Welcome to the 11th meeting in 2015 of the Venice Committee of the Scottish Parliament. Can I please remind everyone present to turn off any mobile phones, tablets or other electronic devices? We have received apologies this morning from Richard Baker MSP. Our first item of business today is to decide whether to items 4, 5, 6 and 7 in private. Are members agreed? Yes. Members have indicated their agreement. Our second item of business is to take evidence on the UK economic and fiscal outlook. Therefore, I would like to welcome to the meeting Robert Chaudt, Chairman of the Office for Budget Responsibility. Before we move to questions, I invite Robert to make an opening statement. Good morning, Robert. Good morning, convener. Thank you very much indeed for the invitation. It's a pleasure to be back. I should just preface what I say today by warning you that we are now in what is formally the perder period as a result of the UK general election, which means that I'm supposed to be even more opaque and incomprehensible in my answers than I normally would be. So, if you think you understand what I've said, then it's not what I meant to say. Shall I start off by just saying a little bit about the sort of broad highlights of the latest economic and fiscal forecast that we published alongside the UK budget and in doing so, comparing it largely with what we published at the end of last year at the time of the autumn statement. On the economy, if you think about what had changed between December and March, there were a number of factors that were both positive and negative for the economy, most dramatically a further sharp fall in the oil price. The spot price had fallen by about 27 per cent between the two forecasts and the medium-term level implied by the first couple of years of the futures curve by about 17 per cent between those two forecasts. We also saw a further substantial rise in net inward migration into the UK, about 298,000 in the year, and that is significantly higher than we had been anticipating in terms of the levels over the next few years. What we've done now is to plug into our forecast an assumption that net inward migration declines to about 165,000 a year rather than 105,000 a year. We basically have to choose between a variety of options in terms of population projections presented by the Office for National Statistics. We've seen a downward movement in market interest rate expectations, which at one level you can look at as a positive stimulus. On the other hand, it may be reflecting the fact that people are more gloomy about growth prospects, so you can read that either way. We had a series of downward revisions to past GDP growth estimates through 2013 and 2014, which were very slightly reversed in the data that was published yesterday. We had another disappointing quarter for productivity growth output per worker output per hour, continuing the historic weakness of productivity by historic standards. We also had a weaker global outlook judging from the forecast published by the IMF, OECD and the like. All of those taken together, we judged we would have a relatively modest net effect on our GDP forecast and on the budget deficit. We've edged up our growth forecast slightly in the near term, reflecting the fact that the lower oil price via primarily lower fuel prices reduces inflation, pushes up temporarily real incomes, and therefore we've assumed a boost from consumer spending. If you go slightly further into the future, you have growth nudged down in 2017 because of the assumption that oil production is going to be weaker throughout the forecast as a result of the lower oil price, and then right at the end of the forecast a slight upward nudge because of the assumed higher levels of net inward migration. Essentially speaking, looking over the forecast as a whole, you've got growth of about 2.5 per cent a year stretching out over the five years. The other main difference being lower inflation obviously in the near term than we were anticipating then with inflation near zero and presumably negative in some months on the CPI measure. Turning from that to the public finance, the position of the public finances, we've essentially revised down both receipts and spending somewhat over the course of the forecast. On the spending side in particular, the combination of market interest rates and lower inflation means that servicing index link gilts is less expensive and also welfare bills are less expensive because you presume that benefit values are not going to be uprated as quickly as the otherwise would do. The impact of that on the public finances is somewhat offset by the fact that the Government sets out a medium-term profile for overall public spending, which it's changed, but on the basis of that overall approach, if you save some money on debt interest, it doesn't necessarily feed through to a lower forecast for government borrowing, it reduces the somewhat implied squeeze on public services. On receipts, there's a number of reasons why we've pulled those down. One reason, the oil receipts, lower interest rates, reducing the income the Government gets from its assets, etc., and some other changes on various tax measures. If you think about the impact that the budget policy measures had, starting point is to look at what you might think of as the menu with prices that appears in the Treasury's red book, the list of individual tax and spending measures and the costs attached to those. This is another fiscal event, pretty much in common with everyone that we've seen subsequent to the quote-unquote emergency budget in 2010, in that the giveaways broadly match the takeaways over the five years and indeed in most years, so that's not making a great deal of difference to the outlook for borrowing. The Government is to summarise bringing in some more money from the banks and by reducing the value of pension relief for relatively high earners and is spending the money on things like a higher income tax allowance, subsidy for first-time buyers and measures to help the oil sector. What's made more difference to the outlook in terms of the policy choices is that the Government has to tell us what it wants us to assume its policy is towards public expenditure on public services and capital spending, so the choices it makes about that. At the moment, we have detailed plans for public expenditure department by department set out only for 2015-16, which requires an assumption for the remaining four years of the forecast. We ask the Government what they want us to assume about that and we have been given an assumption that we are assured is the agreed view of the coalition as a whole, although both parties would say that if they were governing alone that they would be doing something different. The Government has chosen not to tell us directly how much it wants to spend on public services but to say how much it wants to spend in total. You can then subtract the forecast that we produce for things like debt interest and welfare and that leaves you with an implied envelope that's left over for public services spending. There have been some significant changes on that. The Government has increased slightly the squeeze on total public spending that it wants us to assume through until 2018-19 but has then dropped the idea of cutting total public spending as a share of GDP in the final year of the forecast 2019-20, one consequence of which is that the implied profile for the change in spending on public services over the next five years, over the next parliament, looks somewhat uneven. We refer to it as a roller coaster in the report. Basically, you have a sharper real cut in public spending on public services in 2016-17 and 17-18 than anything that we've seen over the Parliament to date, but that has been put back into reverse in 2019-20. In terms of rationale for this, that's obviously for the Government to say why they choose the numbers that they do, but you can think of a number of things in terms of the shape of the public finance forecast as a whole that the Government has achieved for want of a better word and the consequences that that's had. One thing that it has done is it has ensured that our forecasts for borrowing are lower in every year to 2018-19 than they were in December and that's achieved by tightening the squeeze in the middle. It is no longer the case that public spending is set to fold to its lowest share of GDP since the 1930s, which was the case in the December forecast and now isn't because the additional cut in spending in the final year has been dropped. The Government is also still achieving with some room for manoeuvre the fiscal targets that it set itself as a rolling three-year target for a particular measure of the budget deficit and that's one of the reasons why they continue to pencil in the particularly sharp squeeze on spending in years two and three of the Parliament. Finally, they've also managed to see debt as a share of GDP falling in 2015-16 a year earlier than in our December forecast and they've achieved that by announcing additional asset sales, the granite Northern Rock securitisation vehicle and more sales of Lloyd's Bank shares. Now, I think it's important to point out with asset sales that if you sell an asset for roughly the present value of the future flow of income you're going to get in from it, that's not actually making the public finances better off, you're changing the flow of money that's coming in there. So it's worth noting that that brings in an additional £20 billion to reduce debt in 2015-16 but it also reduces in effect the Government's income in the remaining years of the forecast by about £10 billion. So on the face of it you might look at this profile for public services spending and think why would you design it like that with a blank sheet of paper but I think you have to bear in mind that there are various objectives for what they wanted the public finances forecast to look like and that's what drops out as a consequence. The second point is that this is the agreed policy of the coalition but both parties, both the Conservatives and the Liberal Democrats have said that they would do different things if they were governing alone. The Conservatives, for example, have said that they wouldn't need to squeeze public services as much in the middle of an ex-Parliament because they would find more money from welfare cuts and from tax avoidance measures. The UK Parliament has instructed us not to look at the alternative policies of different parties so I merely note that rather than commenting on it. Okay, well thank you very much for that fascinating introductory statement and also for the documentation that has been provided to committee members. I'm going to start just on the asset sale. You said that if this £20 billion of assets had not been sold in the Government would expect to raise about £10 billion in terms of income as a result of the asset being retained. What kind of level of interest would it have to pay on the £20 billion debt? Would you estimate over those years? Well the effect of this is basically to reduce net debt by about £20 billion in total in 2015-16. So when it comes to asset sales we set a relatively high hurdle in terms of being willing to put those in our forecast. You need to have a reasonable degree of certainty about what exactly it is that the Government is intending to sell crucially when it is likely to sell it, i.e. in which financial years that is likely to take effect, and then to reach a judgment on the amount of money that it's likely to bring in. So we pressed the Government for, if they wished us to include this in the forecast, we needed to have a reasonable amount of certainty around those things. However that said, there always remains uncertainty about the impact of asset sales of that sort because you obviously don't know what market conditions are going to be like in 2015-16, whether they will proceed with the sales as currently described, but we think they've been upfront enough about it and about the amounts of money that will be involved to put that there. So as I say, you have an upfront gain to the public finances of 20 billion-ish in 2015-16, and then one of the consequences of that is that you're not getting the income that you would have done from those assets over the remainder of the forecast. That's about 10 billion over, as I say, the remaining years of the forecast, but then that would stretch on further into the future. Obviously, as I say, if at the end of the day you assume that you sell something for roughly what it's worth, then that comes out in the wash at the end. So what that does is to temporarily reduce public sector net debt rather than to permanently reduce it. It's a change in the profile rather than moderately. The point that I was trying to get at was that the interest that would have to be paid on that 20 billion would be more or less than the 10 billion that the Government would otherwise have received in terms of income from the asset. I know that the asset can possibly fault the 15 billion given market conditions, but who knows? Just on current trends, how would that be? I'm not sure what we will have taken that into account in the forecast. I'm not sure given the amount and the level of interest rates that the sums would be very large in aggregate terms for the health of the public finances, but I can check whether we've got a firma number on that and cut back to it. That would be interesting. You're talking about detailed expenditure plans, £15 million, £16 million, nothing beyond that, and that we're having to do some extrapolations. What you talked about, the implied envelope, is this a £12 billion that's been mooted? There's lots of £12 billion that's around. One of the ones is that the Conservatives have said, as I say, that we have plugged in the number that the coalition has signed off together, but both of them have simultaneously said that that's not what they would do if they were governing alone. The Conservatives have said that they would like to find £12 billion of additional welfare spending, which means that you wouldn't necessarily need to squeeze public services by as much as is implied in the central forecast that we have at the moment. They haven't said where that would come. We've not put that in the forecast for two reasons. One, it's not government policy, it's conservative policy. The second reason is that, even if it was government policy, we would only put it in when it was explained how it would be done, because that obviously affects the whole shape of the forecast. If that's the £12 billion that you're referring to, it's essentially the Conservative saying, well, this is one of the ways in which we would depart from what the coalition has managed to agree together for their spending path. Okay. I've asked you this question in previous years, and I have asked the same question more or less this year and last year, which is about productivity. You talked about another disappointing quarter for productivity growth, down-revisioned estimates of economic growth in 2014, and the world economy, and you touched on that in your opening statement. You also talked about productivity falling on anewarly basis in the final quarter, and the falling shot of a forecast once again. Why