact of property taxes on the timing, volume and price of housing transactions. In each case, the forecasters choose themselves whether or not to pursue these alternative approaches.”
You mention that again further on in the report. Would you like to tell us a wee bit about that? You have given us a wee bit of a teaser there.
There are two aspects to that. The first is the importance of the Best and Kleven work, which Campbell Leith is best equipped to speak to. The other is highlighted in the last sentence in that paragraph. In our conversations and our challenge meetings with the Scottish Government, we might propose that the Government should look at a particular instrument in a certain way or bring in work that has been done externally, but it will not necessarily agree to do that. All that we do is challenge the Government to do those things; it then makes a choice about whether or not to do them, and it addresses some of those choices in the appendix to its forecasting methodology paper. That is why that last sentence appears there.
On the value of the Best and Kleven work, I hand over to Campbell Leith.
11:15
The Best and Kleven paper is an academic paper that looks at the impact on the property market of changing property transaction taxes. It is one of a relatively small number of papers that look at that issue. When the Scottish Government was looking at the potential impacts of forestalling, we recommended that it look at that paper in depth and, using Scottish data, maybe try to replicate what the paper had done in order to assess the magnitude of forestalling and behavioural effects. We dipped into the academic literature, provided the Scottish Government with that resource and suggested that it might be worth looking at it to enhance its forecasting efforts.
Okay. Thank you for that.
Paragraph 3.5 of the report states:
“What drove the Commission’s initial concerns is that the current forecasting methods essentially amount to an extrapolation of historical data for house prices and transactions towards a long-run average.”
Paragraph 3.6 states:
“some kind of ongoing assessment of the sustainability of developments in the housing market would be a useful way of monitoring possible corrections to the market and the impact that would have on forecast revenues.”
Paragraph 3.7 states what Lady Rice emphasised in her opening statement, which is that
“the current approach contains no behavioural responses to changes in tax regime.”
That point is repeated in the report. Can you explain those comments in the report a bit more?
The current approach to forecasting residential LBTT revenues is essentially built up from a forecast for house prices and a forecast for transactions, which are then applied to a probability distribution that gives the probability that we will observe a transaction at a particular house value. The driving factors are prices and aggregate transactions. Prices are forecast using what is called an autoregressive integrated moving average—ARIMA—model, which is essentially a statistical approach that says that house prices next year will be a function of house prices in the past. It is a kind of statistical extrapolation of historical house-price growth. The transactions data is not modelled in a statistical way but is an extrapolation from more recent data towards the kind of long-term average that Robert Chote talked about earlier.
Both those approaches—the estimates of the ARIMA model and the fundamental approach of extrapolating transactions—essentially take historical data and move house-price growth and transactions towards their long-run averages. However, that would not capture the economy going into a boom, with house prices or transactions moving away from the long-term average; nor would it capture a boom or a bust in the housing market. The statistical evidence from the literature suggests also that it would not capture the transition from a boom to a bust—it would not capture the turning point where a housing market bubble was going to burst.
The literature suggests that we need a more multivariate approach that uses a range of variables, possibly with more theoretical grounding inherent in the modelling. That is incredibly difficult to do, but there are approaches out there that work in some instances, and we would encourage the Scottish Government to pursue those. They may work, but they may not.
Okay. Thank you for that.
In terms of non-domestic rates income, paragraph 5.4 of the SFC report states:
“In the forecasting of buoyancy for the 2015-16 Draft Budget, Scottish Government forecasters used a range of macroeconomic data to justify raising the buoyancy forecast above its historical average. The Commission discouraged this approach as no link between the macroeconomic variables and buoyancy had been formally demonstrated to justify the magnitude of the adjustment.”
The following paragraphs say more about buoyancy. Can you give us a bit more of your thinking on buoyancy and how the Scottish Government can improve, shall we say, its forecasting in that area?
Okay. Last year, the Scottish Government approached the issue of forecasting buoyancy by starting from the long-run average, then it looked at a range of economic indicators to see whether, for example, GDP growth was higher, unemployment was going down or business confidence was going up. If the Scottish Government believed that the economy was strengthening, it would shift the buoyancy forecast above its average; if it believed that the economy was not strengthening, it would shift the average down.
The problem that we had with that was that there was no formal assessment. I suppose that GDP growth has increased by 0.5 per cent but how does that 0.5 per cent translate into the deviation of buoyancy from its long-run average? Should buoyancy go up by 0.5 per cent as well? Should it go up by 1 per cent or less than that? There was no formal link between the two. Our position was that until that formal link was demonstrated, the adjustment was essentially ad hoc.
There was a limited span of data for buoyancy subsequently, so it was difficult to do any modelling work on buoyancy at all. We recommended that the Government try to obtain a longer historical series for buoyancy. It managed to obtain such a series and create a second proxy series from NDRI receipts, so we now have two historical data series for buoyancy.
If you look at those two series, you will see that there seems to be a cyclical pattern. Every time there is a revaluation cycle, there is a peak in buoyancy that slowly declines; then there is another revaluation year, buoyancy jumps back up again and then slowly declines. Given the way in which the buoyancy numbers are constructed, revaluation cycles should have no impact on buoyancy, so why that was the pattern is a bit of a puzzle.
Throughout the year, we have pushed the Scottish Government on the matter and explored with the Scottish Assessors Association why the pattern exists, given that, a priori, we are not quite sure why it should exist. They have come up with the story about the relationship between the revaluation cycle and what are called rolling revaluations. The idea is that the rateable value of a property can be appealed at any point in time if the nature of the property changes, but revaluations can be appealed only in the year in which they occur.
What tends to happen is that the rolling revaluations are resolved only when the revaluation appeals are resolved. That gives a mechanism for explaining the cyclical pattern. We have encouraged the Scottish Government to quantify whether it can reasonably explain the pattern, and we now believe that it can. We are looking for further work on that to strengthen our description of the cyclical pattern because only by controlling that can we extract the residual information from the series to assess to what extent buoyancy is affected by other economic variables such as GDP growth, unemployment and all the rest.
We are half way through a process of enhancing the description of the data to allow a more formal modelling of buoyancy in the future.
