Bill Jamieson: Fiscal forecasting in a Force 10 gale

There could be storm clouds ahead as the Scottish Fiscal Commission tries to clarify what conditions are likely to follow. Picture: Donald MacLeod
There could be storm clouds ahead as the Scottish Fiscal Commission tries to clarify what conditions are likely to follow. Picture: Donald MacLeod
Share this article
1
Have your say

New statutory body has its work cut out to present economic figures that are not damned as ‘Project Fear’ says Bill Jamieson

Around each ascending corner the hill keeps on climbing. Just when you thought you had finally arrived is another bend. And finally, there it is: The Governor’s Mansion, next door to St Andrews House, a daunting building of rugged stone and small windows.

Welcome to Scotland’s Gormenghast, home in the novels of Mervyn Peake to the House of Groan where earls ruled for centuries without anything changing. How daunting – and superbly fitting – an abode for our new, independent Scottish Fiscal Commission.

Just when you thought there were surely no more heights to climb, the front door leads to a steep staircase and the first floor offices of the SFC. The ground floor with its kitchen would have been a merciful relief but this was bagged by the Human Rights Commission in that time-honoured principle of government office allocation: it got there first.

Here is where the Scottish government’s hopes for our economy and well-being are about to be put to the fiery test: its every forecast and projection of receipts from taxes devolved to Holyrood – basic and higher income tax bands and levels, Land & Buildings Transactions Tax proceeds, landfill charges, “economic determinants” of forecast revenues from business rates and, tacked on for good measure, social security forecasting.

But its most challenging – and controversial – role will be in providing independent forecast for the Scottish economy.

And here is where you will find the SFC’s chair, Lady Susan Rice, once grand dame of Lloyds Banking Group and now tasked with setting up the SFC (it goes live as a statutory body on 1 April), sorting out the protocols and logistics of its independent dealings with the Holyrood administration, finding three new commissioners who set the strategic direction of the SFC, overseeing the recruitment or secondment of researchers and analysts from both the Scottish and UK civil service, academics and the private sector; presenting the first assessment of the Scottish Budget last December and fixing the SFC’s 2016-17 budget, now raised (twice) to £1.2 million.

All this has proceeded with lengthy discussions and consultations with the UK’s Office for Budget Responsibility.

I understand two new commissioners have already been selected though not yet formally announced: Alasdair Smith, professor of economics and Vice Chancellor at the University of Sussex, currently an inquiry chair at the Competition and Markets Authority; and David Wilson, Executive Director of the International Public Policy Institute at the University of Strathclyde. A third commissioner is mooted. Charles Nolan continues. Interim chief executive is Sean Neill.

Baronial furniture might suit for such a setting and such a function. But the SFC has had to make do with cast-off fittings from the bowels of St Andrews House. The result is a boardroom table with a hole in the middle and Soviet Union fixtures that might have been drawn from Moldova International Airport. No fripperies here: the bare walls have been skimmed in Austerity White.

However, standing in the SFC boardroom last week I was stunned by the panoramic views of the capital: you can see for miles. What more could the SFC need? Unfortunately, this is about the only clear view we are likely to get from Gormenghast.

For not only has it to draw up a bullet-proof methodology for its forecasting; not only has it to agree the scope and limits of its brief with the Scottish government and get a scratch team up and running; not only will it have to wrestle with all the searching questions surrounding the Scottish government’s own forecasting attempts to date and also deal with the imponderables of behavioural effects of tax changes. It is now also faced with the Scottish forecaster’s ultimate nightmare Black Swan event: the prospect of a second independence referendum.

And if all that was not enough, it will also have to contend with a deep public scepticism of economic forecasts and indeed the views of any economic “experts” in general. After the hopelessly optimistic – and doom-laden - claims during the last independence referendum, and the flawed forecasts in the EU referendum, public trust in such projections – independent or otherwise – is at rock bottom. Little wonder many say indyref2 will be determined by feelings, not figures.

The SFC faces a Herculean task in presenting numbers that will not immediately be seized upon as sailing uncomfortably close to ‘Project Fear’. Take, for example, the masterful summary released this week by long-standing economy watcher Professor John McLaren. Scotland’s budget deficit, he notes, is projected to remain around £11 billion or 6.4 per cent of GDP in 1919-20 – just as the UK has come close to balance.

“Unlike previous downturns,” he notes, “this differential is unlikely to change much under current tax and spend patterns as neither the Scottish nor UK governments expect North Sea revenues to return to anything like past peaks.”

As for the economy, over the last year of available data, Scotland’s economy has grown by just 0.7 per cent while the UK has grown by 2.4 per cent.

How the SFC can make a central forecast for Scotland’s economy in the face of a massive fork in the road ahead is not clear. Fortunately from the SFC’s point of view it is barred from the dark diversions of alternative scenario planning. What joyous relief! It has to stick firmly to the central policy direction of the administration, whatever that may be. So how the yawning gap might be narrowed between spending and revenues is left for others.

And that will be a massive relief to the SFC because, as McLaren points out, none of the available options that would allow an independent Scotland to close the gap “are easy or without consequences”.

As with Brexit “the economic implications of independence are highly uncertain, but downsides dominate”. Among policy options are income tax rises - three pence on the basic rate, with a bit more on the higher rate, could raise more than £1.5 billion; removing VAT exemptions and reductions could boost receipts, according to the Mirrlees Review, by 25 per cent. Or it could introduce a new whisky tax that could raise an additional £1 billion a year.

As for spending cuts, an independent Scotland could health and education, by adopting an “unarmed” approach to defence spending, cutting this from £3 billion to around £0.5 billion. However, whether the UK government would still site Trident in Scotland or undertake defence work here is moot. Other possible economies could include economic development (mainly Scottish Enterprise).

Then there is the issue of which currency an independent Scotland would adopt, with the Euro as an option, notwithstanding the pain inflicted on Greece. Through a combination of higher taxes, lower spending and continued borrowing, “a new equilibrium position might be reached”, says McLaren, “that does not lead to a dramatically different country”.

As I walked down from Gormenghast in the swirling mist, I pondered that the SFC might not be so gloom-laden after all, considering what may well lie ahead beyond the number-crunching.