Official Report 708KB pdf
Our next agenda item is an evidence session with the Organisation for Economic Co-operation and Development on its second review of the Scottish Fiscal Commission, which was published last week. I welcome to the meeting Scherie Nicol, who is the lead on Parliaments and independent fiscal institutions in the public management and budgeting division in the directorate for public governance at the OECD.
I understand that you would like to make a short opening statement.
Thank you very much for having me. I will give a bit of context on why the OECD undertook this specific review. The OECD has a workstream on parliamentary budget oversight and independent fiscal institutions. As part of that, it meets annually with a network of institutions, including the Scottish Fiscal Commission, and sets standards for those institutions. The OECD’s main standards are the principles for independent fiscal institutions, and in recent years we have increasingly been evaluating the performance of institutions vis-à-vis those standards.
In line with best practice, legislation sets out that there must be an external independent evaluation of the Scottish Fiscal Commission every five years. The OECD was fortunate enough to be appointed for the first and second of those evaluations, so this is the second independent external review that we have undertaken. I have been involved in about a dozen such reviews internationally.
The focus of the first review was largely on how the Scottish Fiscal Commission had performed relative to our standards. The second review focused much more on how the SFC had responded to the recommendations that we set out in our first review and on the upcoming challenges and opportunities that it needs to be aware of.
I will briefly set out some of the things that we found. The SFC responded very well to the recommendations that we set out in our first review. First, it has expanded the scope of its analysis beyond forecasts on devolved taxes and spending to look at medium-term and long-term fiscal sustainability. We think that that is really important and in line with international trends.
Secondly, the SFC has strengthened its key relations with stakeholders. When an institution is established, it is inevitable that it will take time for such relationships to be established, but those relationships are now working much better.
Thirdly, in relation to how it compares internationally, the SFC is a very strong institution. Scotland can be quite proud of the standing and independence of the institution.
Looking ahead, I think that the main issue will be the changing budgetary context, which was spoken about in the previous evidence session. There are increasing budgetary challenges, but there was a sense among the stakeholders to whom we spoke that there is not sufficient debate on, and awareness of, those challenges. Our recommendations focus on the role that the Fiscal Commission could play in strengthening and empowering public and political understanding of the forthcoming budgetary challenges. We looked at how the institution could strengthen its spending analysis, how it could better communicate its analysis and how it could strengthen fiscal literacy among the public and politicians.
We also looked at some institutional aspects and how the SFC can ensure that it continues to be a strong and independent institution. A key recommendation relating to independence is the securing of multiyear funding to ensure that no Government can, at will, reduce the SFC’s funding.
The sense from the OECD is that those recommendations will put the SFC in a powerful position to move beyond being an institution that supports the fiscal framework by the letter of the law towards one that is a guardian for fiscal sustainability in Scotland and that ensures that the public and politicians are aware of the challenges ahead and the key decisions that need to be taken.
Thank you very much for that opening statement. I am sure that the SFC’s chair, Graeme Roy, will be delighted to be described as
“a seasoned and effective communicator”.
I am sure that we all agree with that.
The report is excellent and really well put together. On page 8, it says that the recommendations
“position the institution to have an important role in empowering political and public understanding around budget choices at a time when Scotland’s fiscal context will become increasingly challenging.”
Obviously, that is quite a sensitive issue in politics. How do you suggest that the SFC can do that in a non-partisan way, or in a way that is seen to be non-partisan?
Other institutions do that quite effectively. For example, when legislation is being considered that would have cost implications for the budget, the SFC could look at different scenarios relating to the legislation and at the scale of budgetary trade-offs that would need to be made under different scenarios. In broad terms, it could look at spending decisions and how they compare with other items in the budget. For example, it could look at 10 alternative ways in which a spending increase could be allocated in order to illustrate the trade-offs that would need to be made in budgetary decisions. It is important that the SFC does not advocate any specific policy, but it could provide illustrative examples of alternative choices that could be made.
It is interesting that, in figure 1 on page 12, you show the SFC’s
“many strengths relative to other”
independent finance institutions
“across the OECD”.
