Agenda item 2 is evidence taking from Scottish Government officials on the Scottish Fiscal Commission Bill. I welcome to the meeting Alison Cumming, Sean Neill and John St Clair and invite Mr Neill to make a short opening statement.
Thank you for the opportunity to make a short opening statement on the Scottish Fiscal Commission Bill.
The bill is a culmination of around two years of work, including two inquiries conducted by the committee and a Government consultation. It gives the Scottish Fiscal Commission a basis in statute, which safeguards its structural and operational independence, and it formalises the commission’s role in scrutinising the operation of Scotland’s devolved fiscal framework. The Scottish Government has always intended the commission to have a legislative underpinning, and it committed to bringing forward legislative proposals in the 2014-15 programme for government.
As the committee is aware, we published a consultation on a draft bill in March 2015. We have worked carefully over the summer to refine our legislative proposals, reflecting on responses to our consultation, the evidence gathered by the committee and international best practice, including the work of the Organisation for Economic Co-operation and Development and the International Monetary Fund. The bill that has been introduced to Parliament reflects a number of policy changes that we consider further strengthen the commission’s independence and which I am sure we will discuss further today.
The most significant change is the removal of the requirement for the commission to
“prepare other reports on fiscal matters as Ministers may from time to time require”.
Such a power could appear at odds with our policy intention to create a commission that is structurally, operationally and visibly independent of Government, and the bill now allows the commission to prepare such reports on
“other fiscal factors ... as it considers appropriate.”
Importantly, the commission’s remit as set out in the bill is designed to reflect and be proportionate to the fiscal powers that are devolved to the Scottish Parliament under the Scotland Act 2012. The commission’s core function is to report to the Parliament and the public on the tax estimates, prepared by Scottish ministers, that underpin the Scottish draft budget. As such, the work of the commission is central to the integrity of the Scottish budget process.
The bill is also designed to provide flexibility to amend the commission’s remit in the future to reflect any expansion in the Scottish Parliament’s fiscal powers, including those contained in the Scotland Bill that is currently proceeding through Westminster. We need to future proof the bill to ensure that the commission’s functions adequately address any new settlement without recourse to primary legislation. The financial memorandum accompanying the bill demonstrates that the Scottish Government is committed to providing the commission with sufficient and appropriate resources to discharge its functions and to provide effective and robust scrutiny of the fiscal estimates that underpin the Scottish budget.
The Government has found the work that the committee has undertaken to date on the creation of the Scottish Fiscal Commission to be very helpful in informing the development of our legislative proposals. We look forward to considering and reflecting on the further evidence that the committee will gather at stage 1 of the bill process and to discussing our legislative proposals with you this morning.
Thank you for that brief introduction. We will go straight to questions from me, after which I will allow other members of the committee to come in.
One issue that has been raised is forecasting. You will have read our report on Scotland’s fiscal framework, particularly the recommendations set out in paragraphs 131 to 133. Paragraph 131 states that
“The Committee is unaware of any other example of a fiscal council relying solely on official government forecasts”,
while paragraph 133 states that
“The Committee notes the strong level of support among witnesses for the SFC carrying out its own forecasts”.
Why is the Scottish Government insisting on the situation here being different from that in other countries, where other bodies are able to comment on other fiscal forecasts, including those produced independently?
The Scottish Government considers that what it is doing is consistent with international best practice across the world. The OECD and the IMF both recognise that the specific roles and functions of a fiscal commission should be tailored to local political and institutional fiscal environments, and the Deputy First Minister has made clear to Parliament on several occasions that in his view the responsibility for preparing tax forecasts that appear in the Scottish budget is a primary responsibility of Scottish ministers, who should be directly accountable to the Parliament for those forecasts.
We believe that our approach maximises the transparency of the forecasting process. It ensures that there is a full account in the public domain of the Government’s forecasting methodology and the assumptions that underpin those forecasts. Also—and importantly—the results of independent scrutiny undertaken by the Fiscal Commission will be available. That information will include the commission’s assessment of the forecasts, and the impact on forecasts of any specific recommendations that the commission had made during the scrutiny process will be clearly set out.
We have looked carefully at the OECD evidence—this is also reflected in the Scottish Parliament information centre briefing on the bill—and it is clear that a very small number of fiscal councils in operation across the world, of which the United Kingdom Office for Budget Responsibility is one, produce official forecasts for Governments. In the majority of cases, the official forecasts are prepared by a ministry of finance or the equivalent.
What we have sought to do in the bill is to make clear that the process by which the commission will determine how it assesses the reasonableness of forecasts is a matter over which the Government will have no power of direction or involvement whatsoever. Indeed, that is also made clear in the framework document for the non-statutory commission. Crucially, we have not shut down in any way the commission’s ability to produce its own alternative forecasts of the tax revenues and other factors that are within its remit and in the draft budget. The commission will be empowered both through legislative powers and the resources that will be allocated to them as set out in the financial memorandum. There is scope for the commission to prepare alternative forecasts if it so chooses, but that is a matter for the commission to determine.
Okay. We all have the same SPICe table that shows the number of Governments that produce their own forecasts, but SPICe also points out that
“it is common in independent fiscal institutions (IFIs) for there to be other economic and fiscal forecasts to draw on”
and that
“both the Irish and Swedish fiscal bodies have access to alternative forecasts and do not rely solely on Government forecasts.”