is it a $64,000 question? Are we still continuing to see this difficulty in terms of productivity stubbornly refusing to arise? Obviously, it's having a serious impact in terms of economic growth overall, and it's affecting the economy and competitiveness. I'd love to say that we've cracked it since the last time you asked this question. That's exactly what IFS said. I was hoping that you would be the front of all knowledge on this occasion in trying to get one over on IFS. I realise that it's not in here, but I'm just wondering if you've got any—you obviously have some thoughts about why that should be. I think the main explanation to which most of us cling more than to any other, although I think that given the scale of the shortfall from historical experience, you will have to assume that there must be a number of explanations adding up here. The presumption that the difficulties in the financial system—credit conditions, the fact that the largest banks aren't functioning as they would do in normal times—is preventing the efficient reallocation of capital away from firms that would ordinarily shut under those circumstances to relatively young, potentially rapidly growing, innovative, productive, younger firms, and that that hinders productivity growth, also hinders your ability to take advantage of the falls in the exchange rate and in export markets. One half of that argument is the so-called zombie firms argument, that some relatively unproductive firms don't go out of business because of a combination of interest rates being relatively low, wage growth being relatively low, banks being reluctant to pull the plug on them. On the other hand, and my main macro colleague on the committee, I think, would place more emphasis on this than on the zombie firms, is the inability of potentially rapidly growing innovative firms to get access to enough working capital and the ability to expand. That remains the straw to which we all cling as the main explanation. The Bank of England has devoted thousands of person hours to this and comes up with a long list of which that would be one of the main ones that they would cite. It is a very important assumption, and we continue to assume that over time productivity growth will get back to the sorts of rates that you have seen historically and consequently, that the potential output of the economy will return to the sorts of growth rates that we have seen historically. It is partly an act of faith on the assumption that there doesn't seem to be a firm evidence base for saying that that's not going to be the case. However, there are different views on this. Some people would say that we can expect productivity growth now to rebound relatively rapidly. People are more confident than we are of that. There are some people who run the argument that we have had three industrial revolutions and that's your lot and that you're not going to see productivity growth reviving. We did not, in this forecast but in the previous one, some alternative scenarios, basically saying what would the forecast look like if, in one case, you assumed that rather than gradually recovering to the historical trend rate, you'd see the sort of improvement in productivity growth that you saw in the 1980s. An alternative view is just that recent history continues and it remains very depressed and summarising the bad outcome produces a bad outcome and the good outcome produces a good outcome. If you have a weaker outlook for potential GDP, that's crucial in constraining the outlook for the fiscal position because, basically, if you kick a hole in the potential of the economy, you create an additional element of the budget deficit that's presumed to be structural and won't disappear as the economy gets back to the normal level at the Bank of England that is consistent with the bank, hopefully, successfully achieving the inflation target over time. Maybe next time I'm here, we will have cracked it but that's as good as we've got at the moment. I understand that productivity growth in the norm is about 1.4 per cent, but when we thought productivity would have increased certainly in the public sector, given the significant reduction in people in that sector with the demand continuing to rise. As much of it in the private sector, as well as surely with 298,000 migrants, most of whom I would imagine to be young and fairly dynamic working-age population, that alone would think boost productivity. On the back of that, can you tell me what the GDP per capita growth is? You're talking about growth that's forecast at 3 per cent, now 2.6 per cent, but that's economic growth as opposed to per capita growth. I take it that's now lower because, obviously, if the population is increasing but the economy is not growing as fast as it should have been, then you're looking at a per capita GDP growth significantly less. Let's look at the impact of the migration change on per capita GDP as a starting point. As I say, we've shifted to what the ONS calls its principal population projection rather than the low migration population projection, which, as I say, is basically assuming getting to 165,000 a year rather than 105,000 a year. If you look at the consequence that that has for potential GDP over the aggregate growth rate over the course of the forecast, as a result of that, you revise it up by about 0.6 percentage points as a consequence of the higher migration. 0.5 of that 0.6 simply reflects the fact that the population is going to be bigger, so that doesn't have any effect on per capita GDP. There is an additional 0.1 of that 0.6, which reflects the fact that the employment rate is presumed to be higher as a consequence of that. That relates to the fact that net inward migrants tend to be more likely to be of working age than the population in general. We make the assumption that net inward migrants have the same productivity, the same age and gender-specific employment rates as the native population. However, the consequence then of making that is that the increase in the employment rate increases per capita GDP. It doesn't increase GDP per worker because it's the fact that you're getting more workers per chunk of the population out of the net inward migrants than you would do otherwise, so there is an effect there. Neil, you're now going to have to remind me what your initial question was on the productivity. I was just saying that the point that I was trying to make was that the productivity, one would imagine, has increased in the public sector because of the huge decrease in the number of people in the public sector. Therefore, most of the productivity would be in the private sector. It's interesting that we had been surprised and it took us longer than perhaps it should have done to catch up with the fact that cutting public services spending, we assumed, would have more of a direct drag on GDP via the bit of GDP that is the Government's consumption of goods and services than it was going to. Although overall growth has generally come in weaker than we've anticipated, we overestimated the size of the direct drag from the public spending cuts. That is because of the way in which output and therefore productivity within the public sector is measured. For a reasonably large chunk of public services, you measure the output of those services directly, but relatively simply, with things like the number of children being educated and the number of operations taking place. If you look, for example, at education, because the Government has not responded to an X per cent cut in spending on education by saying that we will educate X per cent fewer children, but rather it's changed the overall quality and quantity of educational services, but it's not shown up in the measure of direct output, then actually it's not dragged that down, and it does, as you say, shows up in productivity, shows up in the price mix, and it's taken us a while to realise that that would be the case. If you go back a few forecasts, we would have been assuming that the cuts would have been a greater drag from that source than they've actually tended to be in the measured numbers. That's a different question, however, from is the overall fiscal consolidation having the impact on the economy that you would anticipate? That's a broader question bringing in what's going on in the public sector, in the private sector as well as the public sector, but you're right to highlight the fact that the link has not been straightforward and shows up in a relatively good productivity performance. I'm not going to ask any further on this, but when we'd have thought that just advancing technology alone would help boost productivity, which is done over previous years and generations, there might be a further leap in technology will itself take things forward. It depends a lot on, in the end, how you measure the output. This is not to deny that the cuts may not be having broader effects or those sort of effects there, but if you, for the purposes of the national accounts, measure the output of education as being number of children being educated, a lot of those things just don't show up. You say in 1.48 of the economic and fiscal outlook executive, some of it is considerable uncertainty around our central forecast. I want to move on to Scotland in that regard. In terms of the forecast with the Scottish rate of income tax, of course, which will be introduced from April for a year today, the forecasts have changed quite markedly over the years. For example, the forecast for 2016-17 has fallen by 18 per cent since your March 2012 forecast, which is also quite significant. At this stage, the forecast is now that the receipts will grow from £4.379 to £5.748 billion, which is a 30 per cent increase over five years in the Scottish rate of income tax. In terms of other forecasts, there have been significant changes in terms of a 15 per cent reduction just since December in your prediction for land bills' attraction tax for the same year, 16-17, from £600 to £5.10 million. Again, over the period from 14-15 to 19-20, you are predicting a 90 per cent increase in receipts there. Overall, you are predicting a total increase in tax receipts and the devolved taxes of 35 per cent over five years, which seems to me quite significant in terms of the overall economic growth that we are talking about. First of all, I wonder if you can explain to me some of it in the documentation, but for the record, apart from anything else. Can you explain to me why there have been significant changes to your forecasting over the past three years and, indeed, in the last quarter with regard to LBTT? Why are you so optimistic about the tax forecasts? I think that we would all be delighted if they came true, but a 35 per cent increase in tax receipts in Scotland in five years does seem pretty optimistic. In both cases, if you are looking at the changes over time, most of those are the consequence of changes in the UK forecast as distinct from changes in the Scottish share, for example if you take the SRIT forecast. On the income tax story, it is coming back in part to the productivity puzzle that we were talking about a moment ago. What you have seen is a fall in the effective tax rate. You can be wrong about the amount of income tax you are going to bring in because you are wrong about the amount of income, but you can also be wrong about the income tax forecast because you are wrong about the amount of income tax you are going to bring in per pound of wages and salaries. I appreciate that the UK changes to personal allowance. Has it an impact on that in terms of the previous forecast as well? Yes, that is true. The policy changes subsequent to that, and it is also an important drive for what is going on with the Scottish share looking forward as well. In terms of why the income tax forecasts have disappointed, it is partly a consequence of the fact that we have continued to be surprised by the fact that wage growth has not been picked up, but employment growth has been weaker than expected and employment growth has been stronger than expected, which is another way of manifestation of the productivity puzzle. It is generally the case that if you see labour income, wages and salaries rising by £10 billion, the Exchequer gets more bang for that buck if that is a consequence of everybody's wages going up by 10 per cent than it is if the amount of employment goes up by 10 per cent. The reason for that is that if wage growth is relatively strong throughout the income distribution is that it pulls more of people's incomes into higher tax brackets, a process called fiscal drag, which you normally rely upon to raise the average tax rate year in year out. That is an important reason why you see the income tax numbers rising if you look forward into the future, but that has not happened in part because of this change. If employment growth rises rather than wage growth, you may end up with a larger number of people on relatively low incomes, not paying very much more tax rather than helping to drive people up through higher tax rates. That is one reason. In addition, the employment growth, which has been stronger than expected, has not been as tax-rich as one would have anticipated. Some of it has been in self-employment and the evidence suggests that the increase in self-employment that these have been at self-employed jobs that are paying less than self-employed jobs normally do on average. For that reason, as well, you have the average tax rate, the effective tax rate being weaker, and that is a manifestation of that. If you then say why is that expected to pick up looking forward, partly it comes back to our assumption that we will get back to a position in which you have more historically normal rates of productivity growth and associated with that more normal rates of wage growth and that that will return you to fiscal drag and help to raise the average tax rate as you go forward. You also have the fact that because inflation is lower than anticipated, the uprating of allowances and thresholds is less than it otherwise would be, which means that you do not have to travel as far to get people over those higher rates. That is another reason for having a relatively robust growth rate for receipts looking forward. The key judgment on which this depends is whether you get back to the sorts of rates of productivity growth and earnings growth that we have seen in the past. Most of the story has been on the UK forecast. If you look at the Scottish share specifically, the Scottish share, as we have discussed before, has been relatively stable over quite a period, a little over 3 per cent, but has then declined and we assume that it will continue to decline in the future. That is primarily, as you say, a consequence of the policy changes that have been announced. You have had revenue-raising measures at the top, the additional rate of income tax, some of the withdrawal of the personal allowance at relatively high rates, and at the bottom you have had the personal allowance being raised, narrowing the tax base at that level. Because that has made the income tax system more reliant on the incomes of the people towards the top and because of the difference in the income distribution between Scotland and the rest of the UK, that basically helps to explain