Making the numbers add up: interview with Lady Susan Rice of the Scottish Fiscal Commission

Forecasting the future - Image credit: istock

In an era of fake news and alternative facts, producing well-researched sober forecasts about the nation’s finances is unlikely to win you any friends.

But that is the daunting task that will soon be handed to the Scottish Fiscal Commission (SFC) as it moves from checking the Finance Secretary’s homework to doing its own independent financial future gazing.

The SFC was established in 2014 to scrutinise Scottish Government forecasts for the limited devolved tax in the Scotland Act 2012 – mainly landfill tax and Land and Buildings Transaction Tax (LBTT).

Since then we’ve had ‘The Vow’, the Smith Commission, the Scotland Act 2016 and a raft of new fiscal powers handed to Scotland, so on 1 April the SFC will move from being scrutineers to producing the official forecasts for the Scottish Government.

But after two referendums, endless elections and enough diametrically opposed economic reports to fill a library, Scotland is drained, divided and confused about the future, so it remains to be seen how the new supercharged SFC will fit into this landscape.

---

RELATED CONTENT

Ex-Bank of England chief: Scotland ‘certainly could’ be an independent country

"The Fixer": Derek Mackay talks budget

Bank of England chief economist: Economic forecasting 'in crisis'

---

“It’s an interesting world that we live in,” chair Lady Susan Rice tells Holyrood shortly before the SFC assumes its new powers.

“My goal is to do a highly professional job of forecasting, do the best that we can do, and that we in the SFC talk about our forecasts in layman’s terms – I think that’s hugely important.

“We’ll be very public about what we are seeing and what we are finding, and that means that others can look at this and make what they want of it.

“But my hope is that we do a first-class job and that we as a commission become the voice that others turn to, because they come to trust us and they come to respect us.

“I think we’ve got a better chance of avoiding the chaos that’s out there in terms of understanding if we can develop that respect internally, but that comes with time, it comes with us doing a good job, communicating and living up to our own promises about accessibility and openness.

“But at the end of the day we’re not the police, we can’t control what others do with the information, but what we can do is be open with the information so that all sides, everybody, sees the same information and we can simply be true to our own promise of independence and what we do here.”

So can a forecast ever be entirely spin-proof?

When the UK Office for Budget Responsibility (OBR) was created in 2010, it was almost immediately accused of bowing to government interference when it revised down public sector job losses ahead of the chancellor’s budget.

The then shadow chancellor, Alistair Darling, said the row put the OBR’s “very credibility at stake”.

Darling later went on to release a raft of dire economic ‘facts’ about Scottish separatism as head of Better Together to counter the Scottish Government’s cheery ‘facts’ about independence in its White Paper.

Scotland voted No, so we never got to see whose ‘facts’ were the right ones, but Britain did vote for Brexit following a campaign so packed with ‘facts’ that top Brexiteer Michael Gove declared that we had all had “enough of experts from organisations with acronyms saying that they know what is best and getting it consistently wrong”.

How can the SFC even begin to produce authoritative forecasts when we’re about to begin a highly-charged Brexit with everyone keeping their cards so close to their chests?

“It is an area of great uncertainty,” says Lady Rice, with an air of understatement.

“In fact, my understanding is that if something were to change, any ultimate cutting of the rope takes a couple of years to happen, so it’s not as if something happens overnight.

“Mindsets may be different, but we have to wait and see how the economy – and this is not a political question – is responding and how businesses are responding to it.

“We hear about some businesses setting up a little office here and there, but others are saying that they are actually expanding their London or Scottish bases.

“What matters is how those economic and behavioural factors out there respond to the fact that Article 50 is triggered.

“Any change of that sort has to figure in our forecasting, so as we get later on into this year we will see what impacts Brexit will have had, and will have been perceived to have had, and all of that will be part of the information that we use.

“But what we will avoid, I hope, is making assumptions ahead of time about something like Brexit and weaving those assumptions based on nothing into our thinking.