I think that that is the issue. You have just said that the SFC will be able to produce its own forecasts. Is that realistic, given the fact that it will also be involved in producing the Government’s forecasts? What level of input does the commission currently have in helping to produce the Government’s forecasts?
The Government has sole responsibility for producing forecasts; the role of the commission is to challenge and scrutinise them.
Under the present process, Scottish Government economists prepare forecasts and forecasting methodology papers, which are presented to the commission for discussion. Those are subject to robust scrutiny and review by commission members, who will ask the economists to justify the basis for the judgments that have been made and the techniques that they have applied in arriving at those forecasts.
We are working with the commission to look at ways of maximising the transparency of that scrutiny process. Obviously it is difficult to do that while the scrutiny process is on-going, but we anticipate that when the Scottish draft budget for 2016-17 is published—and the commission’s report alongside that—we will see clearly the impact of the commission’s scrutiny on the Government’s forecasts. There will be transparency with regard to the interactions that have taken place between the Government and the commission and the nature of those interactions.
I am sure that colleagues will want to explore that area further, so I will turn to another issue.
The bill as introduced requires the commission to publish its report on the assessment of the reasonableness of the forecasts for the devolved taxes on the same day that the draft budget is published. Why is that? Surely one would expect the commission to have some time after publication to look at that instead of its having to phone you up while you are all scurrying around trying to dot the i’s and cross the t’s on the draft budget. The fact that the report has to come out on the same day does not seem to be a recipe for producing it in the most efficient or effective way. What is the thinking behind that approach?
The commission’s scrutiny of the Government’s fiscal forecasts and estimates is central to the integrity of the Scottish budget process. The Deputy First Minister has made it clear on several occasions that he would not want to bring forward forecasts underpinning a Scottish budget that were not assessed as reasonable by the independent commission. The main area of value that the commission can add is in undertaking its scrutiny prior to the budget’s publication to ensure that when the budget comes forward it is underpinned by forecasts that are as robust and reasonable as possible.
In that respect, there are parallels with public audit and other processes. In order to facilitate that, the bill requires the commission to send a copy of its report to the Scottish ministers in advance of laying it before Parliament. I suspect that you might want to explore that requirement this morning, but, again, it is consistent with the process for Audit Scotland reports. It also provides the opportunity for the Government to access and understand the nature of the commission’s findings. Importantly, it also gives time for ministers, if they so choose, to revise their forecasts in line with the commission’s findings.
We heard in a private briefing from Ian Lienert, who has done an excellent piece of research on this area, that since 2013 the European Union has been putting pressure on eurozone countries to look at macroeconomic forecasts. Given that background, could the bill be amended to look at the sustainability of Scotland’s macrofinances as we progress?
One of the key narratives running through our policy proposals has been the recognition that the commission’s functions should be proportionate to the Parliament’s fiscal powers. As a result, we have sought to design a remit for the commission that reflects the current devolved competence of the Scottish Parliament.
The Deputy First Minister previously suggested to the committee that there is a role for Parliament in holding the Government to account on the sustainability of its spending decisions. Obviously we will look closely at ways of expanding the commission’s remit to reflect further fiscal powers that might come in a future Scotland bill or, indeed, in the current Scotland Bill.
On ensuring access to your information, the bill gives Scottish ministers considerable discretion to decide what can “reasonably” be provided within “reasonable” time limits. Should the bill not be more unequivocal in this area?
10:15
This might be an area where John St Clair will wish to expand on what I say. In section 7, we have presented what we consider to be a very robust right of access to information for the commission. Indeed, it is a specific “right of access” for the commission, rather than a right to request information. We would be looking to underpin the statutory provisions with a more detailed memorandum of understanding, which would explain how things would work in practice. That said, although we consider that we have set out a robust right of access, we are very much open to suggestions on how we could strengthen it further.
As Alison Cumming has said, there is a statutory right to information as well as a powerful right to require information. We do not mention legal powers in the bill, but those could be invoked, if necessary, by a declarator or some other action in the Court of Session if somebody refused to hand over information or give an explanation.
That said, these provisions relate to Government departments, and it is almost inconceivable that one bit of the Administration would litigate against another. One does not put that in statute. There are legal back-up powers, but they will not be invoked. Usually there is an MOU between departments or some sort of political settlement. It would be a sign of some crisis if one bit of the Administration was not able to get from another bit information that it is entitled to.
We think that the measures are robust. As for reasonability, that is a very common issue. It would be possible to ask for almost any information, but it would not be possible to say, for instance, “We need every single taxpayer’s report by tomorrow afternoon.” That is the sort of thing that the provision is trying to stop. The powers of Revenue Scotland are framed in very similar terms and, indeed, they run through most tax legislation. Powers must be tempered to a certain extent to ensure that departments are not overloaded with requests.
We know from the bill how much additional funding is going to be provided to the Scottish Fiscal Commission, but how much internal resource is being allocated within the Scottish Government to help prepare and enhance the quality of forecasts?
As Alison Cumming has mentioned, there has been input from a number of analytical services and departments across the Government. In my division, Alison and her team work very closely with the commission. Across key areas such as environment, communities and the office of the chief economic adviser, significant resources have been allocated to support work on assessing the reasonableness of our forecasts.