Thank you for that comprehensive answer.
I move on to the additional land and buildings transaction tax, which is new for 2016-17. Paragraph 7.1 of your report says that
“The proposed 3% slab tax is envisaged to be applied to additional residential property transactions in excess of £40,000”
and that there is an estimate of
“the revenues generated of between £45m-£75m”.
However, you also say that
“the transaction tax will effectively wipe out the return in the first year of a buy-to-let investment”,
for the reasons that you explain. You say that
“This will affect the price distribution for the first homes. At present, this is not in the forecasting model.”
In paragraph 7.9, you ultimately suggest a final revenue estimate for 2016-17 of between £17 million and £29 million. That is significantly different from what the Scottish Government predicts. Will you talk us through your thinking on that significant difference?
The figures are from the Scottish Government; we are talking through the various adjustments that the Government has made to the underlying forecast. There is the base forecast, which tries to identify the transactions that would fall under the tax if everything proceeded as it currently does. There are bits of information about the extent of buy-to-let mortgages, the number of purchases of such properties through the year and so on. They give rise to the first headline figure.
The Scottish Government has made various adjustments in an effort to reflect behavioural factors. This is one case in which it is trying to take account of behavioural impacts. A series of adjustments are made and the forecast is ultimately downgraded once those behavioural responses are taken account of. That is essentially what the note details.
That is fine.
In the section of your report entitled “Improving the Forecasting Process”, you say in paragraph 8.2:
“data limitations may place a constraint on the forecasters’ ability to apply more sophisticated methods.”
You go on to say:
“we are increasingly concerned about the residential LBTT forecasts which still assume no behavioural responses.”
There are two issues. The first is whether the availability of data has been improving. That issue has concerned the committee for a number of years. You mentioned the limited span of data on buoyancy for non-domestic rates income. Given that you think that there are issues with the availability of data, what areas should the Scottish Government focus on in improving data availability, where that is possible?
A number of improvements have been made in data availability through the years. For the buoyancy figures, we now have a longer historical time series, albeit that it is not tremendously long, and there are two versions of that time series. That is a clear improvement.
In addition, we are starting to get outcome data from the taxes, which helps us to assess the validity of the forecasts. There is also a new series from Her Majesty’s Revenue and Customs on property transactions in the non-residential sector in Scotland, which was not previously available. That has allowed us to undertake further evaluation of the validity of the underlying forecast. Therefore, data is coming on stream.
In some of our recommendations, we encourage the Scottish Government to look at more micro data on transactions, which should exist. We would like it to look at individual transactions so that it can get the distribution of transactions across the price range of properties. We believe that there are cases in which data exists, and we ask the Scottish Government forecasters to use that data. However, as always, there is never enough data. With any piece of data, the longer the run we can get, the better.
You would also like more emphasis on behavioural responses.
Yes.
I will add a footnote to what Campbell Leith said. There might be instances in which it is not possible to get data. For example, at the high end of property transactions in Scotland, the numbers are low enough that it might be possible, were HMRC to release the data, to identify taxpayers, properties and so forth. In looking at micro data, we might reach a point at which there are restrictions and limitations.
I will now open out the session. The first colleague to ask questions will be John Mason.
Thank you for your report, which makes good reading. I picked out a few things on my way through it. Lady Rice mentioned having a protocol. That is referred to in paragraph 1.24 on page 5 of the report, which says that the SFC’s scrutiny of the Scottish Government’s forecasts of receipts will be developed into a protocol. Will you explain what that means?
I am searching for the right word, which might not be a technical word. The purpose of the protocol is to respond to some conversations that we have had with the committee. You wanted people to feel that they understand how we operate. The protocol will build on the most recent year’s experience, which was much fuller and richer for us. It will describe how we interact with the Scottish Government, what we do, what our programme of work is during the year and how we go about doing those things. The idea of the protocol has been developed in response to some of what the committee helped us to focus on in past conversations.
That is helpful. There will probably be an agreement between the commission and the Government, but the protocol will give the commission’s angle on how it views its role.
The protocol will set out how we intend to do our work.
The way in which we develop the protocol will be contingent on the remit that we ultimately get from the Scottish Fiscal Commission Bill and the response to the committee’s report as the bill goes through Parliament.
11:30
I will come back to that later, but first I will turn to other specifics. Paragraph 3.5 on page 8 of the SFC’s report highlights concerns
“that the current forecasting methods”
are an
“extrapolation of historical data”.
It makes a point about whether,
“if the housing market was drifting away from its long-term average”,
that would be picked up in the forecasting.
I was interested to read that, and Mr Chote mentioned it in his evidence; I think that you were in the room at that point. There is a whole issue about whether we are on a long-term trend or returning to a long-term trend, whether a new trend is starting and how we know the difference. Will you explain your concerns?
The nuts and bolts of forecasting are about discerning what is going on and discerning whether something is a long-term trend or whether there are just cyclical components and random variations. One can use a host of techniques to identify what is going on with regard to specific variables. The approach that the Scottish Government is adopting to the housing market involves a straightforward extrapolation technique, which works well in normal times but would not capture instances in which a new trend was developing and we were moving away from what we had previously.
If a new trend is starting, surely it is impossible to predict.
There are techniques for identifying time variation in trends, so people can see that a historical trend no longer applies to the current data releases.
So it is a question of picking up a new trend once it has started.
It depends. In simple statistical models, techniques can be used that allow people to pick up new trends as they develop. The idea is that turning points are picked up quickly.
There is also more structural modelling, which says that, fundamentally, house prices should be driven by the earnings of the people who are buying the houses, the state of the economy and so on. That is a far bigger economic modelling exercise but, with such modelling, you might even be able to anticipate the turning point, which is the holy grail of forecasting. There are examples in the literature in which people claim that certain techniques can do that at certain points in time.
I remain slightly sceptical about whether you will ever get the holy grail.
The convener touched on an issue that is linked to that. Paragraph 3.23 on page 14 states that it
“remains unclear ... to what extent this is a temporary phenomenon”
and whether
“certain sections of the market will reduce activity in the longer-term.”