“So if you look from last June until now, roughly, there has been a change in the exchange rate for sterling, which seems to have bedded in now, but it was a change.

“Everybody predicted last June that the economy would literally fall off a cliff within weeks, but that hasn’t happened and we see that in the data.

“Pundits said: ‘If it hasn’t happened immediately, then it will happen by September.’

“Well, here we are in March and that hasn’t, for the most part, happened yet, so what we will do is wait until we’re doing our work and take that information we have about those impacts.

“So we have to be cognisant about these things and think about them, but not imagine what it could be.”

And what will happen if the Scottish Government throws another constitutional hand grenade into the mix with a second independence referendum?

“I couldn’t even answer that at this stage,” admits Lady Rice.

“Obviously any potential change will have impacts on what is happening, if it has impacts on savings, growth, any of the factors that we actually deal with, that’s what we’re interested in.”

But it’s not just constitutional uncertainty that can throw forecasts out the window, as the financial crash of 2008 demonstrated when some dodgy US mortgages dragged down the entire world economy with almost no advance warning.

“Anything can happen,” says Lady Rice.

“In the wider world, in the UK, or in Scotland, I couldn’t say we’re expecting a change in one industry or another.

“It’s hard to look into a crystal ball and know what’s coming, but if you look back before any of this to the financial crash – I can’t believe it’s ten years ago – people weren’t really predicting that ahead of time, but it happened and it’s had all sorts of impacts and the repercussions have lasted a long time.”

Scotland also includes its own built-in volatility with so much of its economy reliant on the North Sea, where the value of its abundant oil and gas assets are determined by Arab sheiks, Texan oil barons and London excisemen.

While oil revenues remain reserved to Westminster, the SFC will have to determine how the fortunes of the offshore economy impacts onshore, such as calculating the tax take from workers’ wages or the duty from plummeting Aberdeenshire house prices.

Lady Rice said: “Onshore GDP forecasting becomes part of our remit going forward. It’s not something we have done so I can’t speak from practice or experience, but a lot of factors and a lot of variability will affect what happens onshore.

“Oil is one, although it’s not the only factor in Scotland, and the oil price change which impacts on the tax revenue is just one factor.

“It’s not my expertise, but I lived in Aberdeen for a long time and engaged with some of the industry there. You’ve got an onshore industry that serves the world, it’s not just serving the North Sea, and that’s the brilliant thing about the 800 companies in Aberdeen, Aberdeenshire and some in the central belt.”

Scotland already had a taste of this uncertainty when the Scottish Government revised down its LBTT forecasts from £1.8 bn between 2017-18 and 2020-21 to just £962m in December.

“You learn from that and it shows you something about behaviour,” Lady Rice said.

“Did property prices go down? Did people perhaps sell the more expensive properties before the tax kicked in – something we call forestalling?

“We actually saw evidence of forestalling just before the tax took effect. We saw a similar thing with the additional dwelling supplement for a second property.

“You don’t know about that until it happens.”

One thing that is certain is when the SFC assumes its new role on 1 April it will be breaking new ground as one of the first sub-state fiscal institutions responsible for forecasting.

“On April 1 we become a non-ministerial department and our remit changes quite profoundly,” she said.

“Where we have been scrutinising forecasts that others have done, now we will have responsibility for creating the central forecast for each of the devolved taxes or other devolved fiscal powers.

“We will own the models, shape the models, evolve the models or create new ones and we take responsibility for these forecasts which will ultimately be the numbers that inform the budget here.”

The Scottish Government will produce its own unofficial forecasts, and the SFC will also have an eye on the work of the OBR and the developing role of Strathclyde University’s Fraser of Allander Institute, which is beefing up its forecasting capabilities in preparation for Scotland’s new taxes.

Lady Rice said: “The OBR is responsible for doing the forecasts for the whole of the UK and they will take their data from various sources and formulate models for different taxes to the extent that they will come up with regional numbers.

“Scotland would be classed as a region and they will take a top-down approach ascribing a proportion of certain taxes to Scotland.