I will raise one more topic before I allow colleagues to ask questions. I note that
“the OECD has developed a number of minimum requirements or principles that are deemed suitable”
for such commissions,
“regardless of local circumstances.”
Have all those principles been met?
We consider that they have been met, to the extent that it is possible for the Government to do so. A number of the principles relate to the commission’s activities and to the way in which the commission conducts itself, and we have set out in the policy memorandum our assessment of how we believe our legislative proposals deliver against those OECD principles.
One of the policy changes that we introduced following our consultation on the draft bill over the spring and summer was a statutory requirement for independent evaluation of the commission’s performance every five years. That was driven, in part, by the responses to the consultation. It also involved further reflection on how the bill might reflect the OECD principles, one of which is to ensure that such a body’s work is subject to external scrutiny.
Do you wish to comment on that, too, Sean?
I should just mention that that sits alongside the requirement in the bill for the commission to prepare an annual report that sets out how it is getting on with its work.
A number of colleagues wish to ask questions. We will start with Gavin Brown.
Good morning. Let us go to section 4 of the bill. The convener asked you about ministers getting copies of reports prior to those reports going before Parliament. Will you reiterate the policy reason why ministers would get those reports before Parliament?
That would be to ensure that the process of scrutiny supports the integrity of the Scottish budget process so that there is an opportunity for ministers to ensure that the forecasts that they provide to Parliament in the draft budget have been independently assessed as reasonable. We consider that there is public interest in ensuring that the forecasts that underpin the Scottish budget are independently assessed as being robust.
We accept that there is a need for such arrangements to be as transparent as possible and have been discussing with the Fiscal Commission the possibility of developing a protocol that is similar to the ones that exist between the Scottish Government and Audit Scotland, which are published as annexes to the Scottish public finance manual. That protocol would provide Parliament and the public with information on how the relationship is to be managed and how information, including draft and final reports, is to be exchanged.
So, the process will mirror the Audit Scotland process in some ways. Exact details might not be available on timing, but how much earlier than Parliament do you envisage the Scottish Government getting reports?
That would be a matter for agreement with the commission; we would not seek to dictate or specify that to it. To take Audit Scotland reports as an example, the Scottish Government receives a clearance draft of a report in order to check its factual accuracy, and has three weeks within which to provide comments on it. The protocol requires that the Scottish Government is, thereafter, provided with an embargoed copy of the final report three days prior to publication. I suggest that we would use that benchmark as a basis for discussion with the commission, but agreement would be based on timescales with which the commission was comfortable.
There is no fixed answer yet, but is it your understanding that we could have a scenario in which the Scottish Fiscal Commission would send to the Government a clearance draft of a report three weeks before Parliament would see it, and would then send to the Government an embargoed copy three days before Parliament would see it?
That is potentially the case; that is how it works for Audit Scotland reports. The budget process can be quite time pressured. I am not saying that three weeks would be the appropriate period; it is what we would use as a reference point for discussions with the commission.
It is probably important to make it clear that, when we talk about clearance, we refer to clearance for factual accuracy as opposed to clearance of the report. The Fiscal Commission will produce its own report independent of Government and we should not in any way seek to influence what is in it.
This might not be a question that you can answer, but can you envisage any areas of dispute or discussions about the clearance draft being made public at some later point?
If there were any disputes to be had, they would be over factual accuracy. Our experience is that the commission would want to be sure that whatever it was putting into the public domain was factually accurate. We are also mindful of exchanges on draft reports in recent months between the Treasury and the OBR. We would therefore, as far as is possible and practical, seek to be transparent about changes, but as Sean Neill said, the only changes that we envisage would be to clarify understanding of the forecasting processes and methodologies that the Scottish Government had put in place.
There are robust measures in the bill and in the framework document for the non-statutory commission that make it clear that the Government would not seek to influence in any way the commission’s judgements, or the presentation of its findings.
I will move on to a different issue, which relates to section 2 of the bill, on the commission’s functions. Under section 2(1)(a), the commission will look at
“forecasts of receipts from the devolved taxes”.
That is fairly straightforward, but I struggle with section 2(1)(b). Instead of looking at the forecasts for non-domestic rates, the commission will look at
“the assumptions made by the Scottish Ministers in relation to the determinants described in subsection (2) (being the economic determinants on which the Scottish Ministers’ forecasts of receipts from non-domestic rates are based)”.
I have looked at what the OBR does; basically, it produces a forecast for non-domestic rates. Why could the commission not just take a view on the overall forecast for non-domestic rates, rather than taking the more convoluted approach that section 2(1)(b) provides for?
The approach that is set out in the bill for non-domestic rates is consistent with the role that the non-statutory commission has in relation to the economic determinants of non-domestic rate forecasts, which are defined as the buoyancy assumption and the inflation-rate assumption. In designing the remit of the non-statutory commission, a decision was taken that there are elements of the non-domestic rate forecast that are driven by commercial assumptions on issues such as bad debts and appeal losses, which are based on experience and assessments made by the Scottish Government and local authorities. Those areas of judgment might be less suited to the expertise of the Scottish Fiscal Commission, which will be more focused on economic forecasting assumptions.