what is driving with the share there. In terms of the LBTT, one of the reasons that we have moved down, and this is true for again for the rest of the UK, the SDLT system there and for the Scottish system, is that we have revised down our assumption about the level, the normal level of transactions, the frequency with which people move and buy and sell houses relative to what we have had in before. We have basically, again, looked at a number of years and tried to derive a historical average to which you return, and we have looked back and thought that maybe the years we were averaging over, some of them, weren't particularly representative, and we've shifted that there. Now with LBTT, because the thresholds are assumed to be fixed, there's been no announcement about indexing them, you again have this issue of fiscal drag. If you have house prices increasing, it's pulling more transactions into relatively higher bits of the system, and you also have the assumption that in addition to house prices recovering, that you have transactions recovering back to this, albeit lower assumed historical norm. So it's not unusual for stamp duty, LBTT-type taxes to have quite big ups and downs, because it's not merely driven by what's happening to prices, it's driven by what's happening to transactions as well. An additional twist on this is that the consequence of moving to the slice systems on both sides of the border is that you would expect to get more fiscal drag out of the new systems than you did out of the old one, because the average tax rate goes on rising at the top rather than being capped at the highest slab rate. So as the value of the transaction gets higher and higher, the average tax rate is asymptoting towards the highest marginal rate. It poses an interesting issue for us, for the Fiscal Commission as well, I think, that this new structure is going to mean that the amount of receipts you get from LBTT and from the similar structure of SDLT in the rest of the UK becomes increasingly dependent on the number of transactions taking place for relatively highly priced properties. That is always a hard adjustment to have to make. It's not simply a question of coming up with a macroeconomic forecast that tells you average house prices, we assume, will do the following. In the UK context, we always have to worry about whether London is doing something different from the rest of the UK and adjusting for that. Looking back, we've basically seen a period and we have assumed that there was a period in which London would outperform the rest of the country. That seems to have dissipated and we're not assuming that that's the case looking forward. I think that even for doing the forecast for LBTT, you would have to be concerned not merely about what the average performance of house prices is going to be across Scotland but what's going to happen in particular areas where you have relatively high house prices. It's striking that the housing market as a whole Scotland in terms of the movement in the average house price doesn't look very different from the rest of the UK ex-London and indeed looks more similar to the rest of the UK ex-London than, for example, Wales, Northern Ireland, North East England do. I suspect that when the Scottish Government and the Fiscal Commission are looking at the LBTT forecasts over time and we do as well, wondering whether there are particular reasons for more highly priced properties to perform differently from the rest will be quite an important consideration and that may not be entirely down to what's going on in the macro forecast. I'm not an expert in this area but my guess would be that the number of the movement or the behaviour of relatively highly priced properties in the Aberdeen area might have as much to do with what's going on in the oil sector as it does with the overall macro picture. I'm going to let my colleagues in in just a minute. I'm just going to ask one thing further. I mean, I understand that you are unable to produce a Scottish macroeconomic forecast because the macroeconomic forecasts and economic determinants are generally not available at Scottish level or only after a long lag is that at the case still? That's right, yeah. So what kind of lag are we talking about in terms of being able to assess Scottish figures? I think it varies from statistic to statistic, I'm sure that Fiscal Commission colleagues would be more up to speed on that. I think, as I say, whether in some of the sensitivities it's the elements, I mean clearly if you wanted to take a very different view about what was going to happen to the path of labour income, what was going to happen to the prices of average house prices, that's something that you would derive out of a macroeconomic forecast which would shed light on that, but that wouldn't get you away from, as I say, the other sorts of judgments you have to make as well in particular. So, for example, in the income tax forecast, once you've got a macroeconomic forecast, we have to worry about whether policy measures are resulting in full stalling, whether there's something particularly unusual going on with the distribution and size of bonuses in the financial sector and outside the financial sector in the LBTT and SDLT forecasts, you worry about whether there's something different going on with relatively highly priced properties versus other properties. If you're looking at landfill, there's clearly policy questions as much as macro questions that if you come up with a macro forecast, that gives you some sense of what's going to happen to landfill. So, clearly if you had a completely fully articulated up-to-date Scottish macro forecast, that would be a useful input to put into these things, but there would still be a lot of awkward things you would have to take judgments on a forecast by forecast basis that means that even that wouldn't get you the whole way. Thank you very much for that. The first colleague to ask questions will be a welcome. Thank you. I realise that you've got to be even less political than you are, never are political, of course, but we tend to be getting pulled in the opposite direction. One of your most quoted soundbites has been about the rollercoaster profile, and I suppose that, certainly, despite the accusation that spending levels were returning to 1930s levels, I suppose—you probably can't comment on that—that the squeeze has increased slightly till 2018. Is that a significant change from previously, or is that—I'm not quite clear what the reason for that being, unless it's to create a rollercoaster? It's not an enormous change. What it in effect means is that, because the Government has chosen to tell us what to assume about public services spending by coming up with a rule that describes what happens to overall spending over this period and then backing out the implied profile for public services spending, that rule has now become quite complicated. Back in 2011, the Government gave us an assumption for what should happen to public spending beyond the period for which there were detailed plans, and we could explain it in our document in 29 words. The rule has now become sufficiently complicated that it takes us 428 words to explain it, so that gives you some sense of how much effort has gone into getting the profile that they want. What in practice this has meant is that, because of what's happened to inflation and interest rates in the forecast, the debt interest payment forecast has come down quite a lot. Essentially, what the Government has said in the way that it's expressed the assumption to us is that we want to bank some of that in a way that reduces the budget deficit and, perhaps not uncoincidentally, reduces the budget deficit to slightly lower than it was in the forecast that we produced in December, and the rest of it effectively loosens the implied squeeze on public services spending. Over that period, the roller coaster is somewhat less roller coaster-y than it would otherwise have been. If you're looking for the explanation for why that pattern looks as it does, it's the combination of wanting to have borrowing lower in most years than in the previous forecast, wanting to achieve a particular amount of fiscal consolidation by 2017-18 and not wanting to have public spending hitting the lowest, a post-war low at the end of the process, that once you've achieved all of those things by the 428 words explaining where the overall profile for spending is, the roller coaster is what drops out as the consequence for public services spending. It's not that the Government has said that this is the path of real changes in spending on public services that we think makes sense for the planning of public expenditure. Obviously, as I say, both parties would say that they would do different things that meant that the pattern wouldn't look like that if they were governing alone. The key point, though, is that this is now the baseline for whichever party or parties do come into power after the election, and if they don't want it to look like that, they're going to have to explain what they would do differently, and then we will come back and tell you what the path looks like as a consequence of that. As I say, the working assumption is that, at some point in the autumn of this year, the new Government is going to have to say what it wants to set out some detailed plans or the envelope for the detailed plans over some years into the future. What we don't know is how many years into the future, and that, of course, may depend in part on what the Government looks like after the election. It's not quite such a striking sound bite, but it has been quoted by various commentators when you said that the coalition Government's politicians in this budget are not expected to have a material impact on the economy, which might be thought to be surprising in terms of the purpose of a budget. Although the Government has been lucky in terms of lower oil prices and lower inflation at one level—not, obviously, lucky for Scotland—you also say that the economy is ending in a weaker state than expected in 2014, and then there were some figures for January yesterday that suggest that it might be even weaker. I don't know whether you can comment any of that in terms of looking forward, or are you still fairly optimistic about the growth of the economy? Well, this is a central forecast, and we haven't updated it since the budget. I think that the latest numbers that have come out on the GDP front, although they do show higher growth on average over 2014, so we had the downward revisions that have been partially reversed. The main reason for the change in the calendar year is because there was a small upward revision to GDP in the first quarter of 2014. I'm not sure the numbers that came out yesterday tell us anything terribly different about the momentum at the moment. The fourth quarter GDP growth rate was revised up a tad, but the third quarter was revised down. I think that the index of services was perhaps slightly weaker than anticipated in January, so I don't think that you would look at that and say that there was a particularly different momentum story arising out of those revisions. In terms of the judgment that we made that the policies were unlikely to have a material effect, that's partly a reflection, as I said, of the fact that this is yet another package in which the aggregate size of the giveaways broadly offsets the aggregate size of the takeaways, and it's quite hard to produce a policy package that does have a dramatic effect on the economy for which that is also the case. We've not made any dramatic changes to the growth profile as a consequence of this. You do look at individual policies, so, for example, you could argue that the subsidy for first-time buyers is something that's likely to push up house prices. You would expect that. It's increasing demand, not doing very much for supply, pushing that up. However, we've made the assumption that the magnitude of that policy change is not large enough to materially change the forecast. One obvious difference is that this is not a policy change, although policy partially reverses it, is that the decline in oil production assumed through the forecast does make a difference in terms of the overall GDP path. We've basically assumed that the tax measures that were announced in the budget would reverse or ameliorate about a third of the decline in production that she would otherwise have attasipated merely from what's gone on with the oil price over that period. For the oil sector, that's material, but in terms of the macro picture, it's not necessary. The fallout from the fiscal mandate has much discussed in Scotland. The first part of it, in particular, aims to achieve cyclically adjusted current balance by the end of the third year of the rolling five-year forecast period. You're obviously quite confident in your report that you understand that, but other people in the debate in the House of Commons, which is much quoted as well in Scotland, said that this was all rather obscure, particularly cyclically adjusted and rolling. You're quite confident that you know what that means. I think so, and we've certainly produced a forecast and a judgment on whether they're going to hit it or not on that basis. The distinction what is being targeted, another way of putting this, is to say that you want the Government to be raising enough in revenue to cover its spending on things other than capital investment. That's what balancing the current budget means. Cyclically adjusted means that you would want that to be the case if the economy was running at a Goldilocks level that was neither too hot nor too cold. We are assuming that there will still be a little bit of spare capacity in the economy in 2017, which would marginally make the underlying position look worse. We've not got very much spare capacity, so the difference between cyclically adjusted and non-cyclically adjusted is becoming smaller as that gap closes. The rolling nature of the forecast, the Government has, and it's true in the new framework, it was true in the old one, you have one target that is at a fixed date, so until the end of last year they wanted the debt to GDP ratio to fall in 2015-16, and it doesn't matter when you do the forecast, it was always 2015-16. They've now changed that to 16-17, but again it's 16-17. In terms of achieving the cyclically adjusted current budget balance, that is rolling in the sense of every year, every time we do a forecast, they want that to be true in the third year of the forecast. Every year we roll the forecast forward another year, and that target then rolls forward into the future. The rationale for that would be that if you kept that stock at a particular date, you could end up having to make some very, very dramatic policy changes with a year to go, and that in fact it's better to keep your eyes focused on the medium term. The Government has decided to shrink that horizon over which it's looking from five to three years. Some people would argue that you would have been better sticking off with five, some people would prefer a fixed date, but that's what they've chosen to do, and that's what we have to stick to. It is one of the reasons, presumably, why you still have this relatively tight squeeze in