Again, there is the question of what is temporary and what is more permanent.
It has been mentioned that the private letting sector, or buy to let, is expanding. Is that the kind of longer-term change from which there might be an impact?
There are various factors—table 1 on page 10 of the report might help to frame the answer to that question. Table 1 contains evidence that we gave to the committee previously; it is based on the attempt to assess how well the outturn data mapped to the forecast. In the first couple of columns, the table allocates the forecast of £235 million for residential LBTT across months, given the seasonal variability that occurs in house prices and transactions. We then contrast that with the outturn data to get the size of the forecast error.
That is—or could be interpreted as—a measure of the forestalling that has gone on in that market. We were interested in seeing the extent to which the forecast error has tapered away as we have moved away from the date on which the tax was implemented. We have gathered an extra month of data since we constructed the table, which for the first time contains a negative forecast error, as more revenue was generated than was forecast.
We have the 3 per cent from the next tax change coming in, so I presume that forestalling for that is starting already.
Yes—it should be starting now, so it is not in the November numbers.
So the two areas of forestalling will interact with each other.
There is forestalling on top of forestalling. Yes. The interesting thing from the updated data in table 1 is that what we were concerned with before was that it looked as though forestalling was tapering away by August, but it seemed to bounce back again in September. The information for the two subsequent months of October and November that we now have seems to suggest that the forecast is back on track at that point. As an initial look, it looks as though the forestalling has bottomed out at around £30 million.
That is helpful. Thank you.
On headline forecasts, paragraph 3.31 on page 16 of the Scottish Fiscal Commission’s report talks about the
“unfortunate inconsistency in the way the Scottish Government and OBR report their residential LBTT forecast in the presence of forestalling effects”
and whether they are included in the headline forecasts. Is that important or just a presentational thing?
No. It is a very minor aside.
We will leave that then.
I think that the convener said that he understood the whole report, which is good, but I struggled with some words in it. Could you explain what paragraph 3.32 says? It talks about the
“simple univariate forecasting of house prices”.
I was not quite sure that I knew what “univariate” means.
There is univariate versus multivariate. Univariate forecasting involves taking the historical data for house prices and extrapolating forward to predict house prices; house prices are therefore the only variable that is used to forecast house prices. A multivariate approach would use house prices, interest rates, mortgage availability and all kinds of data to forecast house prices. One variable forecasts one variable in a univariate approach.
Is it fair to say that univariate forecasting is simplistic, or is that unfair?
It is simpler.
That is an indictment of the education system.
I am not sure that I understood another thing. Paragraph 3.39 on page 18 says:
“We regressed the natural logarithm”.
I vaguely remember logarithms at school, but I was toiling a little bit. Will you explain what you tried to do there? Are we saying that the question is whether, as the UK market changes, the Scottish market is changing in exactly the same way or in a slightly different way?
Yes. The Scottish Government used for its forecast the OBR’s forecasts for transactions in the non-residential market. I think that HMRC published data on the Scottish equivalent data in October. Therefore, we now have data for non-commercial property transactions for Scotland. Given that we now have those two data series, we can now look to see to what extent they move together and whether it is a good assumption to use the OBR forecasts in the Scottish forecasts for non-residential LBTT. We take the two data series for the UK data and the Scottish data and say, “Suppose the UK transactions go up by 1 per cent. What percentage increase in transactions in Scotland should we expect?” We should roughly expect a 1 per cent increase in Scotland, too. Therefore, using the UK data for Scotland in that instance does not seem like a bad thing to do.
That paragraph ends up saying:
“UK transactions can explain 89% or 87% of the variation in Scottish transactions”.
The next paragraph says that
“neither estimate is statistically significantly different from unity”,
so 87 and 89 per cent are not significant.
The difference from unity is the elasticity. We measure how much Scottish transactions change when UK transactions change by 1 per cent. The estimate is 0.94 in one case and 1.08 in the other, which are not statistically significantly different from one. Basically, when UK transactions go up by 1 per cent, Scottish transactions would be expected to go up by 1 per cent, as well.
That is helpful. Thank you.
Paragraph 7.10 on page 36 also mentions elasticity. You emphasise there that there is a huge amount of uncertainty around a 3 per cent LBTT, I think, as the closest example that we have is
“the Stamp Duty holiday of 2008”.
You seem to me to really emphasise the uncertainty. You then say:
“bearing these caveats in mind, we are prepared to endorse these forecasts as reasonable”.
That seems a little strange to me. You say that it is very uncertain. Are you just saying that it is impossible to know so anything is reasonable?
Yes. It is a bit like the Bank of England’s inflation forecast—I think that we have discussed it in the past—which has fan charts that have the bank’s central estimates and then the range of uncertainty, which widens as we push it forward in time. In essence, we are saying that the central estimate is reasonable but the uncertainty round about it is very large.
In paragraph 8.2 on page 37, you talk about the forecasting methodologies and the challenge meetings that you have had. I am impressed with the report. Some of the terminology is at the edges of my understanding, but I am glad that somebody other than the Finance Committee is challenging the forecasts, because the committee could not have done such work. That makes me ask whether, if you as the commission produced the forecasts, there is somebody who could have such challenge meetings with you. How would we handle that challenge function?
That is an absolutely pertinent question, particularly if that were to come out of the Scottish Fiscal Commission Bill in due course. As we have said before, we have a system in which the Government produces the official forecasts and the commission assesses them. If we were to produce the official forecasts—the forecasts with a capital F, as I said at our previous meeting—we would absolutely want them to be challenged and scrutinised by another body, as would you. For us to do that, Parliament might have to think about what that other body would be and whether a new body would need to be created to do it. It would cause great concern if the commission simply produced the official forecasts and that was it.
That is my point.
The deputy convener’s questioning was quite comprehensive, but I have a couple of additional questions. My first one touches on Professor Leith’s remarks about the holy grail of forecasting: the ability to predict boom and bust. If it were possible, would somebody not be doing it? How much would it become a self-fulfilling prophecy, particularly if you predict that a bubble will burst? If you say that, in year X, we think that the housing market bubble will burst, will it become a self-fulfilling prophecy because the markets react according to your prediction?