You are right to say that what is provided for in the bill mirrors the functions of the non-statutory commission, but I did not really understand at the time why the functions of the non-statutory commission were defined in that way. The OBR is obviously bigger than the SFC, but I am still confused about why the SFC could not assess the overall forecast rather than just looking at the buoyancy factors, when other fiscal commissions such as the OBR can forecast how much is likely to be collected in business rates. Will you explain why the commission could not simply forecast the receipts from business rates?
The reason for that is to do with commercial assumptions, which was thought to be an area on which the commission could not reach a judgement in the same way as it can on the economic factors that drive the forecasts. Those assumptions tend to be based on judgment, experience and commercially sensitive data. At the time, the Deputy First Minister made it clear which areas of non-domestic rates he considered to be suitable for the commission to review, but we will certainly reflect further on the issue.
That is fair enough. Of course, there are commercial judgments involved, but given that we are asking the commission to look at the successor to stamp duty land tax—land and buildings transaction tax—which is volatile, too, and the forecast for which involves commercial assumptions, I am still at a loss to understand the reason for the Government’s position. However, you have said that you will reflect on the matter.
Similarly, the OBR forecasts receipts from council tax. Why are we not asking the commission to look at the forecasts for council tax, which will have a big impact on public spending in Scotland?
In designing the scope of the commission’s work, we have focused strongly on forecasts that underpin the Scottish budget. Because the Scottish budget is not underpinned by council tax forecasts, which are a matter for local authorities, we have not in the bill provided for a function in relation to council tax.
Again, that mirrors the position of the non-statutory commission, which I accepted at the time. However, although the council tax forecasts do not affect the Scottish budget, they affect the spending power of councils and therefore the economic position of Scotland as a whole. Has the Government reached a fixed view on that or would it be prepared to reflect on the matter?
That goes back to the fundamental fact that the commission’s primary role relates to the Scottish budget rather than to wider public finance issues.
10:30
I will move on to my last issue, which is forecasting. I guess that that is usually the one that takes up the most time, although the convener has clearly covered it in a bit of detail.
The Scottish Government position is—I think that you have said it again today—that what it is doing is consistent with international best practice. You are right to say that not every fiscal commission does the official forecast—I think that there are three fiscal commissions that do that, of which the OBR is one, so I accept your point entirely. However, I am struggling when I look at all the other fiscal commissions. I have looked at the other commissions through the work of independent experts, SPICe and anyone else that I can find. Every one that I have looked at either prepares alternative forecasts or has access to independent alternative forecasts, whether it is the IMF, the OECD, the EU or another body, such as the one that they have in Sweden. However, I have not been able to find any fiscal commissions that look only at Government forecasts as the only option that they have for making decisions. I ask this question quite genuinely: has the Scottish Government done research on this? Given that you have said that its practice is consistent with international best practice, in what countries do the fiscal commissions look only at the Government forecasts?
There are two main points that I would like to make here. The first is about the role of the commission being proportionate to the fiscal powers of the Parliament. We are establishing a fiscal commission for a sub-sovereign Parliament, which changes the nature of the forecast and assumptions that the commission will look at, compared with what the sovereign commissions that exist around the world do.
On alternative forecasts, those sovereign commissions would, to my knowledge, look at forecasts of gross domestic product assumptions, fiscal aggregates and so on, and do not necessarily look at alternative forecasts for individual taxes, which tend to be treated slightly differently. To that extent, we have sought in the bill to empower the commission to determine how it will assess the reasonableness of forecasts. Within that, it will be open to the commission to determine whether the best way to do that is to prepare alternative forecasts either by itself or by commissioning those from external parties. We have included provision in the financial memorandum for external research costs.
We have also underpinned that, as we discussed, by a right of access—a right to receive data from the Scottish Government and from Revenue Scotland and other public bodies that would hold relevant data. It is difficult for the Government to comment too much on what the commission should do in that area because, clearly, that would be a matter for the commission. However, we have sought through the legislation to enable the commission to do that and not in any way to restrict its ability to do that.
You may not have a live example of a country now, which is fair enough, but are there international examples where the fiscal commissions look only at the Government forecasts? I am genuinely interested, because I have not found any examples, although I have looked quite hard.
I take your point that the situation for subnational legislatures is slightly different. However, at the end of the day, if we get it wrong or we suffer from optimism bias, we will be left with the same problems, in that suddenly we may have a shortfall. It may not be of the degree that it would be for a fully sovereign commission, but the error would grow year on year and could become a pretty big problem. I simply leave that point out there.
On your last point about not wanting to be too prescriptive on how the commission does it job, I have to say that I am quite heartened by what you said. I scribbled it down, so I do not have an exact quotation, but you basically said that you have not shut down the Fiscal Commission’s ability to prepare alternative forecasts. I hope that that is correct, but it seems to be slightly at odds with at least the tone of the previous evidence that I have heard from the Government. Again, I cannot quote it exactly, but I was given the impression that if the commission were to do alternative forecasts, that would be unnecessary duplication. It certainly seemed to me that the Government view at that time was that it not only did not want to put that in the bill, but wanted to discourage it, because it felt that that would be duplication. Is the Government’s view different now? Saying, “We haven’t shut the door,” is slightly different from saying, “We think it would be quite a good idea and we wouldn’t be against it.” Again, maybe you cannot go too far on this, but is there a Government view that alternative forecasting would be a positive thing, or are you simply saying that you would not legally block it?