“What we are developing in Scotland is the use of Scottish data and taking a bottom-up approach.

“The creation of Revenue Scotland has been really important in this, and SEPA on the landfill side.

“One of the ways that we are breaking new ground here in Scotland, and this is all very exciting, is that we don’t have a mature suite of many think-tanks, big international corporations with economics departments and lots of bodies doing economic forecasts.

“That’s a very good environment for a body like the OBR, because it creates challenges for them, broadens their thinking and gives them a suite of peers in terms of forecasting.

“I hope that will develop over time in Scotland. We’re seeing some of that develop at Fraser of Allander.”

But what happens if all of these sources disagree? And, more pertinently, what happens if the SFC produces a forecast that is politically difficult for the government of the day?

“The Scottish Government will need to do their own forecasts, and that’s fine, they can do that,” says Lady Rice.

“We are in the throes of working out a formal protocol – which will become public when it is signed and sealed – about how we and the Scottish Government interact, because there will need to be interaction.

“We ultimately need to know what the final agreed policy is, because our forecasts relate to the final agreed policies – we’re not doing forecasting along the way.

“But as we develop our models we’re happy to share some of that information if the Scottish Government wants to know how we’re going to be looking at a particular tax, we can share that along the way, so we’re working on that protocol.

“You wouldn’t expect them not to do their own forecasts, but those will be their forecasts and they will not ultimately be the forecasts that inform the Scottish budget.

“Our forecasts will be the official forecasts that do that.

“We’re just about there, were just putting the final touches on it. We’ve had a lot of engagement, just like we have had in the last couple of years. We have published documents saying how we and the government will work.

“We’re going to be really transparent about this. The transparency is really important so we need everybody, both the government in power but all the other parties, the whole parliament, to understand what the rules of engagement are.

“We’ve done that for our scrutiny role over the past months for the budget just recently passed.

“We had a suite of meetings, we called the meetings as the body that was doing the scrutiny, we set the agenda, we take minutes, and we publish them.

“Those are the rules of engagement.

“We’ve always had that, but now our responsibilities are different so we’re getting a different suite of rules – but we’re just about there.”

The SFC has stressed that dialogue between the Scottish Government and their forecasters will be about modelling – such as new inputs required due to UK legislation or software coding – and these adjustments will be shared with stakeholders.

But there are more subtle forms of influence that can set tongues wagging on the opposition benches, as Audit Scotland found when draft reports with stronger language were leaked and correspondence was uncovered through FOI showing public bodies trying to water down critical findings.

Lady Rice says: “What we have done in the past is share the report of our scrutiny activities, within a very short timeframe beforehand, with the forecasting teams, purely for a fact check.

“So if they came back and said: ‘We don’t like the language here’, we say: ‘Well, we’ve been very thoughtful about our language and we’ve chosen these words carefully, we’ve made this point with some care, so, sorry, that’s it’.

“In fact, with the very first report we did we talked about one of the taxes, and we put in our report that we felt the numbers that had come out in forecasting…were somewhat optimistic.

“Now, we’re all brand new at it at this point, everybody learns over time, so it’s not a criticism.

“When John Swinney, the finance minister at the time, presented his draft budget to parliament and our report was released at the same time, he spoke to the parliament and said the report had said that (the SFC) think that the government forecasts, because of this scrutiny, are somewhat optimistic in this case, and that he would like to adjust down.

“He did that in a completely public parliamentary environment, but there was absolutely no pressure to change any words at all.

“That’s how we’ve operated from day one – and that’s how we will continue to operate.”

She added: “We don’t work for the ministers; we work for the parliament. It’s as simple as that.

“So we keep our counsel, in that sense, and we will have a protocol and actual timetable as we get close to the draft budget – when our forecasts and our report, if you will, is pretty much done – and we’ll share that immediately before.

“But we won’t change it, that’s not what we’re about, we are independent and that independence is the most important characteristic we have to display.

“But if somebody did try to, then I would have no problem in saying: ‘That’s not on, full stop, no discussion, that’s not what this is about.’”