years two and three of the Parliament, because that's what helps to determine what the deficit is in 2016-17. When we roll the forecast forward another year, the target year will move from 16-17 to 17-18. Obviously, at one level, you can say, well, that's fine. You're always saying, jam tomorrow, but you never deliver the jam today. What we do, of course, though, is to explain what was going on with the old versions of the targets as well as the new, so it'll be entirely transparent in the analysis that we've done as to whether you're simply shifting the promised land one year further into the future or whether you've continued to deliver on it in the earlier years. The Government obviously changed its fiscal mandate because it's just current now, and I think that it was more than current before. I don't know if you can comment on this, but do you feel that in order to reach that mandate, we require to have the squeeze that we're having? Presumably, I suppose that a related question for me on that given it's current now, do you know how much of capital expenditure is financed by current expenditure? We could presume that that's relevant to whether it hits the target or not, since capital expenditure could be exempted from the fiscal mandate now. To start with, the thing that they're targeting hasn't changed. That was all that was current before it's current now. The only thing that has changed is that it's moved from year 5 to year 3, so that's not changed. In terms of the forecast, we are doing these on the basis of the national accounts definition of what constitutes capital versus current. It is certainly true of local authorities that you can have rules about whether you're allowed to use current income to finance capital spending, but we are essentially looking at what is the total magnitude of non-investment spending, what is the total magnitude of receipts and comparing the two on a national accounts basis so that there shouldn't be that scope for gaming in that sort of way. There is a debate obviously about whether the distinction between current and capital spending is the right sort of thing to be worrying about. If your argument is that you're happy to borrow for things that have a benefit for future generations and therefore it's worthwhile borrowing for that and future generations can help pay for it by helping to service the debt that you raise, then people might argue why would you be happier to do that for some areas of capital spending that might not actually deliver great value for money but you're not prepared to do that for training teachers and doctors, which does have a long-term benefit. That's a question of how you should design the rule. It's one that's not for us to comment on but people would look at that and the Government has chosen to set the rule in this way. It is of course common to the golden rule that was under the Labour Government previously and again the rationale being at the time that if you do end up in a situation where there needs to be a squeeze, you don't necessarily want capital spending to bear an undue proportion of that squeeze. In practice, when times get tough, Governments often cut what they can, not necessarily what they should, and those are the consequences that come out. I'm not saying that that's happening in this particular case but it's one of the shared rationales for making that sort of distinction, although other people would say maybe that is or isn't the right thing to be targeting but we have to police them against the targets that they've chosen to be policed against. To be clear, you're saying that if you spend current or resource money on capital, you would classify that as capital expenditure, that's what you said? Yes, I mean we will. The capital depends on what your spending is. I know but that's very important because, presumed, that's why I wanted to know how much I mean we're very familiar with this in terms of the Scottish budget but in terms of spending resource on capital, I just wondered how much across the UK that applied because that's very relevant to whether you meet the fiscal mandate or not because if you then borrowed for that capital you would obviously free up that resource or current expenditure for current services. Yes, I think in the national account sense you're taking a step back from that and saying that Government sets out detailed plans for what it is going to spend on capital and what it is going to spend on current and then it basically has a set of plans to bring in revenue which are which is being spent on both of those things and on servicing debts, playing for the welfare system etc so in terms of policing this against the way the national accounts does it's not you know we're not looking at what particular bits of revenue are paying for particular bits of expenditure there's a whole lot of revenue that comes in and then their Government has spending plans some of which is plans to spend on capital some of which is planned to spend on current and in terms of the fiscal rule what we're looking at is whether you know the Government is basically raising enough in revenue to pay for the current resource bit of it. Yeah but it would make a difference because if you were spending that resource on teachers and nurses etc and were borrowing you would then have the same amount of capital expenditure but you would have so you're saying you couldn't get around that because you would have the Government in effect decides this is what we want to spend on capital this is what we want to spend on current and we're bringing in some money simultaneously is it bringing in and you know we're obviously comparing both so in the aggregate budget deficit you're saying are they bringing in enough revenue to pay for both of these things in judging the current budget you're saying are they bringing in enough revenue to pay for the non-investment bit of this. Okay, thanks anyway. Okay, thank you. Thanks, convener. I think a couple of points I wanted to ask about one being inflation. You do mention a number of times about CPI inflation to return to the Government's 2 per cent target relatively slowly and elsewhere we expect inflation to remain below one and a half per cent until the end of 2016. I mean I had a kind of gut feeling that inflation would you know jump up again at some stage but I've obviously got that wrong. So it does seem to be quite low at the moment. I mean would it matter if inflation you know went negative and 0.1% I'm saying negative 0.1% you know some tiny amount would that have a kind of psychological impact or would it have any real impact or have you looked at that at all? Was I saying I think our working assumption is which seems to be being bought out in the data at the moment is on consumer price inflation basically or heading to you know averaging fractionally above zero at a quarterly basis and that's entirely consistent with it being negative year on year in some months. I think the consensus view is that you know if you do end up with a bit of deflation of that sort it's of the relatively benign kind of deflation that reflects the fact that in particular the oil price has declined quite a lot that you know reduces the amount that households have got to spend on fuel means that their risk to their income goes further that temporarily boosts consumption and is a positive for economic activity albeit temporarily looking further into the future the path of consumer spending depends much more on whether you get the productivity growth wage growth that is a sustainable source of that where I think people would worry much more is if you get into a situation in which psychologically people assume that inflation is going to remain negative prices are going to fall over time which then encourages people to say I won't spend today because it'll be cheaper to spend tomorrow and that becomes a vicious cycle. I think the people's presumption at the moment is that isn't likely to be the case it's not what we have in our forecast one reason for that is if you look at what we're assuming about the path of the oil price we take the the the oil price path that we plug into the forecast is essentially you know obviously the spot price today what the futures curve is telling you about prices over the next couple of years and then we hold it constant at that point thereafter basically because you know the IMF and others suggest that the the futures market is not liquid enough to be providing you much useful information beyond that point so what we have in the in the implied movement of the oil price is a sharp fall relative to our december forecast but one which is partially reversed over the next couple of years so that also when you map it through to the forecast we have for consumer price inflation is it drops down sharply to zero but then after a year the base effect of the lower oil price and the lower fuel price drops out and it's no longer pulling the inflation rate down so inflation kicks back up again relatively quickly to about one percent from zero and then as you say we have it moving relatively slowly back towards the governments and the bank of england's two percent target by the end of the end of the forecast now it's not i think the bank may have it moving back more quickly but the difference is really nothing to get excited about your back to about one point eight by 2018 i think we're assuming that the lag defect of movements in the exchange rate is one reason why you won't expect it to snap straight back but you know i think a key reason that most people would see this as the benign form of of deflation is that you're having an assumed one off temporary gain from the reduction in the oil price which isn't going to go on and on and on falling your price is now and the futures curve is slightly lower now i think than it was when we did the forecast but not dramatically so and so for that reason you're not projecting inflation being negative for an extended period of time and in particular in the sort of way that central bankers and others would worry about as being a sort of deflationary spiral okay i mean you linked it in what you were saying and also in the in the written evidence about the inflation being linked to sterling's value i mean presumably a lot of that is out with our control so that that would depend largely on you know how does china's economy do how does the state's economy do that kind of thing so i guess that is quite hard to predict as well yes again i mean well in terms of the exchange rate we assume that the exchange rate moves in line with the relationship between expected levels of interest rates in different countries and that there's a there's a response there so we're not making any particular judgments over the exchange rate it drops out of you know where the exchange rate is now where the expected levels of interest rates are going to be in different countries in terms of the effect of all of this on the fiscal position i mean obviously different measures of inflation matter in different parts of the forecast so consumer price inflation will matter for example in the upgrading of income tax bans retail price inflation will matter for the cost of index link giltson for the upgrading of excise duties so the mapping from what's going on with inflation to what goes on in the fiscal forecast is not entirely is not entirely straightforward okay and you've also mentioned oil prices which was the other point i wanted to touch on i mean i don't think as far as i can see anybody had predicted the kind of fall when it happened people were arguing over what the price would be and then it kind of seemed to fall below everybody's expectation i mean have we learned from that or were there lessons to learn about predicting the oil price or does it continue to be just incredibly difficult and again probably linked to say the chinese economy and how much they're using and things like that i think it's you know it's very difficult if i could predict it accurately i wouldn't be doing something much more remunerative instead i think the lesson i draw from this which is the lesson i think you know i've said when we've discussed particularly the oil receipts forecast in the past is that you know this is a highly uncertain and very mobile forecast and you have a very volatile path for receipts and the lesson i would draw from this is that you know that forecast could have been wrong in the opposite direction and you one has to make plans on the basis that this is something that is affected you know not you know by the by the oil price by what's going on with production by what's going on with the level of investment in the industry you know it's uh it's not the most volatile of the receipts paths by some distance for nothing there are a whole variety of reasons for that uh and you know the swings can be quite large over periods we've seen oil receipts drop from 12 roughly 12 to roughly one billion a year we then saw them go back up to roughly 12 billion since when they've dropped back probably down to about one billion a year the oil price is obviously driven by global demand and supply by particular geopolitical factors by you know what's going on with particular suppliers and i think the best that we can do is to say you know it's not for us i think to try to or other you know we could try to second guess the futures market but i think this is probably the best we've got to go on uh as you know when we do our longer term projections we go into quite a lot of efforts to explain what the differences would be if you had different assumptions looking at a range of forecasts for the uh for the oil price and seeing what impact that would have but this is a very volatile receipt stream the forecast errors are enormous and i think the lesson to draw from that is that you know we're unlikely to move to a point at which this is you know trivial to to forecast in the future and whoever is getting those receipts has to plan on that basis okay thanks so much thank you a mark a gaffer to be followed by mark okay good morning everyone um if we come on to the devolved taxes first um one that hasn't been touched on so far is landfill tax um i did have a load of questions ready and then i saw that you'd published an addendum or a slight change to the to the original so can you tell us i guess just in broad terms based on the the change you made what is roughly happening to landfill tax in scotland over the next couple of years um the where are we um we have the the landfill tax moving from about 103 a million in 2014 dropping down to about 90 and then picking up a little bit uh further uh after that so it ends up at 99 million by the uh by the end of the forecast so that's a somewhat more optimistic view as i say um there was an error in the initial forecast on basically on how the death projections for waste were being interpreted into this and it's moved it it's moved it back but the um the downward there is you know fundamentally is still a downward revision in the forecast since uh december that reflects the fact primarily that receipts in 2014 15 came in lower than anticipated and that pushes through the remainder of the forecast there's a lower projection now for the proportion of local authority waste that is set sent to landfill that's