For example, you show that the SFC rates highly for its independence, analytical focus and communications apparatus. However, the one area that it seems to fall down on is its communications impact. You compare the SFC with its equivalent in the Netherlands—the Centraal Planbureau, which
“takes a holistic approach to its communications ... from day one”.
You say that it provides
“communications training one day per week over eight to ten weeks”
on
“formulating clear sentences and ways to visualise material more effectively.”
It is “proactive” and “remarkably open”, and it has “six in-house staff” for communications, which is more than the SFC has.
11:45However, there is an old saying that you can take a horse to water but you cannot make it drink. It is difficult to see how the areas that the SFC covers can be broadened out to what you might call a wider audience. I think that stakeholders are very much aware of the work that the SFC does and respect it. How do you get that into the general population? That seems to be an area where the Netherlands is doing well; I have just mentioned some examples of that. How realistic is it that we can get beyond 5 or 10 per cent of the Scottish population—if I am optimistic—knowing the work of the SFC?
Levels of awareness and understanding around public finance are low, but that is not to say that there is no capability for them to increase, specifically if public finance becomes relevant to people. In a range of subject areas, we see citizens developing acute awareness of particular topics in the news. An example is the astronauts coming back to earth today. People suddenly have an acute awareness of the impact of space on astronauts and how they need to readjust over the coming months. That is an example of how something that is quite technical and abstract can become salient to people’s lives and then, all of a sudden, they become quite knowledgeable about it. The same can happen around public finances, particularly if something becomes more relevant to people. As difficult spending decisions are made, they have to become more relevant for people. That is where you have to start talking about how you communicate on public finances to improve people’s ability to understand them.
There are some difficulties in communicating on public finances, because people just hear big numbers and they do not necessarily understand why those numbers are relevant to them. However, there are ways in which institutions such as the Scottish Fiscal Commission can overcome those challenges. I will draw on an example from Ireland, where there was debate about pensions and pension changes. An initial report from the Irish Fiscal Advisory Council on the implications of the pension changes in terms of billions of pounds got relatively little traction in the press, but, when the debate came back to Parliament, the Fiscal Advisory Council reframed its analysis. Instead of talking about the billions of pounds that the changes were going to cost the taxpayer, it said that young people would have to pay an extra £2,000 in tax as a result of the changes, and the issue became much more interesting to citizens.
If you can change the communication of public finances from being about big-picture issues that lack salience for the everyday person to being about tangible sums of money that they can understand, and if you can show the implications for them personally, you start to get more traction. There are ways in which institutions can make public finances more interesting and accessible for the public.
I have done that by talking about what the UK debt is per person as opposed to the figure of some £2.3 trillion, which people do not really comprehend.
On page 14 of your report, you say:
“Even among those identified by the SFC as key stakeholders, just 25% rated themselves as having a great deal of understanding of the Scottish budget.”
That is disconcerting in itself.
You also talk about the fact that members of the Scottish Parliament
“are not regularly immersed in budget scrutiny”
and do not have a high level of fiscal literacy. Although it is understandable for members to be focused on other areas, it is important that they have a high level of fiscal literacy. You suggest that the induction of new members following Scottish Parliament elections should provide insights into the SFC’s role and
“an overview of key issues relating to fiscal sustainability.”
Over recent years, we have seen budget scrutiny become much broader, but it has not necessarily become deeper. A study that was undertaken by the Scottish Parliament information centre, the University of Strathclyde and the University of Glasgow showed exactly that. Across a range of subject areas, there is a need for budget scrutiny to become much deeper. In particular, with the advent of the new powers in relation to benefits, it is important that the committee that leads on that matter becomes very accustomed to the overall fiscal constraints that Scotland is facing, so that it can bear that in mind when it considers relevant legislation and looks at the budget.
