Bill Jamieson: A satnav for Scots budget is a must

The Scottish Fiscal Commission will play a key role in keeping Scottish government finances on the road

It’s shiny. It glistens. And this souped-up motor will soon be delivered to a driveway near us. Scotland’s extra tax and spending powers may not be quite the complete new model with the independence saltire logo that many desired. But it has an array of new buttons, an extra couple of gears – and a bigger seat for the driver.

But before we climb in and switch on the engine, we notice holes. There’s bits of the dashboard missing. Where’s the petrol gauge? And the oil check level and the speedometer? Come to that, where’s the satnav that should be fitted as standard?

Scotland is set to take possession of significant new powers to vary tax levels and rates.

It has already flexed its muscles with the Land and Buildings Transactions Tax (L&BTT). It also has other new tools in the bag.

Together these could have a significant effect on economic performance.

But other critical components need to be in place on the dashboard – a means to monitor and control the effects of tax and spending and enable us to check that the engine is working as effectively and efficiently as it should.

Enter the proposed new Scottish Fiscal Commission – the body that will act as the country’s fiscal watchdog. It needs to provide independent monitoring of the government’s budget, its spending and borrowing proposals and to check regularly on Scotland’s economic direction and performance.

By the end of next month a preliminary progress report on setting up the commission will be made to the Scottish Parliament’s finance committee. It will be a vital tool to enable MSPs and the wider public to check on the stewardship of Scotland’s public finances. But how can we ensure that it really will be independent? Who will appoint its chair and senior officials? What should be its scope and remit? Should it provide alternative budget projections and economic forecasts separate from those of the Scottish government? From where will its staff be recruited? And how should it report to MSPs?

The proposed SFC – similar in outline to the UK’s independent Office for Budget Responsibility – will mark a significant change from the existing Independent Fiscal Commission, the pallid three-person body chaired by Lady Susan Rice, flanked by Professor Andrew Hughes-Hallett and Prof Campbell Leith. With a budget of just £20,000 it was never in a position to provide the full scale of independent monitoring and scrutiny required.

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An immediate contentious issue is how closely – if at all – the Scottish Government should adopt the UK’s government’s fiscal rules – permanent constraints on fiscal aggregates such as the fiscal balance, debt (gross or net) and total expenditure. Should these be fully aligned with those of the UK or alternative rules adopted? Separate rules may be justified on the grounds that they would be more attuned to specific Scottish conditions and characteristics. But how much leeway is compatible with the UK government’s commitment to balancing the budget over five years and ensuring that public sector net debt meets Treasury obligations to see this fall as a percentage of GDP?

One possible sanction might be to adopt the letter-writing obligation the Chancellor has imposed on the Bank of England whenever there is a significant deviation from the inflation target – a letter that would explain how the deviation arose and how it intends to correct it. Under such an arrangement, the Scottish Government would be obliged to write a letter to the Scottish parliament when its spending and borrowing targets are in danger of being breached – and obliging it to spell out how it intends to make corrections.

The proposed new Fiscal Commission could wield considerable influence through its own independent assessments of Scottish government forecasts of tax revenues and the economic assumptions underlying these forecasts.

A cardinal issue will be the assessment of tax changes and particularly the calculation of behavioural effects. The Scottish government may be keen to raise revenue through changes to income tax rates and levels. But such changes need to take account of the likely response of taxpayers. Increases in the higher rate could well result in exodus, or taxpayers seeking to mitigate their liability by drawing down capital payments from companies rather than direct income tax. How much behavioural analysis was undertaken, for example, in the setting of L&BTT? Very little, I am told.

Should the proposed Commission provide alternative assessments of the government’s economic forecasts? Several problems arise here. First, do we have in Scotland an independent economic forecasting team of sufficient substance and resource to undertake this? We have the Fraser of Allander Institute, Fiscal Affairs Scotland and valuable commentary from Professor David Bell at Stirling University and Inverness-based Tony McKay. But neither would claim to be running a fully resourced independent forecasting unit. It is a very poor reflection on Scotland’s universities that so little research funding and support has been given for macro-economic analysis and forecasting.

And then there may come a point beyond which the finance secretary would be loath to concede powers over economic levers so newly acquired. He or she may find themselves constantly second guessed by bodies duty bound to find fault and armed to the legal teeth to question every call that is made.

It is the prime duty of government to govern and, unlike statutory bodies, it draws its legitimacy from a democratic mandate. However, such constant testing and questioning is also part of a democratic constitution. And it brings the benefit of more sound, researched and considered judgment.

How is the managerial independence of the proposed new commission to be secured and its continuing independence guaranteed? A front runner proposal is that the SFC chair should be nominated by the government and subsequently approved with a veto right by the parliament.

But it can hardly be right that the government gets to appoint the chair of the very commission that is supposed to act as an independent watchdog. Perhaps a better arrangement would be for a nominating troika of qualified people outside of government – Audit Scotland, perhaps, Fiscal Affairs Scotland and a top accountancy professional – say, KPMG – to draw up a short list of nominees which can then be submitted to parliament for approval. This would get round the risk of the government appointing its own nodding donkeys.

Finally, there is the question of whether the SFC’s operational independence – non-interference by government – should be enshrined in law. I would say yes. But as a general principle there should be limits to the recourse to law in matters of economics. Discretion permits a greater flexibility of response than rules.

These are the thorny issues that arise on what seems a fairly straightforward matter for the parliament to consider. A Scottish OBR is a vital part of “more powers”. But we must take care to ensure that we get an SFC that is fully equipped for its important task, that it has clear responsibilities and that its independence is sufficiently robust to attract that most scarce commodity of all in our institutions today – public trust.