based on the the deffra projections suggesting a steeper fall in the near term so you have that pushing in one direction on the other hand you have our assumption that uh the tax rates are raised in line with rpi inflation uh so you have the teams pushing in both directions and uh towards the end of the forecast you're assuming a flatter trend in waste sent to landfill i think with the scotish government i mean we've again sort of looking at the shares of receipts coming in so we're not basing this on an explicit assumption that landfill moves in line with government targets here or anywhere else which i think may be the case in the scotish government forecast okay i mean obviously this forecast goes up to 1920 but i mean longer term do you see it as being a tax that's going to eventually diminish over time because presumably if we get to zero waste at some point it becomes pretty close to nil but do you think that'll happen over time or is that just not something you've well it obviously depends crucially on what the policy setting is thereafter so if you're basically seeing uh the amount of landfill relatively steeply declining there's a choice about whether you raise the the tax rate in order to offset that and how far you want to go with that before you decide that the tax rates are too high so what we've done here in the absence of fully articulated policy towards this is to assume that it rises with with rpi inflation uh obviously if different choices were made you could slow that decline um presumably um as a consequence okay thank you um you've been asked a couple of questions about lbt t already but i'll just if we can return to that briefly um you think your projections for commercial lbt t have been revised upwards slightly since your december forecast uh yes i suspect that's on the basis of latest information on prices and transactions such as we have to go on but the residential lbt t has been revised down and you put four reasons or there are four it's your table 3.3 we have four changes changing lbt t rates minus 47 so is that the fact that the government the scottish government changed the thresholds post because i guess you post the December the December forecast had the original ones that were announced at the time of the draft budget and then we've taken on board the new ones the new ones mr spinny announced something and modelling changes what does what does that mean um that generally is a sort of variety of uh taking on board what the latest data is telling you about things going through the date plus just literally looking at uh the nature of the model where there are particular wrinkles in it or ways that you can adjust things better than you otherwise would do but that as you can see is relatively small okay properly transactions down 37 million so that's that's based on guess this is comes back to the question that the convener asked earlier so we've basically made an assumption that the rate of property transactions to which we return in the medium term is somewhat lower than we had previously assumed because we looked at the years that we were averaging that over i think again with the scott relative to the scottish Government we're we're both assuming a a long-term transactions rate of around five to six percent so we may be a bit lower than them but not dramatically i think okay and just the bit you have at 3.15 your forecast takes into account they're bringing forward of some higher price transactions some delayed transactions at the lower end so i think you're saying sdlt is up by 11 million in 14 15 and your lbtt goes down by 20 million in 15 16 just that the 20 million point that's a reduction whereabouts in your table 3.3 is that which you know is that changing rates presumably it's not modelling is that property transactions or is it is that 20 million split across different categories or is it all lumped into one i assume that's in changing lbtt rates it's certainly not in property transactions or house prices it might possibly be in modelling but i think it's probably in the uh in the other one i mean this is i mean this is basically as a consequence of the the rates being announced some time before they were being implemented we have to assume and this was a painful experience from the changes in the higher rates of income tax that you know when people know about changes in tax rates well in advance and it's something that they can change the timing at which they might pay for it then there's an incentive to do so sure okay fine and just in terms of going forward i mean maybe you've not been asked anything yet but i mean have you been sort of formally asked by government at any point to look at the smith taxes or is that something that just hasn't crossed your officially crossed your path yet not yet i mean it's something obviously that i wait with keen interest to see what it's all going to uh to end up looking like and uh you know we want to make sure that we can do that as best we can uh i mean obviously in terms of you know how all of this stuff evolves the complexity of the job will depend an awful lot on the degree to which the devolution of these things actually results in different policy uh as you and obviously you know scottans had the right to move the income tax rate for a while and hasn't done so so the issue about well what would you assume was the behavioural response to that hasn't arisen as a practical issue and obviously with SRIT uh i mean with LBTT it has because the whole new system and the UK's been the rest of the UK's changed the system as well but it's not merely a question of looking at the the new areas that we may have to look at but also you don't know to what extent any room for manoeuvre would actually be used and therefore what sort of issues are going to arise in forecasting that okay thank you um you've been asked a couple of questions about oil already but i just i want to return to that too um it's i'm looking at page 116 of your economic and fiscal outlook specifically table 4.12 and if we take if we look at maybe 2015-16 in that particular table your december forecast it was 2.2 billion for 2015-16 your march forecast is not 0.7 a change of minus 1.5 billion i'm just wondering if you can talk us through the you've got pre-measures for changes and then you've got budget measures which change it obviously the minus 1.1 that's oil prices that's reflected in the drop in oil prices gas prices as opposed similar can you talk us through production expenditure and modelling and return receipts and just how those changes manifest themselves uh yes i mean the the assumption that the lower oil price results in lower production and obviously in terms of the outlook for production we use the work that deck the department for energy and climate change has a model of how production is likely to evolve and they in turn base that on the oil and gas UK's survey of what's going on in terms of activity in the basin so given the scale of the price change you have to make some judgment first about what would happen to production in the absence of the government doing anything and then what difference it would make if the government did make changes and so as you can see not entirely surprisingly the production effect builds over time as you assume that the oil production uh oil and gas production falls further below the line that was in place in the december forecast and straightforwardly a reduction in production generates a reduction in receipts expenditure moves in the opposite direction because a lot of expenditure capital expenditure etc is allowable against tax so if you have you know a burst of as we have seen in recent years relatively high investment in the north sea the hope obviously is that that's going to generate you more production and thus more receipts in the future but in the near term an increase in a dramatic increase investment reduces receipts because it's uh it's got there's more money that the confirms can set off against tax so if you have uh you know the assumption that the lower oil price not merely encourages lower production but also discourages investment because fewer projects are likely to get over the the hurdle rates then that lowers expenditure which is actually positive for receipts rather than the negative so generally speaking those two always move in the opposite directions. Modelling and outterm receipts that's partly taking on board what the latest you know numbers through the year are showing uh modelling changes here i'm not sure whether this is specifically the case for this one but it's often the way in which HMRC has to look at which fields are expected to produce what and then linking that to whether the firms in question are in a position that they would be likely to be paying tax or not so sometimes modelling changes can reflect a change in the view or an updating of your understanding of field ownership. Okay and then so there are the pre-measures you then got on the same table budget measures minus not point two static effect minus not point two and no behavioural effect so what that basically means that the the tax changes for 15 16 will result in 200 million less that's right so you're basically having more more generous tax treatment which costs money but then over time the assumption is that that will increase the amount of both expenditure and production eventually and that that's likely to be positive so uh i think roughly speaking there's a consequence of the oil price change on its own we would have reduced expected production at the end of the forecast by about 20 about about 30 in the absence of any policy measures taking into account the policy measures we assume the decline would be about 20 so the policy measures are not assumed to be you know sufficient to completely outweigh they partially offset the the implications of the change and the price for production okay so we're hoping for greater production at least not as larger decline in production as a consequence and you make certain assumptions there but in terms of the i should just say on that i mean needless to say given the size of those changes the amount of uncertainty both around the pre-measures forecast and around you know exactly how much impact those uh you know those measures will have you can make some sort of you know you know relatively precisely calibrated things about how many projects might this shove above the line but there's obviously a broader you know psychological is not quite the word but you know a broader confidence issue about whether this is a sector to be investing in in the long term and you know judging that for the purpose of this forecast is not straightforward and i wouldn't claim that we've done anything terribly scientific to try to do that sure okay and last question then just i mean so it's harder to predict the outcomes i guess is what you're saying and it can move in different directions but in terms of the the cost of the budget measures as it were i mean are they your point minus point two for 15 16 minus point four for 16 17.3 for 17 18 and so on are they are they slightly more predictable or are they reliant upon a range of factors as well they are reliant on a range of factors assuming how much you know activity is there to take advantage of those but i think the key point to note here is that the size of you know the specific identifiable to the cost to the exchequer of this is dwarfed by the changes in the revenues implied by the movements in production by the movements in the price as well so exactly how that set of incentives is going to shape up in terms of cost is i think much less important than the fact that you know it's very very hard to predict with any confidence what a change in the oil price of this magnitude is likely to generate and how much of the of that would be reversed by by the policy measures so there is uncertainty around those numbers but i think that's probably the least of our problems sure i'm grateful thank you thank you martin before by gene thank you thank you very much convener just to touch a little bit more on the oil and gas i note the the adjustments that you made in terms of the budget 2015 compared against the autumn statement now in the intervening period between december and march there had been some upturn in in the oil price and there's expected to you know most forecasters are expecting there to be a reasonable upturn across the rest of the year with with some form of stabilisation over over the peace because the view field is that other than the south east pretty much none of the other opac countries can sustain a significantly lower oil price than the than that which we're experiencing at present so i wonder therefore why there was such a dramatic adjustment for future years in your forecasting given those factors which are are widely being commented on perhaps you could elaborate on that and basically what we do in terms of the assumptions that we make about the oil price that are that are factored into the forecast is that you incorporate the change in the spot price in the near term obviously and then we assume that the oil price moves in line with the futures curve over the next couple of years and then thereafter and this is reflecting some research that was done at the IMF you would say that the market is at that point too thin to provide you with a great deal of additional useful information and therefore that we are seeing the oil prices constant thereafter so if you look at the way in which things moved between december and the march forecast the spot price was about 27 percent lower when we closed the march forecast which is basically we take an average over a number of days about a fortnight before we shut the forecast uh to do this was about 27 percent lower but as you say the assumption was in the market that some of that would be reversed looking forward and so if you then look at the oil price that we're assuming for the end of the forecast that's only only 17 percent lower rather than 27 percent lower which is taking into account the effect that you you said there now clearly there are a wide variety of other forecasts uh out there some of which are relatively technical and data based some of which are drawing prognostications about the world economy geopolitical events etc we've highlighted in the past using the the us internet energy bodies projections which give you an enormously wide range around the any central forecast but from our point of view we don't think there's a strong case for saying that we can second guess that we would be in a position to second guess the futures market over that sort of time horizon so that's what we've plugged in and it's why it shows exactly what you say you have a decline and it's picked up a bit I think I haven't looked at it closely recently that the decline in the oil price now as distinct from where we were in March is that indeed the spot price and the futures curve is lower still but not by a dramatic margin okay I mean we've touched earlier on sort of the ability of those and I think there are a number of international analyses of oil price which you know looking at them now do not bear bear out what we're seeing and so I wonder in that respect what value you attached to five-year forecasting given that essentially