When it comes to induction, one of the challenges that we have seen in Parliaments across the OECD is that there tends to be a focus on the plumbing, by which I mean issues such as at what time of year the budget is laid, how long members have to scrutinise it and what the procedures are for the subject committees and the finance committee, without ensuring that all members of the various committees have an understanding of the key concepts that they need to understand. It is the equivalent of showing parliamentarians the brushstrokes without showing them the masterpiece.
There is a need not only to have a focused induction, but to change the nature of the induction so that it is much less about the plumbing and much more about the broad concepts that need to be understood if we are to ensure that Scotland’s public finances are on a sustainable path.
I will ask one more question before I bring colleagues in. Frankly, the most recent Scottish Parliament election was more of a Dutch auction than any of the others that I have experienced under devolution, in that increasingly unfunded promises were made right across the board.
You highlight that,
“In publishing its forecasts, assessments and reports, the Commission must have regard to relevant Scottish Government policy and will not consider what the effect of alternative policies would be”.
The commission is not allowed to consider what the effect of alternative policies would be, but do you think that it would be more effective if it was able to do that? I know that that is a difficult balancing act, but other independent financial institutions provide such advice. Would it be helpful if the commission was able to look at policies and say things such as, “That’s just nonsense—we’re not going to be able to afford that”?
Regardless of whether they can look at alternative policies, it is important that independent fiscal institutions such as the Scottish Fiscal Commission do not take a view on whether those policies should be supported. However, it is well within the remit and the capability of such an institution to look at a policy, to state its impacts in the short to medium term and the long term, and to look at what trade-offs might have to be made as a result of having that policy.
For example, in relation to a pensions change such as increasing or decreasing the pension age, the Scottish Fiscal Commission could say, “That would cost Scotland £500 million a year, which would be the equivalent of spending on these other things.” It could illustrate what sort of cuts might have to be made in order to fund a pensions increase, given that Scotland has to balance its budget each year. It would be within the commission’s remit to do that. It certainly has the capability to do that at the moment and, from speaking to various stakeholders, I think that a lot of people would support its doing such work. I therefore do not believe that a change in legislation is needed for the commission to perform that important role and improve the discussion around the trade-offs that different budget decisions would involve.
Thank you for that. I will bring in colleagues around the table, starting with John Mason.
Following that line, if we expand the SFC’s remit too much to include spending, is there a danger that it will lose focus?
If you look at the Scottish Fiscal Commission vis-à-vis comparable institutions—ones that have a forecasting role and other fiscal analysis within their remit—the SFC focuses a lot of its resources on its forecasts in relation to international institutions. That has been the right thing to do for the past 10 years—it has been a new function and a new area for Scotland. As the system matures, such things become more routine, and the SFC can look at how some of those resources can be diverted to other areas in which they would add more value.
I do not believe that going into the area of spending would necessarily compromise the existing functions. It is part of the natural life cycle of such functions that they become more routine over time, which can free up resources to look at new areas.
The convener referred to the figure on page 12 of the report. It was interesting to see all the different institutions. Are some of the groups national and some of them—I detest the term but I will use it anyway—subnational?
They are all from OECD countries. The only institution in that figure that does not represent an OECD country is the Scottish Fiscal Commission.
Some of the countries have two institutions—Portugal, Ireland and Belgium all have more than one. I am not sure what that means. Is one of them subnational?
No. In about eight OECD countries, there are two institutions. It tends to be that one is a fiscal council and one is a parliamentary budget office. Although there can be some overlap of functions, generally the parliamentary budget office has a more hands-on role with the parliamentary committees and in answering queries, and the fiscal council has a more formal role in which it assesses compliance with fiscal rules and such things. It is akin to how Scotland has both the financial scrutiny unit and the Scottish Fiscal Commission.
I will continue on the theme of comparisons. In the report, you make the point that the room for error in Scotland, which is linked to the UK, is less than it is elsewhere: other countries have flexibility of 1.4 per cent of gross domestic product, on average; we have flexibility of only 0.6 per cent of GDP. Is that something that we have to live with and cope with, or is it something that should be changed?
When you say “room for error”, which statistic does that refer to?
I will have to find it.