It is important to be clear that what we are saying is that we have left open to the Scottish Fiscal Commission the option to determine how it assesses reasonableness.
When we were considering the financial memorandum, we had a dialogue about the resources that the non-statutory commission felt that it needed to discharge the functions. That is reflected in the financial memorandum and the resources that are set aside for, as Alison Cumming said, staffing, and for potential further research. We are clearly saying here that we want to leave it up to the commission to determine how it assesses reasonableness. We are trying to enable that by giving it the resources, as well as, in section 2(5), the legislative cover, if the commission thinks that that is right.
Just to be clear, it is no longer the official Government view that alternative forecasts would be duplication.
That issue has been considered, and if the Fiscal Commission were preparing official forecasts, the Government would also need to produce its own forecasting models to support on-going policy development and financial planning. If the Fiscal Commission prepares alternative forecasts, there will be potential duplication of effort. However, as Sean Neill said, that is for the commission to determine.
There is a practical point to make here. We are leaving it to the commission to decide about the forecasts. If the commission says that the Government’s forecasts are unreasonable, one would expect the commission to identify what it thinks is the reasonable way of forecasting. It would then be up to either the commission or outsiders to work the projections from that reasonable basis, which may already be implicit in a criticism of the reasonableness of the forecasts.
Okay. I am grateful to you. Thank you.
The next question is from John Mason, to be followed by Mark McDonald. [Interruption.] Sorry, Jackie—I thought that you had been in already.
Are you suggesting that Gavin Brown has been going on for too long? I would not dream of suggesting that.
Certainly not. Jackie will be followed by John Mason. I apologise for that.
I will be much briefer than I had intended because a lot of the ground has been covered.
First, I come back to the issue about testing the independence of the commission, which I think is critical to whether people accept the commission. The relationship with Audit Scotland is interesting, as is the parallel that you chose to draw. I remember, in the not too dim and distant past, a degree of controversy over the sharing of an Audit Scotland report with the Government, and changes that were being made which were considered to be—I refer to those who were critical of it at the time—not factual but presentational. Surely it is in the Government’s interests for the Fiscal Commission to act truly independently in order to avoid the perception that there is any collusion behind the scenes. Therefore, do you think that the Audit Scotland model is appropriate?
Secondly, I would agree about same-day reporting if the situation was as it is with the OBR, because the OBR does the official forecasting for the UK Government. You are not asking the Fiscal Commission to do that, which is why I think that a separation in time might not be a bad thing. If we are being honest about it, the capacity in Scotland—even in Government—to do that kind of forecasting is limited, and we will need to increase that capacity for Scotland as a whole. I cannot imagine a situation in which you are waiting for the Fiscal Commission to tell you that a forecast is okay, because the Government has the greatest capacity to do that kind of forecasting.
Will you comment on both of those issues?
Certainly. On the Audit Scotland issue, the example of the protocol was really more in terms of the process. There is a published protocol that specifies things including time limits. I am not saying that that would be replicated in its entirety for the Fiscal Commission. There are clearly other considerations. The Scottish Government has been very robust in stating its position that we will not seek to influence the commission’s judgments on our forecasts. It is important for the commission’s credibility, however, that there is an opportunity to comment on factual accuracy. I do not think that that is in dispute.
We would seek to ensure that the protocol was very clear and continued the theme of the framework document for the non-statutory commission, so that on any clearance draft—for want of a better term—that was submitted to the Scottish Government, the Government would offer its views to the commission only on matters of factual accuracy. We would not seek to offer any views on the commission’s findings or on how it presented those findings.
History tells us that that has not necessarily been the case in all the Government’s dealings with people with which it has understandings.
To guard against any suggestion that the Fiscal Commission is tied up with the Government, I wonder whether you will, if there is a process of advance notification to allow issues to be raised regarding factual accuracy, publish as a matter of course any amendments that are made.
We will take that point away and discuss it with the commission. We are very open to considering any ways in which we can maximise the transparency of the relationship and interactions between the Scottish Fiscal Commission and the Scottish Government. I cannot comment on any previous Audit Scotland reports.
Your second set of points was about the desirability of the Scottish Government having access to a report in advance and about reports being published at the same time as the Deputy First Minister or the finance secretary of the day stands up to deliver the draft budget. That comes down to the value that the Fiscal Commission adds to the integrity of the Scottish budget process.
We suggest that it might not be in the public interest for a Government to bring forward a budget that is underpinned by tax forecasts that determine the overall amount of spending power available to that Government if independent experts subsequently say that those forecasts are unreasonable. The public interest is in maintaining the integrity of the draft budget process, so that the draft budget that is brought to Parliament comes with the assessment having already taken place and there is no need to revise parts of the budget to reflect changes in the forecasts after the draft budget has been published.
By its nature, the budget is revised as it makes its way through Parliament, so surely it would not be difficult for the Government to do what I have suggested.
It might not be practically difficult, but we think that the integrity of the Scottish draft budget is maximised if the assessment takes place prior to publication and if there is complete transparency about that assessment.
Sure. The idea could equally—as you would expect me to say from a Finance Committee perspective—lend more robust scrutiny to the process.
I will deal with flexibility in forecasts, although you dealt with many of the issues in response to Gavin Brown’s questions. You point to section 2(5)—I confess that I do not have the wording in front of me. Does that provision explicitly give the Fiscal Commission the power, if you are prepared to be that flexible, to do forecasting itself if it chooses to do so?