between December and March you've had to radically alter your five-year forecasting I mean when would you anticipate looking again at that five-year forecasting and making any necessary adjustments to it? Well I mean we we update the forecast whenever there is a fiscal event under normal circumstances that would mean that we would come back to it at the next autumn statement which would be late November or December of course this may be different this year because if we have a new government that comes in and it decides it wants to have an additional budget relatively early on in the summer as the incoming coalition did in June 2010 we may return to it earlier than that it's not it depends you know if an incoming government wanted to announce a new a package of measures and if that needed a new forecast or whether they were happy to use the basis that we've we've had before so we would come back to it at that stage in terms of the value of it I think you know governments are trying to they have medium term fiscal plans I think there is a merit in producing this and you know being able to set out a fully articulated view but it does come back to the point and I've you know done numerous talks to this effect that you only need to look if you look at chart 4.5 on page 114 you know this is not if you look at the scale of the the jumps up and down in receipts and it's all you know we've been consistently over optimistic about the level of oil receipts since we came in as you can see from all the blue lines line above the black one which has continued to fall you know but there were people around saying that we were being you know we were under shooting this so I say the lesson I draw from this is if you look at that line don't expect to get this right very often. Okay turning back to the fiscal mandate I note at PARA's 113, 114 there's some commentary from you around that and appears that the fiscal mandate now applies in year three rather than in year five and is it the effect of that essentially the cuts in public spending which would have taken place over a five-year period or now anticipated to take place over a three-year period is that essentially what's anticipated as a result of that? No it isn't because the government is not trying to you know to get to where it had previously wanted in terms of the where the you know the the forecast of the deficits out as they haven't said we want to get to where the OBR was forecasting we would be in year five in year three in which case as you say you would be concentrating the remaining fiscal consolidation into three years rather than five years so the fiscal consolidation as set out and as implied in particular by the medium term path of public spending continues beyond the fiscal mandate date and you have another year in particular of spending squeeze in 2018-19 so if you look at the way in which our forecast for that year has moved since December it's not moved dramatically so basically you know you can think of it as the government saying that at a five-year horizon it looked as though we were going to be overshoot you know we were going to be overachieving this forecast by a significant margin in the third year we will be looking or we will be expecting to overachieve it by a smaller margin so now let's aim for the third year instead so it's not trying to as I say do five years work in three it's saying three is the year on which we ought to focus people's attention so you're not doing dramatically more consolidation by then this explains at 114 the in terms of meeting with 16.8 billion to spare compared to the previous expectation of meeting with 38.8 billion to spare that's what that refers to that that's that's right because you know you would expect the budget balance to be improving over time as the spending cuts go on and as the tax revenue picks up obviously the margin by which they would expect to hit it in year five if that was still the target would now be significantly lower than it was in December because the government has made the choice to drop this additional year of spending cuts in 2019-20 as a share of GDP so in terms of that fiscal mandate that's the fiscal mandate that was essentially approved as part of the autumn statement so that's what was voted on at the autumn statement that fiscal mandate so the three year period and so in order to achieve that fiscal mandate if one had signed up to that fiscal mandate according to what you're saying at 114 that will require there to be significant cuts in public spending either way in order to attain that fiscal mandate. Well I wouldn't use the word require the government the way that policy is set out at the moment both in terms of the tax rates the benefit rates and the overall path for total spending on public services and capital investment as a matter of fact if you look at it over that period the current forecast implies that most of the action takes place in terms of cuts in public services spending it's also true if you look over the full five years of the forecast if you think about getting from what is roughly a 5% of GDP budget deficit now to a small surplus in 2019-20 about 70% of that additional deficit reduction takes the form of implied cuts in public services spending as a share of GDP but that doesn't you know that doesn't have to be the way it does it it's what's implied by the government policy choices that we've taken on board now and as I say both both the coalition parties would say that if governing alone that's not what they would want to see and for different reasons they would have less of a squeeze on public services as I say the conservatives have talked about welfare and tax avoidance measures the liberal democrats about tax measures and having a different degree of ambition on the overall borrowing figure so it's it's required in the sense that that is what is implied by the policies the policies we've been given to produce the forecast but policies can always change and people can do these things in different ways or try to achieve something different but there would there would necessitate spending reductions of some form I mean you've mentioned welfare there and some of us would argue that you know welfare spending is saying you could avoid cuts in public services expenditure by cutting welfare may not be the the appropriate measure to take and that there may be that argument but that will necessitate there to be cuts taking place somewhere in order for the fiscal mandate to be achieved with with the degree of room for manoeuvre or margin for error that is implied in our current forecast this is what you know arises out of current tax rates current welfare policy and the detailed spending plans for 15 16 and the implied spending totals for subsequent years any of those things could be changed by a future government if it wished to do so it could do you know more on tax more on welfare it could choose to aim for achieving a different target or the same target with a different degree of of margin so these are all policy choices which but for our point of view we have to look at the basis of current policy but but you say it could choose to do alter the target that would presumably therefore be different to the fiscal mandate that was agreed to in in in the autumn statement which is what I'm well a future government could choose to have a different target it could also choose to try to achieve the target with a different degree of margin for error so it wouldn't necessarily mean a different you have to change the targets as you say here on the central forecast the government is on track to meet the new mandate with 17 billion to spare you could choose not to achieve it with 17 billion to spare or you could choose to have a different target or you could choose to have a different composition of measures to get you there okay okay thank you I just have a quick question the OBR forecast for household debt is that it continues to rise and it's now I think according to your own papers far above the levels of 2008 and I just wonder what your thought is about that the sustainability of that and if you expect that it would stabilise at any point well over the course of the forecast we've got a slightly less steep increase so for those of you who have the book it's on page 73 forecast of household debt to income as you can see it is as you rightly say well it remains broadly flat until 2016 and then picks up thereafter primarily the debt to income ratio rises because not because this is what's as it were required to fuel consumer spending over this period that's more dependent on what goes on with productivity and wages but the fact that house prices are assumed to grow more rapidly transactions recover and therefore quite a lot of this is secured lending on housing which has a corresponding change on the household assets side as well as on the on the debt side in terms of why things have been revised down since last time it's partly because then the latest date of the starting point is lower in cash terms than it was in addition we have the growth in mortgage debt less than it was in the previous forecast which comes back to the point that has been raised twice before about the fact that we have less housing transactions so there's less you know debt being being generated as a consequence of that and we also have less accumulation of unsecured debt and that's because we have different forecasts for the amount that households are consuming and investing and therefore there's less of a push up there but you're right in terms of the overall picture you do have the the debt to income ratio rising given what is going on with the rest of the of the forecast and given the stance of monetary policy that's not necessarily a surprising or inconsistent thing but we do highlight it as one of the potential risks to the forecast is that you know this you know you are seeing household activity moving in this sort of direction and that could be something that affects the the path of the of the forecast it's a broad it's a in a sense it's a microcosm of a broader issue with this forecast which is that on the face of it you know when we were starting out talking about the growth rates of GDP this looks a very stable picture over the next five years you've got growth chugging along at two and a half percent a year yes you've got inflation falling in the near term but basically heading back to the target interest rates aren't moving terribly far over the forecast implied by by government receipts but within it you've got quite a change going on in the composition because you've got a fish you know a substantial fiscal consolidation continuing through this and one quite useful way to look at this is at the various balances of net lending by each individual sector in the economy and the rest of the world and all of those things have to add up to to zero and so you know for that to be the case you do have you know this implication for household debt we have a relatively you know robust improvement in business investment we have some improvement on the overseas balance not really the trade deficit improving very much that remains a modest drag on GDP growth throughout but seeing the the income balance improving so at the moment we have a you know the latest figures suggest the current account balance was at its biggest deficit since the 1800s in 2014 all of these things we see moving over time so on the one hand you have a forecast that looks very stable at a headline level but if you're actually looking at the changes in the household balances and the other balances and the economy of which this is one manifestation then there's there's quite a lot going on under the surface okay and just i'm finally uh just the rise i suppose the change in the in the labour market generally or the rise in the difference that's occurring in employment given that we have more self-employment and uh growth in zero hours contracts and more what feels like less stable employment practice do you factor all of that in how do you forecast that kind of thing or well it's a key factor as we were discussing earlier in terms of understanding and projecting forward what is going on with income tax receipts in particular this is precisely one of the reasons why income tax receipts have been relatively disappointing as I say partly because you've had you know headline employment performing better than we've anticipated and earnings growth not picking up as we've anticipated in a series of forecasts and then on top of that the fact that some of the things that you highlight here have meant that you've got less receipts out of the increase in employment because you know some of the self-employed or more of the self-employed appear to be on relatively low incomes than is normally the case when you get a rise in self-employment income uh there um we don't do a that said an extremely detailed decomposition of the labour market forecast in exactly what sorts of employment and what sorts of contracts are going on there we're basically taking a judgment on what the the unemployment rate consistent with stable inflation is in the medium term and we don't have a very different view of that from the one that the Bank of England does uh you assume it gets back to about five and a half percent uh and uh we assume that the that the unemployment rate will you know not fall as fast over the remainder of the forecast than it has done in recent years which is the flip side of saying that we think that the absence productivity growth of the recent years will hopefully come back but that as we've underlined here remains one of the biggest uncertainties in the forecast of if and when normal service will be resumed again thank you okay thank you that's exhausted questions so committee i've just got a couple of really to finish on um in the in the economic and fiscal outlook um on page un on 78 you say in i quote so the UK began the period 2009 to 2014 with the second highest deficit after the US and ended with the second highest after Japan and then you're going to say the contribution of lower spending to that fall was the largest among these countries the UK was the only country with a deficit has not been reduced by having revenue growing faster than national income going forward though i mean is that how you see it in terms of the relationship between the UK and other countries is there's still a significant difference in how the UK is approaching this issue with other countries well we don't have equivalent forecast we've looked back at what's happened over the last few years in terms of making the international comparisons but we don't do detailed forecasts for all the other countries looking forward as you'll see from this comparison that we've done you know receipts have made less of a contribution than in most other countries there are a number of reasons for that which we've which we've covered already you know the government the coalition has announced additional tax increase is notably the increase in vat early on uh so the gross tax increase gross tax increase uh three and a bit percent of gdp uh probably uh about half of that has been handed back in the form of other tax cuts notably the increase in the income tax personal allowance the reductions in the headline