It is on page 21 of the report.
That is right. On page 21, the report talks about
“managing the reputational risks associated with”
the challenge. It goes on to say that, because the margin is so tight, there is a greater risk for the SFC. Is that what that means?
In the Scottish fiscal context, the Scottish Government must balance its budget. There is relatively little flexibility in terms of the reserve and borrowing powers. As a result, when there are forecasting errors, they can potentially have the impact that the Government has to cut its budget in certain areas.
That is quite risky—it puts the Scottish Fiscal Commission in a position in which it could be blamed for cuts being made in the Government’s budget as a result of its errors. It is important that the constraints of the fiscal framework are explained so that the blame for any adjustments that need to be made as a result of the forecasts does not lie with the Scottish Fiscal Commission.
However, as you have said before, it is quite difficult to explain that to the public and to MSPs. If I remember correctly, in the previous review of the SFC you said that the arrangement that we have with Westminster is one of the most complex fiscal arrangements. Is that still the case?
Yes. Relative to what exists in other countries, it is a very difficult fiscal framework for the layperson to understand.
12:00
I like the way that you say “layperson”.
That includes some MSPs.
I do not want to step too much on Michelle Thomson’s toes, but another point that I want to ask about is diversity in the SFC. We have raised the fact that, at the moment, it is all male. I was particularly interested that you thought that we should perhaps widen out the backgrounds of the people who are in the SFC, so that it would include not just economists. I have always thought that we have to fill it with economists, but could accountants have a place?
The new European Union directive that has just come through for independent fiscal institutions across Europe under the new economic governance arrangement states that the members and leaders of fiscal institutions should have qualifications in economics, finance or budgetary management. It is for the institutions to decide what is best in their own context.
One of the rationales behind our recommendation was that the Scottish Fiscal Commission is seeking to increase its spending analysis. It is doing more work on long-term fiscal sustainability, which touches on areas including health spending and climate change. In that context, it would be sensible to look at a broader range of skill sets beyond economics, and to look to public finance and public financial management, so that it can have the leadership that it needs in order to manage that analysis.
Okay. Thanks.
Your report says:
“The SFC and the Scottish Government should also revisit their Protocol for Engagement to strengthen mutual understanding and reinforce adherence to agreed timelines.”
It goes on to say:
“To ensure accountability, the SFC should also continue to highlight non-compliance with deadlines through publicly reporting, creating a reputational incentive for timely co-operation.”
That is the equivalent of a gold star. However, should the SFC have some powers of sanction beyond just a critical report or press release? If that is the gold star, what equivalent to the naughty step should we be looking for?
There are different types of escalation mechanisms that can be put in place. This committee plays an important role in supporting the Scottish Fiscal Commission to receive the documents that it needs in time. For example, it could be a helpful additional step that the Fiscal Commission could write to the convener and the convener could then raise the matter with the Scottish Government.
There are steps that are available to fiscal institutions in other countries to escalate issues when that is required. However, it is unusual for any one of those mechanisms alone to be sufficient. It is good to have a range of soft and hard options to ensure that the information that is needed is provided on time.
The convener alluded to the fact that the report lists countries with national organisations. We have a devolved Government and a devolved Parliament: ergo, we have a Scotland-focused institution. Given that many of the issues that we look at are spending decisions that relate to Westminster, there is a far greater interplay between the two.
I also want to address some of the political concerns that some people have about Scottish exceptionalism. Could there be an alternative model in which the SFC is part of the Office for Budget Responsibility? Would that address the concern about the proximity to the organisation that gives funding to the SFC? Your report identified some questions about the implications of the relationship between the SFC’s independence and its source of funding. Might that be an alternative model that could make the organisation further removed from the Scottish Government and enable it to look at the whole of Scottish public finances in relation to Westminster?
