Why has the Scottish Fiscal Commission been set up?
The need for independent scrutiny of Scotland’s public finances was highlighted by the Smith Commission resulting from “the additional variability and uncertainty that further tax and spending devolution will introduce into the budgeting process."
The Scottish Fiscal Commission (2016) Act established the Commission as a statutory body, independent of the Scottish Government, to produce official fiscal and economic forecasts for the Government to use in its budget and financial planning. The Commission’s forecasts will also assist the Parliament’s scrutiny of the Draft Budget and Budget Bill.
The Commission is part of a growing international trend to establish independent fiscal institutions to promote sound fiscal policy and sustainable public finances. The Commission was originally established as a non-statutory body in 2014 as the Scottish Government began to collect devolved taxes.
What is the Scottish Fiscal Commission?
The Commission is a Non-Ministerial Department and consists of independent Commissioners who are appointed by the Cabinet Secretary for Finance and the Constitution after an open public appointments process. The appointments are then subject to approval by the Scottish Parliament after a recommendation by the Finance and Constitution Committee. The Commission is chaired by Lady Susan Rice and there are two other Commissioners, David Wilson and Professor Alasdair Smith.
How many staff does the SFC have? How does this compare to the OBR?
The Commission has recruited 20 staff into the Commission from the Scottish and UK civil service, academia and the private sector.
The Office for Budget Responsibility (OBR) is the UK independent fiscal forecaster. It has around 30 staff, although it is difficult to make comparisons: they have a wider role on, for example, fiscal sustainability and spending policy costing, but use analysts across Whitehall Departments to produce their forecasts. The Commission has its own economic and tax models used to produce forecasts. This year the Commission has relied upon Scottish Government analysts to produce some of its social security forecasts under the guidance of the Commissioners and their staff. We plan to bring this activity in house in the new year.
When are your forecasts published?
The Commission produces at least two substantive forecasts each year. The first is published at the same time as the Scottish Government’s Draft Budget usually in December. This will be updated as the Budget Bill is considered by Parliament to reflect any changes in the Scottish Government’s policies. The Commission intends to publish a second substantive forecast probably in the late spring – and it can produce further forecasts if the Commissioners decide that there are significant new factors that need to be considered.
What does the SFC forecast?
The Commission’s forecasting remit is specified by the Scottish Fiscal Commission (2016) Act and in secondary legislation. The fiscal forecasts are for Scottish Government receipts from fully and partially devolved taxes and devolved social security expenditure.
The taxes are Scottish Non-Savings Non-Dividend Income Tax; Land and Buildings Transaction Tax; Scottish Landfill Tax and Non-Domestic Rates. We will also forecast Aggregates Levy and Air Departure Tax.
The Social Security expenditure that has already been devolved comprises Discretionary Housing Payments, the Scottish Welfare Fund and the employability programmes. Our forecasts of expenditure on these areas reflect current Scottish Government policy. The Scottish Government plans to devolve Carer’s Allowance and introduce a supplement by summer 2018 and we have forecast expenditure on both Carer’s Allowance and the Supplement to Carer’s Allowance.
The final group of social security benefits forecast are those where the Scottish Government has announced plans for devolution, but the timetable and policy information are not sufficiently detailed for us to cost at this stage. This covers Funeral Payments, Healthy Start Vouchers and Sure Start Maternity Grant. For these benefits we are forecasting expenditure based on current UK Government policy.
The Commission is also required to forecast onshore Scottish GDP.
The forecasts will be for five years, with in-year forecasts for the current financial year.
How do the forecasts help the Scottish Government decide on its Budget?
Our fiscal forecasts are used by the Scottish Government as they develop their annual Draft Budget. This means the Government will have seen the forecasts before they are published alongside the Draft Budget. The interaction between the Government and the Commission in the ten weeks before the Draft Budget is published in December and is governed by a Protocol that was agreed between the Chair of the Fiscal Commission and the Cabinet Secretary for Finance. The Protocol is published on the Commission’s website.
Details of all engagement and contact between Commissioners and Scottish Ministers during fiscal events will be published alongside the Commission’s forecast report.
The Parliament also makes use of the Commission’s forecasts and its fiscal analysis during their scrutiny of the Draft Budget and the Budget Bill. The Commissioners will give evidence to the Finance and Constitution Committee after their forecasts are published.
Do the fiscal forecasts determine the size of the Government’s Budget?
The Commission’s forecasts are an important component in determining the total budget that is available to the Scottish Government to spend in each fiscal year. However, it is important to remember that they are not the only forecasts which determine the amount available to the Government and typically a Block Grant Adjustment for each devolved tax depends upon forecasts made by the OBR.
The economic forecast of Scottish onshore GDP could in certain circumstances trigger additional borrowing powers under the Fiscal Framework agreement between the Scottish and UK Governments.
What are the consequences for the Budget if your forecasts are wrong?
For the fully devolved taxes and social security which are collected and spent in Scotland, any differences in receipts and expenditure will have to be managed by the Scottish Government within year. The Scottish Government has access to a number of cash management tools including the ability to borrow for forecast errors.
Income tax is collected by HMRC and full outturn data are available 18 months after the end of the financial year, once self-assessment returns have been collected. Any differences between our forecasts and the collected tax revenues will be reconciled once the outturn data are available. This process ensures that the cash available to the Government reflects the cash actually raised rather than the Commission’s forecasts.
The Commission is required to publish an evaluation of its forecasts each year based on the available outturn data.
What other forecasts are available and who provides them?
The UK Office of Budget Responsibility produces forecasts of tax receipts and some social security spending for the UK and for Scotland using UK-wide assumptions, but not of Scotland’s onshore GDP.
The Scottish Government produces its own forecasts from time to time to aid policy development. It also produces the Government Expenditure & Revenue Scotland report annually. This is an estimate of public sector accounts for Scotland through detailed analysis of official UK and Scottish Government finance statistics. It analyses Scotland’s fiscal position under different scenarios within the current constitutional framework.
Think tanks and agencies produce forecasts using their own preferred models; however the Commission is Scotland’s only official five-year fiscal and economic forecaster.
There are numerous academic and interest groups which publish forecasts and commentary on Scottish economic and fiscal matters from time to time.
How does the Scottish Fiscal Commission work with other fiscal agencies?
Numerous other agencies have interests in Scotland’s fiscal development. On the collection side, Revenue Scotland is responsible for collecting the fully devolved taxes (Land and Buildings Transaction Tax and Scottish Landfill Tax) and HM Revenue and Customs collects Scottish Income Tax. The Commission has a close working relationship with both of these agencies and has developed a Memorandum of Understanding with each of them.
The UK Office of Budget Responsibility is the UK’s independent fiscal forecaster. The Commission works closely with the OBR and has developed a set of principles on how they engage.
We work closely with a number of other data partners including the Scottish Government, the Scottish Environmental Protection Agency and Registers of Scotland.