rate of corporation tax and the remainder of that gross increase of gross tax increase has been swallowed up by the sort of disappointment on the effective tax rates for income tax that we've just been talking about and the cut in the oil receipts etc looking forward as i say the deficit reduction over the next five years you get some more in from receipts hopefully a return to earnings to relearn wage growth and to some fiscal drag but on the other hand you have the effect of the past policy measures moving in the opposite direction some you know as I say recovery in the housing market combined with the nature of the rates on the new sdlt and and lbt but 70 percent of the deficit reduction over the next five years on this forecast is still reductions in implied public services spending whereas it was 82 per cent in the current parliament um sounds plausible that's the ifs figures are just the wonder of the the same view in terms of the roughly the same right yes i mean the 80 20 num i mean depends on precisely what you know measure you looking over what time period whether it's that or somewhat higher but uh as i say looking for looking backwards you had more of a contribution from capital spending cuts in the past than we will have in the future uh you know the welfare changes uh you're delivering you some more of the consolidation looking forward whereas in the past actually welfare spending has risen quite sharply as a share of gdp over the course of the of the crisis and the early recovery period partly because inflation was remaining relatively high while earnings growth was relatively weak okay and the last section that you're talking about really will be out itself and just to give you a quote edward troop who's the second permanent secretary hmrc told the this committee on the 21st of january that and i quote we measure and forecast and the published forecaster signed off by the office for budget responsibility but we do most of the legwork on forecasting and the analysis is done internally within hmrc although the obr has been praised for its independence from our perspective the process feels very much the same as it was when the treasury was doing the forecasting we had the same conversations with colleagues in treasury and the treasury would make those forecasts both in and out is hmrc it provides underlying data and the first cut of the forecast for discussion so just wondering what your comment on that is well i think is right in the sense that the first cut is correct so for all the individual forecasts that we do we basically provide hmrc with the economic forecast so you know which different bits of which matter for different taxes so what's going on with labour income matters for labour for income tax etc they crank the handle on that and come back to us uh say you know in the weeks running up to a budget or an autumn statement with what they think is the uh uh uh is uh as it was described as a first cut what then happens is that we have very detailed discussions at which we tell them how we want them to change those numbers now i suspect that in the old days they did have conversations with a treasury who also told them to change those numbers that they came to in the first instance uh perhaps telling them to change them for different reasons than the reasons we tell them to change them that's the whole point of setting up the process uh in the first place what i think uh you know i don't think Edward meant by that is that basically hmrc comes to us with some numbers and we say you know yeah that's fine toss it to one side and go off for tea you know we we it's our forecast we tell them what we want what the forecast is so if they want to have a new model to predict what a particular tax is going to generate they have to come to us tell us what they're intending and we say whether we think it's sensible or go back and think about it again or why don't you double run this for a while until we're happy with it uh all the sort of judgments about how do you interpret what comes in terms of recent history what the numbers are as they're coming in during the year which is obviously the administrative data that hmrc has you know is that something that's news or noise is it something that you're going to want to push forward into the future years of the forecast or do you think this is a one-off you know distortion that'll come out what do you want to assume about how much you know a change in avoidance is going to take place over this so i think it's you know we do the model for the obr compared to say the larger fiscal watch dogs is that we have a small group of people and we have a legal right to the time and effort and assistance of in particular hmrc and dwp on the welfare side of the ones that matter most but the key point at the end of the day is that these are our forecasts hmrc know that these are our forecasts and that may well condition what sort of first cuts they bring to us as distinct from the sort of first cut they may have brought to the politicians when they were doing it in the old days i think with hmrc i mean we do take comfort from the fact that they are you know we are very you know grateful to them for the work that they do and there is a meaningful degree of arms length between them and the treasury and treasury ministers when they bring us a first cut it doesn't have the whiff of political interference about it it may be something that we want to change a lot and to come up and as i say at the end of the day it's our forecast we do it the way we want to we make the judgments but the fact that that you know is being brought to us in the first instance by hmrc rather than you know by ministers direct representatives i think is you know it's a use it's symbolically important and practically important as well and it conditions the behaviour of everybody in the in the in the process so i think that's you know it's it's a it's a useful feature of the system it's also helps of course that hmrc um have the ability to use taxpayer confidential information in a way in which the you know if the forecast was just being done out of the treasury you know neither the treasury nor we can see detailed taxpayer confidential information and for things like corporation tax that can matter quite a lot if you're getting a relatively large amount of revenue out of a relatively small number of taxpayers but even on things like you know i think one of the reasons at the moment why there's a different methodology for the time being at least in terms of lbtt forecasting is that we can use hmrc's knowledge of the detailed micro data in a way which i i don't you know i don't think that the scottish government can see that micro data we wouldn't see it either but at that sort of level and obviously there's an issue as you go forward as to you know where the forecasting activity resides in terms of the scottish government revenue scotland and the commission which i know was you know raised obviously by by the committee and by the paper that was put out last week there's no one size fits all model that works for everybody speaking personally for the way that we're doing the job i take comfort from the fact that at the end of the day i'm coming up with a central forecast not judging whether i'm willing to accept somebody else's and the fact that we have hmrc as a as a good robust professional organisation providing us with material that as i say doesn't have the width of politics about it particularly okay well thank you very much for that comprehensive answer i'm just and and indeed for your evidence today is there any other points you want to make to committee before we wind up the session no i think we've covered everything pretty exhaustively i think we've more or less half well thank you very much once again robert i shall let you know i'll be obviously seeing you later but i will it will call a break in this session in order to allow a changeover of witnesses and we'll reconvene at 11 25 folks i shall reconvene this session our next item of business today is the evidence from members of the scottish fiscal commission i therefore would like to welcome to the meeting leary susan rice professor andrew hughes halott and professor cambell leith once again welcome to the finance committee and before we move to questions i'd like to invite Leigh the race to make a brief opening statement thank you very much convener um i would simply state that although scotland itself is not in perda as we speak that we intend to be as assiduous as ever and not being political and you would expect nothing less than us but i thought i should make that statement to be in parallel with our colleague earlier um we were last here at the end of october we discussed the draft budget in our report about that we had done a lot of work at that point we've since done a great deal of work uh as well we hadn't known then how much it would have been uh in the way that we know it now you've received or seen three missives from us one was a response to the minister which you were copied in in january uh and then a response to yourselves in terms of relevant sections of the draft report on the 1516 budget and finally uh the uh missive that we sent in at the end of last week in preparation for this meeting um rather than repeat what we have put there we think and given your timing as well it would make sense simply to move directly to questions if you're content and actually i mean some of the questions i'll be asking colleagues i'll ask will be i'll probably be within the document you've submitted but i think it's important that some of these things are raised for the the public record i mean first of all um you know in terms of the draft budget 15 16 i'm just wondering you know how how that process will inform your approach to draft budget 2016 17 we in two ways and many of those ways reflect actually the timetable for for the development of of the budget i mean we spent time last summer once we actually convened in in in august and began functioning as a commission learning what the process was working with the scottish government forecasters to understand the models they have the data they have available where the shortfalls perhaps historically might be in data where they have a new tax coming to scotland so we we did a lot of learning we have that now but we've also continued over the piece to meet with them to challenge them in various respects as they develop their own approach to their work we have asked for and have had some sense of the likely timetable for the upcoming budget 15 16 budget because we're told that in an election year at Westminster that the budget timetable here may be slightly altered we intend to work to something like the original timetable that you would normally have to the extent that we can do because we think that that is prudent we also will simply spread out the work that was very condensed last year and so we have a better grasp of what needs to be done and and somewhat better grasp of when so that's a partial answer perhaps we will continue however this isn't a tap that you turn on and off and we as I say have met with the scottish government forecasters in a number of times a number of occasions and we'll continue to interact with them in terms of their developing use of data and the way their models develop so that we stay in lock step with them if my colleagues want to add to that the point that I was going to actually make just there was the fact that your colleagues can add to anything that I asked when I'm asking a question you know please any any member of the panel should feel free and I'm sorry I didn't point out earlier to answer any question or add to any comments that my colleagues won't hold back so don't worry they're very shy we know that from previous committee meetings now in response to the committee's own report which you've actually commented on each of the relevant paragraphs the scottish government indicates that agreement with the developer of a memorandum of understanding between it and the scottish fiscal commission they stated I quote in interim period before the SFC's place in statutory footing it is proposed to prepare an MOU for agreement among the scottish government scottish fiscal commission and Revenue Scotland setting out respective responsibilities and relationships but they also said that this MOU would be discussed with the finance committee in draft as well as members of the SFC but as yet we haven't been consulted on a memorandum of understanding as a committee I'm just wondering where we are with that well I would answer initially that I think that that's a matter between the government and yourselves because they are the ones who should present that to you we have asked the government for at least a draft of sort of format and style of such a memorandum of understanding we understand that we need it we need it in relation to a number of bodies not least as we look forward we believe with the OBR but certainly also Revenue Scotland and and some others so we are ready to look at any draft we have when it's when it comes back to us all right so you're so you're not any the wiser any further forward than we are in terms of this then um we don't have a draft we've asked for one and we will okay right okay maybe we've not been consulted on it because it's not maybe actually not getting right in it yet that's what seems to be but that's not seeming the implication at this point I'm just wondering maybe we could just add to that that we have had contact with a number of bodies so we have kind of informal working relationships with with several relevant bodies so it's really just dotting the eyes and crossing the T's to get the memorandum of understanding I can learn that's an important point this hasn't held us back in terms of what we felt we needed to do over this year no I mean I'm quite I've noticed the kind of the huge number of interactions that the SFC's actually had with so many organisations and I obviously detailed that in your report um now one of the one of the issues of course is that the government is of the view that it shouldn't be the role of the SFC to produce official forecasts what's your view on that at this point um we all have views but I'll turn to either colleague just so I don't do all the talking yeah well there's a whole range of ways of doing this um we heard from Robert earlier this morning which kind of charts a middle course of obtaining information from some bodies but then being responsible for the overall forecast we instead receive the forecast from the Scottish government and then critically you know evaluate that forecast uh alternatively you could have a body that produces everything to do with the forecast uh it's a question of you know resources you need the enormous number of resources if you want everything to be done in house less resources if you put some of it out of house it's your choice now obviously I realise you don't have access to the you know the first class um plane travel and the shopper driven limousines that Robert Chote has come to enjoy but um there is an issue about the £20,000 budget that you actually do have as a of course I was being facetious there in case anybody to reckon the things or not but of course there is an issue