None of the stakeholders to whom we spoke raised that as something that they would like as a potential solution
I know that, of course, those arrangements exist in Wales, where the UK OBR undertakes devolved forecasts. However, when I look at the situation in Wales vis-à-vis the situation in Scotland, I see that having your own institution brings with it a lot of risks but also brings additional strengths. The strengths are in having an institution that has a Scottish focus, understanding and awareness; the ability to look at the overall Scottish fiscal context in detail and at the extent to which there are specific fiscal challenges ahead and how those could be addressed; and proximity to the Scottish Parliament, which means that it has worked with the financial scrutiny unit in recent years and has helped to upskill members on various fiscal challenges.
You have seen a lot of benefits from having a locally based institution. Those probably outweigh the risks in relation to its independence. Actually, overall, even though there are some risks in terms of its independence, the Scottish Fiscal Commission still ranks very highly in terms of its independence vis-à-vis other OECD institutions.
This has been alluded to, so I will not labour the point, but we have identified that the communications apparatus in the organisation is very good—the people are very effective communicators—but its impact is considerably lower than that of the institution in the Netherlands and that of the OBR. What lessons can we take from that, which the Scottish Fiscal Commission could perhaps look at in order to bolster the impact of a very effective communications operation that just does not seem to be cutting through?
I am really glad that you asked that, because that is one of the things that we have been talking about in depth with the Scottish Fiscal Commission and trying to understand, as part of the review process.
We have come to two conclusions. One is that there are contextual elements that are out of the Scottish Fiscal Commission’s control that mean that it is having a lower communications impact than some of its international peers. When we look at, for example, the media landscape in Scotland, there are relatively few specialist journalists who look at the budget, and the coverage that budgetary issues get in the media institutions that are most read by citizens is relatively low. The situation is very different when compared with that of the UK, where there are many more specialist financial journalists and there seems to be greater coverage of financial issues. That is one part of the picture.
That said, there is still scope for the Scottish Fiscal Commission to improve how it communicates its work, so that it is brought to the fore in articles in which budgetary issues are being discussed. We have spoken to the commission about how it can further embed a communications culture, specifically among its analysts, so that they can write in plainer language and use better communication tools, such as visuals and infographics. We have also spoken to it about interactions with journalists and aspects such as that.
There are two important parts to that communications question.
Okay. Thank you.
We have to put that into perspective as well. The Scottish Fiscal Commission might not be as good as the institutions in countries such as the Netherlands or, indeed, as good as the OBR, but it is a lot better than those in countries such as Finland, France, Germany, Portugal and Greece, as we can see from the list that you have on page 12 of your report.
I call Michelle Thomson.
Thank you for the report—I enjoyed it immensely.
I am genuinely pleased that the SFC got such a clean bill of health. During my time here, I have seen the very determined and deliberate attempts that it has made, particularly around increasing communication, so I celebrate it for that.
In some respects, it is almost like the SFC got the rap for our status quo, much of which we have touched on. I note that it is hard to teach somebody something when their job depends on their not understanding it. We see basic examples of that every year, with MSPs who do not understand why there is a need for contingency in a fixed budget. To what extent is your report a function of the fiscal framework in that there is a fixed budget and limited resource borrowing powers, and there is complexity in the fiscal framework? Would you concede a bit of sympathy for the SFC’s being in the firing line and agree that other actors have very clear roles to play?
It is important to understand that the SFC is one player in a broader ecosystem. A range of actors have important roles to play in improving the fiscal literacy of members of the Scottish Parliament—the financial scrutiny unit, the Scottish Fiscal Commission, think tanks and the media. Ultimately, unless the public understands the issues and puts pressure on the politicians to understand them as well, we will not necessarily get an ecosystem that functions well.
You are correct in saying that the SFC is only one of a range of institutions that have important roles to play in improving the political and public understanding of the fiscal challenges ahead.
You made a comment that I was going to make about specialism in media journalism. We have lost the likes of Ian Fraser, and we very much have generalists. Your common or garden MSP might not understand the fiscal framework, but that extends to journalists. We all have roles; it is not just for the Scottish Fiscal Commission. It is probably also for the political parties, because it is not in the public interest that there is such a swathe of ignorance.
I do not have anything else to add, convener.
