2Fiscal institutions
11.A fiscal framework consists of fiscal rules and fiscal institutions. The OECD defines fiscal institutions as “publicly funded, independent bodies under the statutory authority of the executive or the legislature which provide non-partisan oversight and analysis of, and in some cases advice on, fiscal policy and performance”.8 The IMF states that key features of effective independent fiscal institutions include:
- Strict operational independence from politics;
- Provision or public assessment of budgetary forecasts;
- Strong presence in the public debate (notably through an effective communication; strategy); and
- Explicit role in monitoring fiscal policy rules. 9
12.The Smith Commission recognised the important role that fiscal institutions will have in the new devolution settlement for Scotland. It recommended that independent scrutiny of Scotland’s public finances be expanded and strengthened “in recognition of the additional variability and uncertainty that further tax and spending devolution will introduce into the budgeting process”.10 This can be achieved either by enhancing the role of the Office for Budget Responsibility (OBR) (which already forecasts devolved revenues), or that of the Scottish Fiscal Commission (SFC),11 or the creation of new body in Scotland. The UK Government has been clear in its view that the “remit and capacity” of the Scottish Fiscal Commission should be enhanced, “fully consistent with OECD principles and reflecting the UK experience with the OBR”.12
13.The Scottish Fiscal Commission is currently responsible for assessing the ‘reasonableness’ of Scottish Government forecasts for those taxes already devolved to the Scottish Parliament. In its inquiry into the fiscal framework the Finance Committee of the Scottish Parliament identified “a general consensus that the SFC should produce its own forecasts [ … ] there was also strong support for the SFC having a wider role in monitoring the adherence of the Scottish Government to its fiscal rules and the sustainability of the public finances”.13
14.The Scottish Government is legislating to put the Scottish Fiscal Commission on a statutory footing but the current bill falls short of the recommendations of the Finance Committee. In its report on the Bill the Finance Committee concluded that the
Commission’s role should be “widened substantially” from that stated in the Bill to include production of official forecasts on devolved taxes and assessment of the sustainability of Scotland’s public finances.14 This would give it a similar role to that of the OBR.
15.The accuracy and independence of forecasts will be a key element of the new devolution settlement. As more powers are devolved to the Scottish Parliament then the cost of forecast errors will be proportionally greater.15 The importance of accurate forecasting is not limited to Scottish revenues. The adjustments to the block grant will most likely be determined by forecasts of rUK revenues. Professor Bell, Professor of Economics at Stirling University, told us that this will require a degree of coordination between the OBR and Scotland’s fiscal body because “you do not want to have two completely different views of the prospects for the economy”.16
16.Connected to the issue of forecasting is the question of reconciliation in light of actual outturns. If the block grant adjustments were subsequently amended to reflect the outturn figures it could be argued that the forecasts are less important. However, David Eiser, Research Fellow in the Department of Economics at Stirling University, cautioned that these circumstances might generate political arguments around how good the forecasts were and the implications for budgetary planning. In David Eiser’s view this is a further reason why who does the forecasting is an important issue.17 David Bell told us:
I think it is essential that the forecasting is done outside Government, then you will know if they are wrong, which is probably going to be true; they will be honestly wrong rather than dishonestly wrong.18
17.Economic forecasts will have a key role in the new fiscal framework. There is a clear consensus that forecasting should be done by a body independent of government. We agree with the conclusions of the Finance Committee of the Scottish Parliament and recommend that an enhanced Scottish Fiscal Commission be made responsible for forecasting in Scotland.
18.We make further recommendations on the role of the Scottish Fiscal Commission later in this Report.
8 OECD, Recommendation of the Council on Principles for Independent Fiscal Institutions, February 2014
9 SPICe, Financial Scrutiny Unit Briefing, Scotland’s Fiscal Framework, December 2015
10 The Smith Commission, Report of the Smith Commission for further devolution of powers to the Scottish Parliament, 27 November 2014, Para 95.7
11 The Scottish Fiscal Commission was established in June 2014 “to provide independent scrutiny of Scottish Government forecasts of receipts and economic determinants from taxes devolved to Scotland. At present there are two devolved taxes in Scotland, Scottish Landfill Tax and Land and Buildings Transaction Tax. The Commission also scrutinises the Scottish Government’s assumptions about the economic determinants that drive income from Non-Domestic Rates.” Its remit does not currently include analysis and scrutiny of expenditure.
12 UK Government, Scotland in the United Kingdom: An enduring settlement, Cm 8990, January 2015, para 2.4.34
13 Scottish Parliament Finance Committee, Scotland’s Fiscal Framework, SP Paper 771, June 2015, para 117
14 Scottish Parliament Finance Committee, Report on the Scottish Fiscal Commission Bill, SP Paper 877, 5 January 2016
15 Written evidence submitted by Professor David Bell to the Finance Committee’s Fiscal Framework inquiry
16 Q84
17 Q76
18 Q84
© Parliamentary copyright 2015
Prepared 9 February 2016