There is quite a large literature on all aspects of forecasting and that is just one of them. There are examples in that literature of people constructing models that, out of sample, are able to forecast key events. However, there is also a lot of evidence of models that looked good in the past but which, when a big change happened, missed it completely.
Forecasting is an imperfect science and there are many approaches. It is best to employ a range of approaches so that, if one of them rings alarm bells about a possible bubble in the housing market, we can look into it more deeply. If the other approaches are not ringing alarm bells, we try to reconcile them. The Bank of England employs a suite of models to forecast the economy, not just one, so I recommend that we use all the analytical tools that we have available to come at it from every angle.
How much does that add to the time that is required to undertake the forecasting and the challenge element of it? Would an additional cost in terms of human resource be required to undertake the more complicated forecasting that you described?
The last time we met, we discussed that in some detail. You would probably undertake the simpler forecasting methods on a day-to-day, year-to-year basis as the fundamental driver of the forecast and do deeper, more sophisticated, one-off pieces of analysis that help to identify the turning points or whether there are significant behavioural factors that you need to take account or do not need to take account of.
It is a kind of complementary approach whereby more fundamental, deeper economic analysis is undertaken to assess whether there are issues that really need to be taken account of in applying simpler, day-to-day forecasting techniques. That analysis may mean that you do not need to worry about the issue or it may flag it up as being important.
11:45
Let us set aside the convener’s caveat regarding the commission’s role and what its remit will be once the bill has been passed. On the basis of what is proposed in the bill, is that a function that the commission would carry out in its challenge role, or would the commission expect the Government itself to carry that out following challenge or to be challenged and probed by the commission thereafter? How do you see that function evolving?
At the moment, we have the possibility of producing our own technical working papers, and we have a number of projects under way that are looking at various issues—those would be our own pieces of research. Depending on what those pieces of research delivered, we would take them to the Scottish Government and say that the research had highlighted important issues that the Scottish Government’s forecasts, which it owned, should ideally take account of. It would then be up to the Scottish Government to decide whether to incorporate those extra pieces of analysis that we had produced independently.
Let us move on to the devolved taxes, specifically LBTT. We had a discussion about forestalling in which the deputy convener helpfully highlighted the slab tax that will, in the coming financial year, apply to second properties, which are generally but not always buy-to-let properties, and the potential for a forestalling effect in those properties beginning to emerge. I have two questions. First, you have mentioned that a longer-term analysis of LBTT transactions would be required to understand how much the figures were affected by forestalling and how much they were affected by deeper market changes or other external factors. How long a period would be required for that? Secondly, at what point would you be able to make a reasonable assumption of a forestalling impact in relation to the slab tax that is being introduced in the current financial year? At what point would we be able to look at the figures and say that the differences were the result of that and not something else?
Table 1, to which I referred earlier, is a first-pass attempt to see whether forestalling has come to an end. By looking through the forecast errors, we see that there were large differences immediately after the introduction of the tax, although they have now tapered away. As a first pass, that gives us some confidence that, by November, the forestalling effects will have come to a close. However, we will want to look at that more deeply. We will try to look at the micro-data and the distribution of individual transactions to assess whether, maybe at the top of the market, there is still an on-going forestalling effect that is being compensated for by some other part of the distribution that is driving the figures.
We have some initial evidence and we will look at the issue more deeply. It could be that, by this point, we should be able to pull together the necessary data to reach that conclusion.
Does the fact that there are no Scottish stamp duty figures for any period prior to the current financial year hamper some of that effort?
It hampers our ability to look at the mirror image of the forestalling, which is the transactions that were brought forward. We present some evidence—it is anecdotal, to some extent—of what happened before, which is based on the evidence that we provided to the committee at the previous meeting that we attended, but it is not comparable in quality with the data that we have post the introduction of the tax.
My second question was about the impact of forestalling until the following financial year relating to properties that will be subject to the slab tax after the commencement of the next financial year. They will not be easily identifiable because they will not be paying that tax, so you will not be able to disaggregate them on that basis. If we see a spike in one or more months, how easy will it be to point at it and say that it is a result of forestalling rather than some other market impact?
It would be extremely difficult to disentangle. We will probably have to wait until the tax has been introduced and then see how the revenue figures for it evolve over time.
We will probably need to look at more than one fiscal year and see what patterns arise. Embedded in forestalling is a conundrum, because we will never really know who has changed their mind and not gone in for a transaction because of the change in tax.
I guess that the question is about the variability. You said that we will need to look at more than one fiscal year, and I think that that is what I was driving at. At what point will we legitimately be able to say that we have enough data to be able to assess the impact of the LBTT rates, taking into account forestalling effects et cetera versus any other impacts that might be in play?
We can take the forecast of what the new measure will deliver pre and post-forestalling and see whether the outturn data matches the post-forestalling figures. Essentially, however, our assessment will be contingent on both the underlying forecast and the estimate of the forestalling being right, so it is difficult to disentangle.
Thank you.
Good morning. Right at the end of the formal part of the report, you conclude:
“On the whole, the Commission found these forecasts, within the constraints of the available data, to be reasonable.”
Just for clarity, are you saying that the forecasts are reasonable for the financial year 2016-17 or that they are reasonable for the whole of the forecast period?
We are saying that they are reasonable for the whole of the forecast period, but we emphasise that the error bands around them widen as we move forward in time.
But they are reasonable for the whole period and not just for 2016-17.
Yes.
Yes. The forecast embodies the five years.
Thank you. I just wanted to be clear about that.
Moving on to LBTT, I do not have any questions about the non-residential model. I concur with the convener; I quite like what you have done with the reverse logarithm and so on, which leads me to have no questions on that area. I have questions on the residential model, though, as you might expect.
The Scottish Government forecast for the next financial year for residential ignores the transaction supplement—it ignores the additional tax. Outside of that, its forecast for residential transactions for the next financial year is £295 million, which you think is reasonable. I would like to get a sense of what you believe would be unreasonable, at both the upper and lower ends. You might not have exact numbers, but where would we begin to get into unreasonable territory?
Shall I go first?
Yes. It might be that we are going to say the same thing.