My question is about the independence of the SFC, which you have mentioned, and it follows on from some of what Craig Hoy said. You say in the report that the nature of the SFC’s work
“and the possibility of a changed political landscape means that tensions could emerge. Were this to become a more significant risk to the effectiveness of the SFC at some point in the future then alternative arrangements should be considered”
around the funding of the institution. Can you say a bit more about what you see as being that “changed political landscape” and where tensions might emerge?
There have been no issues to date with the funding of the SFC, and the process of it receiving the resources that it needs to undertake its role has, for the most part, functioned very well.
However, in other countries, particularly when you get involved with spending analysis, for example, you start to get much more involved in the political crossfire. It is important to recognise that an increased level of defences might be needed for an institution such as the Scottish Fiscal Commission.
One aspect of that relates to the changing nature of its future work. The other aspect is recognition that there is an anti-establishment and anti-expert sentiment in some countries, and that some institutions of government have come under political fire. Although that does not seem to be the political situation in Scotland right now, it should be recognised that such situations have arisen elsewhere and that protections should be put in place at home that make sure that the institution is protected, should they arise here.
There have been recent circumstances such as the mini-budget and the then Prime Minister, Liz Truss, questioning the validity of the OBR and questioning working with it in any way. She said that engaging it at all was a mistake and that it, rather than policies, was part of the problem. Are you talking about the circumstance in which people find problems with the validity of the organisation on the basis of the choices that they want to make?
Yes, that is the sort of circumstance. In other countries, such as Canada and Hungary, institutions have received budget cuts when they have produced analyses that the Government has not liked.
12:15
That is useful to know. Your report suggests that the SFC could receive funding directly from the Scottish Parliament rather than the Scottish Government. The committee has done quite a bit of work on directly funded organisations, commissioners and so on. I do not want to put words in people’s mouths, but I would imagine that, for members around the table, the circumstances that you have described might be a concern. Which other models could increase the independence of institutions?
The OECD’s principles for independent fiscal institutions suggests two main protections that can be put in place for resources. First, a separate budget line in the budget for those institutions would mean that it would become increasingly transparent when changes were made. Secondly, binding multiyear funding would mean that a Government would not have the latitude to change funding annually in response to analyses that were not favourable to that particular Government. Internationally, those are the two things that we focus on as being the most effective ways for institutions to secure resources that are independent of the Government.
If the committee was to pursue a budget being set for the Scottish Fiscal Commission at the outset of a Parliamentary session, with a plan across the full five years, do you think that that would grant the commission more security against variations in the politics within that time?
That would be one way of doing it, although I would be hesitant to link funding to a Parliamentary session. The UK OBR has just undergone a review, and it was recommended that it receive multiyear funding. As of last autumn, the UK OBR will receive set funding for the next three years, with funding for the third year being decided on a rolling basis. That would be one way for institutions to have multiyear funding that is de-linked from the political cycle.
That concludes questions from members. I have a final question. The report’s conclusion talks about
“the SFC’s potential to go beyond its role as official economic and fiscal forecaster and help raise awareness around fiscal challenges.”
The SFC has raised awareness about climate change and sustainability and there has not really been any political kickback, because it has been able to show a degree of political neutrality. You believe that the SFC should deepen its spending analysis beyond social security to offer more comprehensive insights into public spending trade-offs.
That is the thrust of our recommendations. Broadening and deepening its spending analysis would enable the SFC to produce analyses that would be much more helpful for enriching the budget debate in Scotland in the years ahead. At the moment, its spending analysis is relatively limited to social security. Broadening that out to cover all the aspects that will be subjected to large spending pressure over forthcoming years—in particular, health, social care and aspects relating to the green transition—will be very important in order that members will have at their fingertips the sort of analyses that will enable them to make better decisions about Scotland’s fiscal future.
Are there any more points that you want to make to wind up the session?
That is everything. Thank you very much.
Thank you for your time. It has been very helpful and we greatly appreciate the work that has gone into the very positive report.
Meeting closed at 12:19.