Section 2(5) provides that reports that are prepared by the commission
“may include such other information relating to the assessments being made as the Commission considers appropriate.”
That power would enable the commission to publish alternative forecasts.
Section 6 is another key provision, which makes it clear that the commission is not subject to Government direction in deciding how it undertakes its assessment of reasonableness. It is implicit in that provision that the commission can determine how it undertakes that assessment, and that it can if it so chooses determine whether it prepares alternative forecasts or assumptions as part of that.
Having discussed the matter with our legal counsel, we understand—John St Clair might want to add to this—that there is no legal requirement to provide specifically for a function to allow the commission to prepare alternative forecasts. We can look at that; the explanatory notes to the bill make it clear that it is open to the commission to
“consider the effect of alternative forecasting assumptions or methodologies on revenue forecasts.”
10:45
Our legal advice is that the bill leaves it wide open for the commission to make explicit alternative forecasts or, alternatively, it can just identify where there has not been reasonableness, provide what it thinks is reasonable and have others make their projections.
Equally, there would be no harm—given that the Government appears to be open to it—in putting that in the bill.
We can reflect on that.
Finally—I promise that this is final, convener—I will stick with the independence of the Fiscal Commission. You take quite sweeping powers in section 26 for ministers to change the functions by regulation. You would naturally expect me to prefer primary legislation to regulation, because it has more scrutiny. Would you shift on that? The importance of the body demands primary legislation.
The Scottish Government is quite heavily involved in the appointment of members to the Fiscal Commission. Scotland is a small place and we all tend to know one another. What other options did you consider to ensure the body’s independence? We have been presented with alternative suggestions that do not involve the Scottish Government but are robust.
I might ask John St Clair to explain the legal position on section 26 afterwards. It is certainly our intention that it will be more of a contingency or emergency provision than something that is routinely used, but he could comment on that in greater detail.
I give as an example section 5, which provides the power for the Scottish ministers to make regulations to confer additional functions and modify or remove functions. We have entrenched some of the commission’s core functions in primary legislation so that they cannot be removed using those regulation-making powers. We very much see that there are areas where we need to provide flexibility, but the core functions and operation of the commission are seen primarily as a matter for primary legislation.
On the appointments process, we have looked at examples of how ministerial appointments work. The key elements are that ministerial appointments are all regulated by the Commissioner for Ethical Standards in Public Life in Scotland and that the appointments process will be subject to the code of practice for ministerial appointments to public bodies in Scotland, which will provide safeguards about the process and about there being a fair and open competition and will ensure that appointments are made on merit. Thereafter, there is in effect a veto for Parliament, because it will scrutinise the nominations that are brought forward for appointment, as the Finance Committee and the Parliament did for the appointments to the non-statutory commission.
I have a tiny question, convener. Did the Government consider alternative options?
I have set out the policy position that the Government has arrived at.
I will follow up the point that Jackie Baillie made. I know that the Delegated Powers and Law Reform Committee has looked at the bill, as I am also a member of that committee. Is part of the thinking behind having the powers as they are and giving ministers power that, as devolution progresses, primary legislation will not be needed every time a new tax or a new power comes? Is that broadly the thinking?
Yes. We recognise that we are going through a process to consider the devolution of further fiscal powers to the Scottish Parliament, so we wanted to ensure that there is reasonable flexibility in the bill for Parliament to modify the functions to reflect any expansion in fiscal powers without having recourse to primary legislation.
Some of that is set out in how the bill is drafted. We talk about devolved taxes in the broadest sense instead of naming the two devolved taxes, so the wording covers all devolved taxes. Wherever possible, we have tried to future proof the bill, but we recognise that devolution of further powers is in transition.
We have devolved taxes such as LBTT, but we will also have assignment of taxes, as in VAT, so there might be more options in the future.
Yes.
You are fairly comfortable that what we have will cover all those options.
The bill covers the full devolution of tax powers in relation to, for example, the powers to replace stamp duty land tax and the UK landfill tax. Air passenger duty and the aggregates levy would be automatically covered under the existing power, given the way in which we have defined devolved taxes. Assigned revenues for VAT, for example, would need to be considered; that would depend on how the power was framed and how the fiscal framework operated. It probably depends on who produces the forecasts but, if the Scottish ministers produced VAT forecasts to support assignment of VAT, we could envisage an additional function being conferred on the commission to review the reasonableness of those forecasts.
The public consultation document that went out contained a list of other functions that the commission could have, and such a function was set out in relation to further devolution.
We have spent a lot of time on who makes forecasts and all that kind of stuff, so I do not want to repeat that. If the commission set up its own forecasting model, do we have any idea of what that would cost?
We do not have specific estimates of that. The cost would depend on how the commission wished to go about the activity. The estimates that were drawn up for the financial memorandum were produced in consultation with members of the non-statutory commission and they are intended to cover, within the total resource envelope, the resource that the commission feels would be required to exercise its scrutiny as set out in the bill.
We have £850,000 per year going forward. If the commission did substantial forecasting, would we be talking about double or triple that figure?