A large part of what I would define as reasonable is contingent on the method that is used to generate the forecast. I have gone into the spreadsheet that details all the underpinning assumptions and the technical modelling aspects that underpin the forecast. When I go through those assumptions and look at the way the modelling works, I am looking for things where I say, “That is obviously inconsistent with the data,” “That’s a bad assumption to make,” or, “I don’t believe that assumption”—things that lead me to believe that the forecast is not reasonable.
Scrutiny meetings are about going through the method in lots of detail and giving tough challenges—“Why are you doing it this way? Does the data not suggest that you should be doing it that way? Justify why it is done this way. Give us the evidence that explains why it is done this way.” That is what underpins our decisions about reasonableness.
It is an important question because people should not assume that we are looking at the output numbers and saying, “That is the right number and that is the wrong number; that is better and that is worse.” We are not looking at the outputs; we are looking at the inputs. It is an important distinction to make.
We are making our judgments on the inputs. We are asking, “What is the basis for those numbers? What are the factors, and therefore what are the numbers and the time series—whatever they are—that are going into each of those forecasting models?” However, we are not then saying, “We think that that number is the right number.” We are not making that judgment.
You are not coming down on a right number, but I want to go back to the comparison with the Bank of England fan charts that Professor Leith mentioned earlier. I am pleased to hear that you are playing about with the model and you are looking at all the assumptions—that is what I would hope for and expect. However, in doing all that, can you not then get a sense of what an unreasonable number would be, at a higher or a lower end, or is that simply impossible?
It is about the methodologies. If the forecasters failed to include some important factors when they ran their model, we would likely say that the model was unreasonable because they were not giving us enough evidence to say that it was legitimate. The number is just the output of the sausage machine, if you will; we are looking at what goes in.
Maybe I can give another example that goes back to last year’s report. As I think we have already discussed, when buoyancy was being forecast last year, the long-run average was taken and then an adjustment was made that depended on the forecasters’ view of the general state of the economy, but the measure of the state of the economy was not formally linked to the adjustment to buoyancy.
The adjustment that was made pushed the increase in buoyancy to the level at which it would have been one of the largest increases in buoyancy we would have seen in the limited span of data that we had. I think that we described that as being very optimistic; it was on the cusp of becoming unreasonable. If it had been pushed any further, we would have reached a limit, at which point we would have said, “No, that is just unacceptable.”
I have read through all the comments that you made about residential LBTT revenue. You set out a number of areas for development and a number of concerns; let us take them all together.
First, you think that there should be a multivariate approach. Next, you think that there should be an examination of the distributional changes. You then say that you are “increasingly concerned” that there is no behavioural analysis whatsoever in relation to the primary part of LBTT. You also raise some questions about £188 million out of the £545 million forecast revenue coming purely from fiscal drag.
There are four concerns there and two of them seem quite major. How can you then sign off the residential LBTT forecast as reasonable despite all those concerns and given that you have used the term “increasingly concerned”?
Our concern is that, in terms of economic theory, we would expect there to be a behavioural response to relatively high tax rates and, given the fiscal drag effects that we document, more and more transactions are being pushed into that part of the distribution.
The issue is that we do not quite know how big those effects are. Are they significant? Are they small? Are they something that we really need to worry about, or are we worrying about nothing? Currently, there is not enough evidence to tip us into saying that the forecasts are unreasonable. We do however wish to look at this area and gather the evidence so that we can then say either, “Those forecasts really need to take account of that factor” or, “It is not as big a deal as we thought.”
I asked whether those concerns were pushing you towards saying that the forecast was unreasonable because of what I read in the Scottish Government’s devolved taxes forecasting methodology paper. When it looks at the supplementary charge on LBTT—the bit that was announced at the budget—it covers behavioural impact. It accepts entirely that there will be a behavioural impact.
The Scottish Government projection is that it will collect £23 million next year from the supplementary part of the tax. It reckons that behavioural impact has affected that £23 million by between £8 million and £13 million, which is quite a huge slice. If that £23 million has been affected by that much, what sort of effect could there be on £295 million? If the change is of a similar magnitude—that is a big “if”—but you are assuming no behavioural impact, those forecasts would be unreasonable.
What needs to happen on behavioural impact? From what I can see, you mentioned it to the Government at every meeting you had with it last year. You are now using phrases such as “increasingly concerned”, but it is still assuming that there will be no behavioural impact. At what point does that become unreasonable?
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On the additional measure, one would probably expect behavioural effects to be far stronger in a very specific segment of the market than one would in the market as a whole. They are slightly separate bits of the market.
We hope that the Scottish Government will tell us how it plans to respond to our recommendations.
I will move on to non-domestic rates. I appreciate that that is Professor Hughes Hallett’s specialism, so he may wish add his comments in future.
From what I can see we are only getting a one-year forecast for non-domestic rates. Is that correct, or have I missed something?
We evaluated a five-year buoyancy forecast that takes account of the cyclical pattern that I discussed earlier. We looked at the full five-year—
That is the buoyancy, but this is a question of clarity about the actual numbers. I can only see one year’s worth of numbers in the budget. Have you seen five years’ worth of numbers?
Our remit tells to focus on buoyancy, so that is what we have been evaluating. I am not sure whether or not we saw the revenue implications of those forecasts; I cannot remember, to be honest.
I appreciate that your remit is different. I was just wondering whether I had missed the figures somewhere. Maybe I did not, if that is the case.
Your remit is to look at buoyancy, so it is harder for you to comment on the numbers, but let us look at patterns. In the budget, the forecast for non-domestic rates is about £30 million lower for the next financial year—2016-17—than it was for 2015-16. You do not look at the exact numbers, but given that the economy is growing, and that there are projected increases for the other taxes that you looked at, does it not strike you as unusual that non-domestic rates income in cash terms is projected to be lower in the next financial year? Did you discuss that with the Government?
The reason for that is the very cyclical pattern that I discussed earlier. In previous years, no adjustment was made for the cyclical pattern, because the data span was not long enough for us to identify it. Now that we have found it to exist, the Scottish Government has adjusted its buoyancy forecast—and therefore the non-domestic rates income forecast—to account for it. Given where we are in the revaluation cycle, one would expect the revenues to reduce.
