Lady Rice meets with MSPs at lunchtime brief

Bruce Crawford MSP, convenor of the Finance and Constitution Committee, kindly invited MSPs to hear more about the role of the Scottish Fiscal Commission at a lunchtime briefing in the parliament on June 22. Commission chair Lady Susan Rice gave a short address on how the Commission is focused on serving parliament.

Susan’s opening remarks:

“Good afternoon.  I’d like to echo Bruce’s thanks to you for coming along at what, I know, is a very busy time for you, just ahead of the summer recess. 

I’m glad you’ve managed to grab a sandwich just now.  At least that’s one task – lunch – we’ve managed to remove from your ‘to do’ list.  To be totally honest, we thought that hearing about Scotland’s fiscal arrangements is best done on a full stomach.

Indeed, there can be few more important priorities for Parliamentarians than the fiscal and economic responsibilities that are yours to oversee.

You’ll be aware that, since the 2012 and 2016 Scotland Acts, your direct responsibility for raising revenues has expanded, as more and more taxes have come under Scotland’s control.  The Scottish Parliament will be responsible for around £17 billion worth of taxes.  The scale of these new powers is one of the reasons why you and your colleagues passed the Scottish Fiscal Commission Act last year.

I’m pleased to say that we are now up and running as an independent, statutory, non-ministerial body.  And we’re ready to forecast future receipts of devolved taxes, social security benefits and the prospects for economic growth.

I am delighted to welcome you here today.  We would like to describe how we intend to do three things:  1) serve you in the months and years ahead in a transparent and open way; 2)  assure you that we’re dedicated to providing the most robust forecasts we can; and 3) to highlight that we’re here to support the work of the entire Parliament, irrespective of political affiliations.

Our job is mainly to provide official forecasts, independently produced, for the Government’s Budget.  The Commission is also required to assess, again on an independent basis, the reasonableness of the Government’s projections of its borrowing requirement.  And our forecasts of onshore GDP will play an important part in triggering the Government’s additional borrowing powers in the event of an economic shock specific to Scotland.

Let me provide a context for all this, first by giving you what I promise will be a short history of the Commission.  Then I’ll describe how we’ve been getting ready for our new responsibilities, followed by what we’re doing now.

We were originally set up in June 2014 as a non-statutory body.  Our job was to provide independent scrutiny of the Scottish Government’s forecasts of receipts from the taxes then newly devolved to Scotland, and to make a judgment as to whether their forecasts were reasonable or not.

We had three devolved taxes to consider in that first year – Land and Buildings Transaction Tax, Scottish Landfill Tax, along with analysis of the economic determinants of Non-Domestic Rates.

Our first report in 2014 was all of 12 pages long.  As we developed through 2015, the forecasts on the Draft Budget moved from a two- to a five-year horizon.  Our second report was five times longer.  There was also quite a lot of Parliamentary debate in those early days as to whether we could genuinely be independent of Government.  

We were answerable to the Parliament and appointed by it, but on the back of Ministerial recommendations.  And we were, after all, scrutinising the Government’s forecasts.

We knew we were operating independently, but we chose the 22 OECD Principles for Independent Fiscal Institutions as our comparator, in order to benchmark our activities against good practice. 

We continued to scrutinize and challenge the Government’s work last year.  For our third budget round in 2016, income tax receipts and threshold-setting powers were added to the list of devolved taxes, so we were looking at significant revenue for this Parliament.

Our report was ten times bigger than in our first although, as an experienced financier, I must caution you that past trends are not always a good indicator of future growth.  And also, last year, further change in the fiscal landscape was afoot. 

Two new pieces of legislation – the 2016 Scotland Act in the Westminster Parliament, and the Scottish Fiscal Commission Act in this Parliament – fundamentally changed our mission.  And provided the primary legislation and framework for us to operate independently, now on a statutory basis.
We began a twelve month transition programme and, on April 1st this year, we emerged from the cocoon as a non-ministerial department, operating under statute and of course still independent of Government.  Which takes me to what we’re doing now.