In the category of staffing costs, there might be a requirement to increase the staffing allocation for strategic and analytical support to the commission, or the commission might wish to use the provision of around £100,000 that we have suggested for research. However, without being able to specify exactly what the commission might want to do, it is difficult to give a precise figure. That would very much be a matter for the commission. If it felt that it was not adequately resourced within the resource envelope, the Government would take that seriously and discuss that further with it.
I do not want to press you unreasonably, because I am asking about something that you are not planning to do. However, do we have an idea of how many Government staff are involved in forecasting? Is that not clear-cut, because staff are doing umpteen different jobs?
That is a good assessment of forecasting. There is a limited number of people in the Government who exclusively do forecasting. They undertake a number of roles, including forecasting, so it would be quite difficult to say exactly how much of their job was spent exclusively on forecasting as opposed to undertaking other analyses.
It could be useful if we had some idea as to what extra costs might be involved, because forecasting is a key issue. For me, one of the answers involves the costs, and knowing those would help us to make our decision. I realise that the bill makes a proposal already but, if it was possible in the future to get any kind of figure on the forecasting, that would be helpful.
The relationship between Audit Scotland and the Government is relevant, but the relationship between auditors and their clients in general is important. In one sense, I see the Fiscal Commission as auditing the Government’s forecasts. On the relationship between the two, is it your understanding that the auditors of any large organisation would be in it throughout the year to assess what was going on and would not just turn up on 31 March or whatever? Is that a fair comparison?
I am an accountant by profession and have experience of both the auditor and auditee sides of the public audit relationship. It is very much my experience that throughout the year there is engagement and reviewing of systems and controls that underpin the financial management and financial reporting arrangements, for example. The audit parallels are familiar to me, and they offer a helpful comparison with how the Fiscal Commission might conduct its work. There needs to be an opportunity for such challenge and scrutiny to take place; that might look to be behind the scenes, but the product of that should be made as transparent as possible.
I will draw a specific parallel. With the auditing of financial accounts, it is clear that the Government or the audited body puts forward its draft unaudited accounts for review by the auditor. The auditor undertakes their work, and at the end of the process the auditor prepares a report that clearly sets out the adjusted audit differences that have impacted on the accounts that were presented for audit before the final signed-off versions for audit were produced. The auditor also draws out any unadjusted material audit differences that were identified during the process, so that there is transparency about the areas that the auditor or external scrutineer looked at and that is put in the public domain.
So you argue that it is possible for an auditor—or the Fiscal Commission—to engage regularly throughout the year and maintain their independence.
Yes.
Yes.
When we talked about the right of access, Mr St Clair mentioned the possibility of a memorandum of understanding. Do we need to refer to that in the bill?
We do not. Memorandums of understanding are informal. They are not legally binding, and they usually just express on paper an on-going relationship between two bits of the Administration. I have never seen them referred to in legislation.
I think that we were broadly comfortable with the idea of members of the commission doing just one fixed term. I still wonder whether we have that many skilled people in Scotland, but I suppose that we could use people from outside Scotland. I understand from one of the reports that we saw that, in Ireland, people have a maximum of two terms of duty or spells on the equivalent body. Is the Government committed to one term? Might two terms work?
The Deputy First Minister has been clear in his position on that. That might even have been from the January 2014 evidence, but it was certainly the case in bringing forward the proposals for the non-statutory commission. The Scottish Government thinks that one of the key safeguards that we can put in place to support the commission’s institutional independence is ensuring that there is no perception that people have any regard to their personal prospects of reappointment in how they report their findings or in the conclusions that they reach. We see that as strengthening the commission’s independence.
Audit Scotland said that it would be an improvement if the commission was funded through the Parliament’s budget rather than the Government’s budget. Do you have any thoughts on that?
We are open to considering that. The Government has made repeated assurances to Parliament that we will ensure that the Fiscal Commission is adequately resourced to fulfil its functions, and it will be subject to scrutiny in the normal way through the draft budget process and our spending proposals. We have spoken to the commission about administrative arrangements that we might be able to put in place to provide longer-term certainty to it about its resource allocation. The policy memorandum refers to that.
11:00
I have just a couple of questions, because some of the questions that I was going to raise have already been asked.
I do not mean to dwell on the forecasting issue, but a point that has been made to the committee is that if the Fiscal Commission were to produce its own forecasts, it could give rise to a conflict of interests, in that it might err in favour of its own forecast and the outcomes of that rather than the Government’s forecasts. This question might be more for the commissioners but, in leaving the door open for the commission to produce its own forecasts, does the Government recognise that conflict of interest?
That is probably a question for the commission, but I point out that a core function of the commission as set out in the bill will be to assess the reasonableness of forecasts that are put forward by Scottish ministers. In other words, the commission will be under a statutory duty to prepare reports assessing the reasonableness of the Government’s forecasts.
The deputy convener has covered the other points that I was going to make, but I have one other question about term lengths for commissioners. Leaving aside the fixed-term element, I note that, first of all, although Parliament will approve the appointments, ministers will determine the length of term and that the bill itself does not define the term limit. Is there a reason why the term limit has been left open ended instead of being defined?
My understanding is that that is consistent with practice elsewhere in Scottish legislation; we tend not to specify in bills term lengths for such appointments and, instead, tend to reference the code of practice for ministerial appointments to public bodies, which sets out maximum term lengths in an administrative way. It is certainly an issue that we would be willing to reflect on when we look at the findings at stage 1.