That might have reduced the figure against the initial forecast. Are you saying that that buoyancy change could, in effect, be bigger than economic growth, and therefore we would collect less in cash terms?
The buoyancy forecast does not take account of economic growth, which is another issue that we have discussed. Previously, we were adjusting it in an ad hoc fashion, based on broad-brush evidence on the state of the economy. In our report we are asking Scottish Government forecasters, once we have controlled for the cyclical pattern, to squeeze whatever information is in that data series and relate it to the economic determinants for buoyancy, to take account of those factors.
When the cabinet secretary gave his statement to Parliament on the budget, he said that he was increasing the large business supplement of non-domestic rates and said that he thought that that would bring in an additional £130 million—I think that I wrote it down correctly when he said it. Were you asked to think about that, or was it outwith your remit?
It was outwith our remit.
Okay, thank you.
In paragraph 1.21 on page 4, you discuss the challenging meetings that you have. Am I right in assuming that it is you who has those meetings?
Yes.
Going back to the relationship that you have with the Scottish Government, and your independence, will that change over time, in relation to staff and so on?
At the moment, the Scottish Fiscal Commission is present along with two part-time research assistants, who attend the meetings largely in an observational capacity.
They also take away some work assignments.
The information that they gather about the discussions can inform the work that they do.
In the two meetings that we have had with the cabinet secretary during which this matter has been dealt with, he has been adamant that he will accept whatever changes the SFC proposes to the budget or the outcomes that are being forecast. Is it your understanding that, provided that your suggestions are reasonable, they will be accepted and presented by the Scottish Government?
From our reading of the Official Reports of those meetings, we understand that the cabinet secretary will want to go to Parliament with a draft budget only when the budget is seen to be reasonable. My interpretation of that is that he would not bring to Parliament a budget that is not seen to be sensible, because that would not make any sense. That is how I understand his thinking; I may or may not be correct.
We are not advising or guiding; we are not doing the other kind of work. All we can do is ask for evidence for why certain numbers have been included and why a particular instrument has been approached in a certain way and not in another, or ask whether the Government can consider a certain thing and come back and tell us whether it has made any difference.
At some point, we will decide that the Government has provided adequate evidence and has followed its model and so on, which will allow us to make a judgment about reasonableness. For example, a forecast might be judged to be reasonable one year and be kept for the next year, but a major policy change might knock it out of that reasonable space. We would have to speak about that and challenge the Government. That is what we do. We do not say, at the end of the day, “These are the right numbers.” There is a difference between the input numbers and the output numbers.
I should perhaps also emphasise that in the series of challenge or scrutiny meetings with the Scottish Government forecasters, at no point do we say, “That’s it. You’ve done enough to get a gold star and now everything will be judged as being reasonable.” We are critical all the way through and we write our report after the final forecasts come out.
As I think that I said earlier, we do not come to a point of agreement with the forecasters: we do not say, “Fine—we’ll sign off on this.” We continue simply to challenge and, at the end of the day, they create the forecast.
You mentioned that you do not come to the challenge meetings with new ideas; you simply react to information that you are given. However, earlier, Professor Leith told Mark McDonald that there are a number of issues that you have been working on and do not know whether the Government would accept them. My next question relates to that point. The biggest change that is coming down the line is the outcome of the Smith commission, and eventually we will have a referendum on Europe. How are those issues dealt with in your thinking in relation to Government thinking?
There are two parts to that question. First, I do not recollect saying that we bring nothing new to the table. The Best and Kleven paper, which we have discussed as an example, was something new that we brought in, and a lot of the challenge is new to the conversation, so I am not sure what I meant, at that point. Of course we bring in new things. That is the nature of challenge: we are looking for areas that may not have been addressed or thought about. Sometimes the challenge is to ask people to explain to us what their thinking is and what goes into it. That is one aspect.
On the second part of your question—I will give Campbell Leith more time to think about his response—we have been quite careful to look closely at what might happen in the future, but we have the present to consider and we have a remit right now, the exigencies of which we need to meet now. We cannot start developing a report that speculates about what legislation will mean or what the outcome of the Smith proposals will give to us. We know that there will be changes, and we are starting to plan for those and think about them, but that is separate from the job that we have to do today. We felt that it was important to focus on what Parliament expects from us and to do that as well as we can, and not to conflate two different aspects.
Your implication is correct that there is a lot of change to come and that we need to be on top of that.
Is that something that you can do independently, or would you be asked to do it? I suspect that a lot of people will want to know what the financial and economic implications will be for Scotland of being in or out of Europe, given the arguments that have been made. Would the Scottish Government charge you with looking at that?
I doubt it, but—
Assessing the costs and benefits of leaving Europe would be outside our current remit. Speaking personally, given the position that I now have in the Scottish Fiscal Commission, I have my own wide research agenda in which I am undertaking a number of projects that directly relate to what we anticipate is coming down the line. With colleagues at the University of Durham and a PhD student in Glasgow, we are starting work on building a macroeconometric model for Scotland. We are looking at dynamic Laffer curves and how variations in tax rates affect revenues, and are considering those calculations with regard to Scotland. With another colleague and another PhD student, we are carrying out a big data analysis of newspaper articles in order to build uncertainty indices for Scotland vis-à-vis the rest of the UK, and things such as that. There is a whole bunch of projects under way that will, I hope, be of use to our future scrutiny work.
There may be other projects, as well, because the academic community is probably only the first place that one might look for some of those answers.
I want to start where Gavin Brown left off, because I am curious about your response regarding when “reasonable” becomes “unreasonable”. I absolutely accept the distinction between the figures and the method by which this is all assessed.
I enjoyed reading your reports from both last year and this year. You are consistent in asking for data on behavioural responses for residential LBTT. In fact, your recommendation in this year’s report is framed in slightly stronger language. I do not know whether that implies frustration that you have not received the data yet, but I am curious to know when you will consider that you have given the Scottish Government enough time to respond to that recommendation.