Our ambition is to develop a strong reputation as a credible, independent and transparent body, delivering value for money to the taxpayer.  With that as the backdrop, we settled on an operating model which we believe is efficient, adaptable and continues to be in line with the OECD principles.

Beginning this fiscal year, the Commission will produce its own forecasts, using its own models.  Our approach is reflected in a Protocol we’ve now agreed with the Government describing how we’ll interact with each other. 

We’ve completed a process of knowledge transfer from the Government forecasters, and taken ownership of the models already in use for the existing devolved taxes.  Last year, we judged the forecasts produced with these models to be reasonable, so it seemed reasonable to start with them now.  But we’re also developing and enhancing them.

And – we‘ve been developing new models for the more recently devolved taxes.  We’ve established protocols and agreements with other bodies, with which we need to interact, such as the OBR and Revenue Scotland.  And we’ve developed our internal governance in order to ensure we operate to the highest public sector standards. 

We’ve hired a strong team of analysts from academia, the private sector and the UK and Scottish civil service.  Their experience includes fiscal forecasting, macroeconomic modelling, housing market analysis, public sector finances, and data and statistics.

Two new Commissioners have joined me, Professor Alasdair Smith and David Wilson.  And we have a new Chief Executive, John Ireland.  Alasdair, David and John are all here and I hope you meet them later.

So I come to my final section before concluding these comments, as I want to share with you what we’re going to be doing in the coming months.

We now have the primary responsibility for forecasting Scottish onshore GDP, income tax receipts (apart from savings and dividend income), Land & Buildings Transaction and other property taxes, Scottish Landfill Tax, non-domestic rates.

And, in time, demand-led social security expenditure – with one new benefit to be included in the upcoming Budget. Air Departure Tax is also coming our way in the next Budget year and after that Aggregates Levy, both more like environmental taxes.

Obviously we’re pretty hard at work, so – when are you likely to hear anything from us?  Well, our remit calls for a forecast at each fiscal event.

While we wait for the findings of the Budget Review Group, which I believe are imminent, we expect to provide forecasts to accompany the Scottish Government’s Draft Budget later this year.
Our mandate restricts us to producing the official forecasts the Government must use for its budget – that’s what we do.  At the same time, our mandate prevents us from providing forecasts relating to alternative proposals, though I know how tempting it might be for some of you to ask!

As you’d expect, we’ll publish evaluations of our prior forecasts in subsequent years.  Indeed, we’ll publish our next evaluation in September this year – although of course it’ll still be the Scottish Government’s forecasts from last year that we’re evaluating – not yet our own.

In conclusion: I invited you to come along to hear first-hand what we do and how we’ll support your fiscal responsibility, but I want to make three final points about our work.

The first is that our Fiscal Commission is one of only a handful in the world that exist at sub-national level.  And the only one pretty much anywhere responsible for developing all its own forecast models and producing the forecasts.

You’ve shown real foresight, and little courage, in setting us up.

The second point is that forecasts are never, by their very nature, right.  Not only that, but phrases such as ‘forecast error’ don’t mean that our colleagues couldn’t add up the numbers. They simply describe, after the fact, how close or far we were from what actually happened, and why.

Finally, our very able staff will be developing economic models and forecasts over the coming months, in response to direction set by us, the Commissioners, not set by anyone else.  

At the end of the day, responsibility for the independent fiscal and economic forecasts for Scotland sits wholly on the shoulders of David, Alasdair and myself.
The forecasts are the Commissioners’ jointly – we’re personally answerable to Parliament for them.

The calibre of our team give the three of us confidence that you can hope to get the best possible information for your decisions as the Scotland Parliament sets off on a new era of fiscal history.

Because, at the end of the day, while the forecasts are ours, the decisions about the Budget are entirely yours as a Parliament.”