It might give the impression that an appointee could be given a very long term length. Parliament might approve the appointment, but it has no official role with regard to the term that the appointee would serve. That could be a means of squaring the circle, but I will leave you to reflect on the matter further.
I have a very brief question of clarification on the forecasting issue and the resources for that. I welcome what has been said this morning about leaving the door open to the potential for the commission to undertake its own forecasting, not least as part of its job in assessing the reasonableness of the Government’s own forecasts. I also welcome your indication to John Mason that you are willing to look into providing further information about the resource impact that that might have on the commission. Have your discussions on the resources that the commission will need also included any discussion on whether the current resource allocation will allow independent forecasts to be commissioned, or is the expectation that that will require significant extra resource?
We have not specifically addressed the alternative forecast issue in our interactions with the commission on the financial memorandum; instead, we have been speaking more generally about the overall resource envelope and whether the commission considers that to be sufficient and adequate for it to discharge its statutory functions.
That is helpful, and I think that the further information that Mr Mason has requested would also help the committee.
That concludes questions from committee members, but not necessarily from me.
The last question that I was going to ask was almost exactly the same as Richard Baker’s, but I want to follow on from that to ask why the Scottish Fiscal Commission’s budget is substantially higher than that for the Irish Fiscal Advisory Council, even though the latter has a wider mandate.
There are two main areas of difference here, the first of which relates to the remuneration of commission members. The second area relates to something that we are trying hard to avoid through the proposals in the financial memorandum; we do not want to constrain in any way the decisions that the commission might make on how it organises itself as it moves to a statutory footing. All those questions will be considered as part of a transition programme. We have, for example, provided for accommodation costs based on commercial rates, which provides flexibility should the commission decide to locate itself in such premises. Of course, that is not to say that the decisions taken by the commission might not end up costing slightly less than what we have provided for in the financial memorandum.
Sticking with the Irish model, I wonder whether you have looked at the fact that that particular fiscal council produces its report a month after the Irish draft budget. Do you feel such an approach to be disadvantageous?
It comes back to the point about the Scottish Government’s view of how the commission can maximise the integrity of the Scottish draft budget process and the fact that the Deputy First Minister has made it very clear that he does not want to take a budget to Parliament that is underpinned by forecasts that the Fiscal Commission does not consider to be reasonable.
So you think that the Irish have got this wrong.
I would not say that they have got it wrong. We are taking forward suggestions that we think suit the Scottish Parliament’s arrangements.
That is fine.
I have one final question before we wind things up. I have already asked Alison Cumming about the principles for effective independent fiscal institutions, which are set out in the SPICe briefing that we all have. One of those principles relates to a clear mandate, in respect of which the SPICe briefing says:
“The OECD state that the mandate of IFIs should be clearly defined in ‘higher-level legislation’ or ‘clearly stated in primary law’. This principle is met by the SFC Bill’s proposals for the SFC in year 1, but may not be met if the SFC’s remit is expanded via regulations subject to affirmative procedure in the future.”
Can you comment on whether that is the case?
As a general point, I would say that, although we consider that this bill delivers on all the OECD principles, we are very interested in hearing any suggestions that might be made at stage 1 of ways in which this aspect could be strengthened, and we are certainly open to looking at and reflecting on them.
The powers in section 5 reflect the unique situation that we have in Scotland with regard to the devolution of further fiscal powers, and we have sought to strike a balance between giving Parliament the flexibility to tailor and amend the Fiscal Commission’s functions to reflect the expansion of those powers without recourse to primary legislation and entrenching the commission’s core functions, including the requirement on it to
“prepare reports setting out its assessment of the reasonableness of”
various factors—although the specific factors set out in section 2(a) to (d) could be subject to review—as well as entrenching its power to prepare reports on
“such fiscal factors ... as it considers appropriate.”
Removing those would require primary legislation. We have sought, as far as we can, to strike a balance between providing as much certainty as possible on the commission’s functions in primary legislation and leaving some flexibility to take account of the devolution that is on-going and which might come in the future.
Thank you. I said that that would be my final question, but I was only kidding on—I have another one.
On the independence of the Fiscal Commission and institutional capture, I note that the SFC’s staff include someone seconded from the Scottish Government. Issues have been raised, not least by the Institute of Chartered Accountants of Scotland, about the Scottish Government’s closeness to the Scottish Fiscal Commission. Surely if we want a body that is not only independent but seen to be independent, it does not really help matters if Scottish Government officials are effectively being seconded to an organisation that is scrutinising the Scottish Government itself.
I make it clear that this particular arrangement is only an interim one—it is not something that has been established and which will continue. As the letter to the committee makes clear, the member of staff in question has nothing to do with the forecasting; the key area in which they are working is more to do with the transition to a statutory body and ensuring that the systems are in place in line with the requirements outlined in the framework agreement. It is all about process and transition, and it has nothing whatever to do with forecasting.
I repeat that this is only an interim arrangement; it is not long established, and it will come to an end. It will be up to the commission to determine the staffing, skills and resources that it needs within the envelope provided for in the financial memorandum.
Thank you very much. That concludes questions from the committee and from me. Do you wish to make any other points before we wind up the session?
No.
In that case, thank you very much for your time and for answering our questions.
I suspend the meeting until 11.15 to give members a natural break and to allow a changeover of witnesses.
11:10 Meeting suspended.