As you describe, we can all recognise the issue of behavioural responses arising from LBTT and the issue of forestalling, which the OBR assessed. We are now going to get an additional behavioural response from the additional LBTT. It seems as if we have just stuck our finger in the wind to assess that. I am curious to know when you will become increasingly impatient.
I think—and I think that the forecasters would concur—that we have been more impatient this year than we were in the previous year. In the forecasting methodology paper, which the Government submitted to the committee, annexe 1 talks about the recommendations that we made for the 2015-16 draft budget and the Government’s response to them. The Government knows, and we know, that there has not been much response, and we have had discussions about that. The Government knows that we see the behavioural factors in particular as important—especially now that we have a five-year forecast horizon. That is what creates the urgency. The issue is not that we are getting impatient with others on a personal level; it is that the forecasts are now not for two years but for five and so we need better texture in what comes out. We hope to see changes in the next round.
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Professor Leith used the same language, in that he talked about hope. Do you have more than hope? You are right that that document does not tell us much about what the Government is doing on the issue. In fact, there is no mention of behaviour in the list of actions that are being taken on residential LBTT. I am curious as to when you will get beyond hope.
It is up to the Scottish Government to respond. To add to what Susan Rice said, as our remit becomes clearer and as our resources come on stream, we will start to do the analysis ourselves. If we think that the issue is important, we will look at it.
If, in our judgment, the issue turns out to be important, that will be a major challenge, and it will become more urgent, because we will have the evidence.
That is helpful to know.
It is extremely helpful to have the minutes of your meetings with the forecasters, as they describe some of the discussions. However, I am less than clear about one issue. In August, you asked for something quite specific on LBTT in relation to seasonality, and in September you repeated the request. There is nothing in the November minute that indicates that you got that, although I assume that you did. For the sake of clarity, and for somebody who was not present at the meetings but who is just reading the minutes, could that be recorded in some way?
Perhaps we could provide a list of action points and when they were resolved.
We could certainly try to do that.
I take it that you got that information.
Yes.
That is good.
Your report includes a helpful comparison between OBR and Scottish Government forecasts on residential and non-residential LBTT. Although Mr Chote—diplomatically—did not want to comment on whether his forecasting is better, I note that the OBR’s forecast for 2016-17 is considerably lower than the Scottish Government’s. There is a substantial difference of £42 million in the residential forecasts. Is there an explanation for that?
One reason is that the OBR incorporated more of the recent outturn data on residential and non-residential LBTT than the Scottish Government did. Another point is that the Scottish Government smoothes the past few years of non-residential transactions in formulating the base on which it projects forwards, because there is variability from year to year in the non-residential market, and that smoothing tends to reduce things. However, as Robert Chote indicated, the differences are not statistically significant. Given the uncertainties that are attached to the forecasts, they are much of a muchness.
I know, but when I think about having to forego £42 million from the budget, that is quite significant in monetary terms.
Yes, but statistically speaking, it is not.
You said that the OBR included outturn data. Is that not key in measuring what is likely to happen?
There are different approaches. We are talking about the part-year outturn data. For the landfill tax, the Scottish Government forecasters used the two quarters of data that we have on landfill as the base on which the forecast is pushed forward.
For the LBTT forecasts, the forecasters used the last complete year of outturn data and not the part-year data that we discussed previously. We have recommended that, particularly in a year such as this one when a large part of the outturn data has been revealed, it might be useful to update the forecast.
I was not quite sure where Gavin Brown got some of his figures on additional LBTT from. At the top of page 11 of the forecasting methodology paper, the Scottish Government’s forecast for revenue, which does not take account of behavioural change or forestalling, is in a range of £45 million to £70 million. Those are the Scottish Government’s starting figures. The fact that the forecast has now dropped to a range of £17 million to £29 million is of considerable concern. I accept all the analysis that the Government has done to get there, but I wonder whether the budget includes the lower or the higher figure for the revenue that will be generated.
The lower figure is the ultimate forecast.
We will find the £17 million to £29 million estimate in the budget, not the £45 million to £70 million estimate.
That is my understanding.
I have two more points, but I will be quick, convener. The first is on non-domestic rates. Paragraph 5.14 of the SFC report says that it is not your job to report on the scale of the forecast errors. Out of curiosity, I ask how big those errors are.
They are relatively small. Buoyancy is essentially a forecast of the increase in the stock of rateable value properties. Revenue is generated by the stock, not that increase. Pretty bad forecasts can be made of the increase, but the stock is fairly constant, so the revenue forecast error is usually relatively small.
It is helpful to understand what you meant.
I heard what you said about revaluation appeals happening at the beginning of a revaluation process, but is it not the case that when a person buys a property, they have six months in which to ask for a revaluation? Therefore, throughout the year and not just at key points, revaluations could occur—that would depend on the number of house sales.
The revaluation data to which we had access suggested that those effects were relatively small but that the revaluation cycle was a great deal more significant.
Finally, the Scottish rate of income tax is tantalisingly mentioned under discussions on paper 6 in the minutes of your 23 September 2015 meeting, at page 57 of the SFC report. The SRIT is not mentioned at all in your report other than in those minutes. I am curious. What do you see the commission’s role to be, given that the OBR carries out a lot of the assessment?
We will have a role. In early 2015, we were given briefing on the nature of the Scottish rate of income tax; we have also joined challenge meetings hosted by the OBR at which the issue has been discussed. Therefore, we have spent time on the tax in the past year when we could and we have become more familiar with it.
Our current job is to scrutinise or assess forecasts that the Scottish Government makes. If the Scottish Government produces a forecast on SRIT, we will have a role in relation to that forecast.
I thank members of the Fiscal Commission for their report. I will cover one area: the capacity for the models that have been developed to take account of variations in regional economies, so I will be quite parochial. Lady Rice knows well the north-east economy, which is going through a particularly tough time that is different from the position of the rest of the economy. I imagine that that will have a particular impact on LBTT, for example. Given that major difference in what is quite a big economy—it has an impact across the country—to what extent can the models take account of that scenario?
The current forecasting models do not provide a regional breakdown at all.
Last year, the committee had evidence that the Aberdeen housing market will not return to its 2015 position for another five years. We also heard about the massive impact on non-residential property. If that comes through in the outturn figures for the current year, will it be possible to factor the impact into future models? You will have to tell me whether this is right, but that could have a significant impact on future forecasts, could it not?
The current forecasting approach employs a distributional model of housing transactions across the various price bands for the whole of Scotland. A similar distribution could be constructed for a particular region that it was thought was going to behave differently from the national average and was going through significant changes, and one could be subtracted from the other in producing the forecast. There are ways of incorporating such regional effects if they are felt to be important.
The current forecast does not take account of what is happening in the north-east’s economy.
No.
I find that quite surprising, because we know what is happening and there is evidence about the drop in the number of transactions. I would feel quite surprised if that had no effect on the numbers for next year.
I appreciate that point; perhaps we could take it away for consideration. A related point is that additional properties, particularly in the buy-to-let market, are big in the north-east, so we need to think about the new tax from that perspective. We will take that away.
That concludes questions from committee members but I have some more to ask just to finish of the session.
In answer to Jackie Baillie’s question, you talked about outturn data and the fact that the 2015-16 data does not feed into the forecast for LBTT, although it does for the forecast for landfill tax. I think that you said that the issue appears in your report, but I do not see anything in the report to explain why that happens.
It is a choice on the part of the Scottish Government forecasters, but we recommend in our report that, perhaps particularly in years in which a significant span of outturn data exists for the year, it is factored into the forecast.
Good. You clearly agree that it should be factored in. That was the one thing that I wanted you to clarify.
Recommendation 2 in the annex to the methodology document says:
“The Scottish Government has investigated developing alternative models for forecasting house prices and transactions volumes. Examination of the requirements to develop new techniques suggests that it would take a significant period for SG economists to produce output to a sufficiently robust quality standard. As such, the view was taken that forecasts using these methodologies could not be utilised within this Budget cycle with any degree of assurance. There is the potential to develop such methodologies over the longer term, with a view to utilising these in a future forecasting cycle.”
What sort of time period are we talking about? It is not of concern that it would take a
“significant period ... to produce output to a sufficiently robust quality standard”?
That is the Scottish Government’s response to us pushing it on the issue. It says that we could look at it, but it would take a while to develop and build the expertise in-house—which seems to be a word that is missing—in order to do that. The Government could give you a sense of the timeframe.
In my opening remarks, I suggested that one of our concerns is that the Government needs to enhance its forecasting capability.
Are you not concerned that there is no timescale for producing such an output to the “sufficiently robust quality standard” that the recommendation suggests?
Yes. Of course we have only just seen the document so we have not had any further discussion with the forecasters about what they mean.
How soon would you want to be able to see that work? How soon would it be practical to achieve it?
Whether research works out the way that you hope it will work out is always hit or miss.
It is just that the response looks to be saying, “How long is a piece of string?”
The initial round of modelling that we are looking for should not take years and years.
We would like work on it to start. That is the most important thing.
Yes. The Government needs to acknowledge that there is an issue. I understand that, but it is one thing to acknowledge something and another to actually deal with it.
I have a final supplementary on your point, convener. I am not quite sure whether I got this right. Lady Rice, did you say that you have only just seen the response to your recommendations from last year’s report?
We have only just seen the table in the document, but we have discussed the issue in our meetings.
I make the observation that it might have been much more useful if you had seen the response much earlier and had been able to challenge it. After all, it relates to last year’s report.
But we have had those discussions in our challenge meetings—they have taken place. What you are referring to is the forecasters’ summary of their position.
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I have a few more questions to finish with.
Table 5 of the Scottish Government’s methodology paper shows non-residential LBTT revenue rising by £10 million annually between 2016-17 and 2020-21, yet there has been a £74 million increase in the forecast in one year. Do you know why that is?
Are you asking why the revenues in one category increase more dramatically than those in the other?
My point is that the figures do not seem to add up.
The reason for the differential in the trends is that the forecasts for the residential transactions are based on the probability distribution model, whereby as prices rise, more and more houses are pushed into higher tax bands. The figures assume that the Government will obtain the revenues from that.
The non-residential forecasts over the five-year period take the original tax base and raise it by revenue and prices without factoring in any of the fiscal drag that dominates the residential forecasts.
I know. It just seems a bit odd that there has been a £74 million increase in the forecast in one year, yet the methodology paper indicates that there will be only a £10 million rise. The two figures just do not seem to add up.
I am not sure which two figures you are referring to.
Where does the £74 million come from?
There has been an increase in the forecast between 2015-16 and 2016-17 of £74 million, but table 5 of the Scottish Government’s methodology paper shows non-residential LBTT revenue rising by only £10 million annually.
So you are talking about the jump from last year’s budget forecast to this year’s budget forecast.
Yes—it seems as if there has been a huge leap.
I am sorry; I misunderstood what you were asking about.
What the Scottish Government did for non-residential revenue was smooth the tax base for three years of outturn data before beginning the forecast, but it did not take account of the fact that we would expect prices to rise over that period. Therefore, when it did that smoothing, it was not really aggregating like with like. That would impart a downward bias to the forecast. The Government has removed that downward bias in the new forecast. In addition, prices and transactions are a bit higher than the Government anticipated when it did the original forecasts. The combination of those two things resulted in the increase in the forecast.
That is very clear—thank you.
In your report on the 2015-16 draft budget, in relation to non-residential LBTT, you recommended the development of new data sources as a high priority. Since then, HMRC has begun to publish data on commercial property transactions in Scotland. Does the existence of that new data mean that we can now develop a Scottish model rather than having to rely on UK-level transactions for the non-residential forecast?
Yes. There is a reasonable span of data, so it would be possible to start to do some fairly straightforward modelling work based on Scottish transactions instead of using UK transactions. That is one of the recommendations in our report.
We would recommend that.
That is great—thank you very much.
Are there any further points that you would like to make?
No; I think that we have covered everything.
Thank you very much for your contributions.
We agreed earlier to move into private session at this point, so I will allow members of the public, our witnesses and the official reporters to leave.
12:34 Meeting continued in private until 12:36.Previous
United Kingdom Spending Review