about the budget that was allocated to you which was £20,000 and I do actually appreciate that you know that you've had to um you know that Glasgow university has been very helpful in providing some in-kind support and you've said in your report that our expense of 2015-60 will increase significantly using of the office to run we need to develop a rather basic website we may commission some research we now have a part-time PA and you're also looking to the possibility of a fourth commissioner this year so what kind of growth and resources do you need to be able to do the job that you hope to be able to do and you believe is expected of you I cannot give you an exact number right now and the reason for that is that the Scottish Government colleagues are sort of well down the road in negotiations with Glasgow university about what expenses the university may be able to carry for us instead of charging them back for at least part of this coming year or maybe the whole of the year these relate to some extent to occupancy costs both costs to put some deaths in an office and whitewash it and so forth and ongoing occupancy costs we have some office operating costs we now have a part-time PA I for my old office provided that kind of service gratis until the end of December so we're on a new operating style since the beginning of the year so to give you some sort of order of magnitude but I wouldn't I don't think any of us would want to be held to this because we don't know the exact numbers just now we're probably talking about a cost of maybe 20 000 for a PA but the university may be helpful with that a process has started to identify a couple of research assistants who whose work would you know a small piece of their time would be spent supporting our work and that cost might be in the same range having said that again the university may well pick up those costs so we're just trying to get our arms around this we have not spent fully the 20 000 this year but that's because we we operated hand to mouth and and as I say my old office provided some gratis service to to the work that we were doing we have factored in a bit of travel and a bit of research in a couple of conferences I would say that we're not an expensive date and we don't expect to be this coming year however one of the needs that we've identified that we think is really urgent and I don't know the title so it's hard to give you it is this kind of person but it's somebody who can scan the political debate scan a lot of your debates brief us see what's happening outside and actually keep us much more closely in the loop because we're as you know doing this part-time with day jobs and and we're not people who are in this circle all the time so we need some support there we've talked to the Scottish Government about the kind of person who would be able to be helpful and it is possible if our remit grows significantly over this year because of what comes out of the Smith commission report and the subsequent command paper or for any other reason that we might look to bring on board another economist so we have a lot of questions about the costs there but there would be an individual who would need to and you'll have a title I don't I call it the political scanner and that person would have to be remunerated indeed I mean I mean you said you were living a hand-to-mouth existence I mean I can't continue really I mean obviously if you're going to be you know a sustainable kind of organisation you can't be relying on the kind of goodwill of your landlord so to speak in terms of that surely you do need a more substantial budget in order to be effectively self-standing wherever you happen to work from you know and not relying on glass university to pay the heating and lighting bills so to speak that's absolutely correct and the university I think doesn't intend to pay them forever but they have been good hosts in the beginning and we're working or we are the Scottish Government is working with them very closely in fact about what costs they will carry what they might charge back if anything is charged back it will go through us relating to occupancy or anything of that sort it will go through us to approve you know that yes we did receive the service or we did receive the the heat in the system as it were but that wouldn't be forever and assuming that the commission is put into statute as well over the next parliamentary session I think that also anchors us and as we do our work over the session we will also have a better handle on actually what those costs are but we've put in a budget submission to the extent that we can do for the numbers we can predict and you're looking for this fourth commissioner to look specifically at economic matters or we're not looking today for a fourth commissioner but we believe that if and as the remit expands we might well need one so that is at least a question certainly not for the first half of next year I wouldn't expect but but we don't know but it's it's only proper to say that we've thought about this and discussed it okay it's a couple of other questions I'm quite keen to ask but I don't want to seal the thunder of all my colleagues so therefore I'm going to open up the session just now in the first person to ask questions from committee will be Gavin good morning thank you first question is about the subject of for stalling and the behavioural impact for LBTT you made some obviously initial observations in your paper in October you obviously wrote something to the Scottish Government afterwards just in advance I guess of their stage 3 budget is there any the impression I got from the cabinet secretary and I may have picked this up wrongly the impression I got was that you were currently doing a piece of work looking at the behavioural impact and forestalling to help them in their discussions with the UK treasury over presumably over the coming weeks or months now that the financial year is closed is there no I may have picked up picked that up wrong are you doing any current work on for stalling or behavioural impact specifically for the Government I think well at the time of the kind of the budget we noted that the kind of modelling work of the Scottish Government in this respect didn't include any behavioural responses at all okay so I think when the for stalling issue kind of became a bigger issue in January the Scottish Government forecast started doing some work on this issue and so we've been scrutinising that work we haven't been doing the work ourselves but as fits the way we operate we've been scrutinising what they do and I think at the time we were asking for further evidence and development of this estimate of the for stalling effect before we could sign off on it and I think we were aware of kind of academic work in this area which I think feed into the the OBR's estimates of for stalling and other behavioural effects and we were encouraging the Scottish Government forecasters to to look at this work more deeply and see if it could be replicated for for Scotland so they've done some preliminary work looking at that but haven't gone the full distance to be able to identify effects the way has been done for the rest of the UK in that way okay so you've done various bits but there's not a live piece of work though as of as of today there's not a lot if you're asking are we doing an independent piece of work or have we commissioned research or anything of the sort independently the answer is no that we're working as Campbell says consistently with our method which is to interact with the Scottish Government forecasters to challenge and discuss and then meet again and take it to the next step but not independently from those conversations Andrew anything I need to say if we wanted to go any further I think we need to contract out one of the current regime okay which goes back to the budget question sure no depends how much you want I suppose the reason I ask is just that the there will be a discussion and whether it will be in the coming weeks or presumably coming months with with an election going on the Scottish Government and the UK Government will sit down to work out what was the effect of forestalling in 2014-15 the OBR have obviously given their projections on what they thought it was and the Scottish Government will have to to work out what they think it is and presumably and then a deal of of some sort is done between the two Governments to to recompense the Scottish Government so there's one more question are you are you involved in the if the OBR are sort of put what they think the case is to the UK Government the Scottish Government haven't said specifically to you can you tell us what you think the forestalling was for 14-15 no what the Scottish Government did is they gave us their initial estimates of what they felt the forestalling effect was we discussed the method they'd used to calculate that and I think our conclusion was that it may well be a reasonable estimate it may not but we required further evidence looking at various bits of modelling work that could be done kind of to supplement that initial work to see whether that estimate was a robust estimate or not and we haven't I think we haven't quite received kind of updates on that work that convinces of the number okay okay the committee obviously felt in our initial report that the the Scottish Fiscal Commission should have responsibility for producing the official macroeconomic forecasts the government disagreed it's probably slightly political to say to ask you should you have responsibility for it so I won't ask that what I will ask so is just imagine for a second the government to change its mind and said actually on reflection we think the Scottish Fiscal Commission should be in the way that the OBR does they should be responsible for the official macroeconomic forecast they just decided that's the case could you do it at this stage if you were asked or if not what sort of work would need to be done before you were ready to do macroeconomic forecasts we three could not do that ourselves I mean absolutely not but but if we if we were asked by parliament to to do that to other if you want to just say I mean we need resource yeah there is also implications would be we'd be quite significant I mean the OBR operating with this kind of model of doing some some modeling work is kind of done within hmrc and then it has its own macro model to do its main macro forecasting even there there's I don't know quite the number of staff involved but there's at least 30 members of staff I think are involved in producing that forecast and they inherited a model from the treasury in order to do that I think Scottish government are in the preliminary stages of developing their own macro model and we would need a team that's maintained and ran that model to be able to produce a complete coherent macroeconomic forecast okay all right next next question is the in your initial report you commented obviously on the on the Scottish government forecasts for LBTT and for landfill tax and then obviously on the underlying indicators for business rates and I forget the exact expression but it was it was something like we can endorse these forecasts as reasonable the word endorsed might be wrong but you something about we accept these as reasonable it was something of that nature what wasn't a guess clear for me looking at it was what would what would be unreasonable in your view and what are the kind of edges of reasonableness if you like I mean there must there must be a sort of upper you know there's a central projection there's a kind of upper thing where you might be being a little bit optimistic and then there's a kind of lower case scenario presumably where you have something or things go wrong for future reports I mean are you giving consideration to sort of publishing in more detail the sort of numbers that you would consider to be reasonable and where you think the upper or lower thresholds might be or is it is your intention to sort of basically you know say it's reasonable or it's not reasonable are you going to go into more detail in in sort of future reports I could speak in relation to the kind of non-domestic rates the initial forecasts that the Scottish Government forecasters were producing I think we described as being on the optimistic side so effectively it was at the upper reaches of reasonable and as a result they decided to change the forecasts so we were introducing language into the reports to indicate that it was pushing the boundaries of what was acceptable but the judgment of reasonableness is based on what the forecasters themselves have chosen to work with what the work that they've done and you know we're not saying they should have used these data or something else we've taken what they've presented and we've then gone back challenged and made that judgment yeah very difficult to publish numbers that you think are reasonable in contrast to what the government is doing because we don't endorse specific numbers we endorse if we do the way of doing it and that the outcome is as reasonable as you can expect in the circumstances there's obviously an enormous judgment going in there because you might you might academically want a much more tight model or some other data or something which doesn't exist so you have to reasonable is within the context of what you can do so there's a compromise in there and so that's I think an explanation a bit of what we think was reasonable and what we thought was not reasonable it wasn't so much in numbers of places where things could be better where is in the other form of behaviour when you've been talking about the behavioural responses you've been largely talking about when the taxes change how do people alter their behaviour and consequence which is the first stalling part but there's also the behaviour of what goes into into LBPTT into the housing market from the economic circumstances surrounding that and the financial circumstances so how national income has grown how what's happened to interest rates and mortgage rates the lending ability and all those sorts of things and my take on this is that's the biggest part of what's missing in the at least in the residential part we were also concerned that the non-residential part was probably the weakest part of the forecasts it's very difficult to to go any further with that because it's very difficult to model I think that's fair to say so it wasn't so surprising but if we could make any progress in that that's where I would put a priority on it and having been through the for stalling exercise I would say you can pick holes on the way it was done but at the end of the day we came down to 20 million pounds which would be wonderful on my bank account but is relatively small in the context and maybe that's not the highest priority from now on in trying to get some of the bigger numbers dealt with better so that's you know where I would approach the problem from being the less reasonable parts that's an answer to your question okay thank you um in terms of bigger I mean how has the Scottish fiscal commission been formally asked to do anything in relation to the Scottish rate of income tax at this stage we have understood it to be part of our remit to become involved with that um presumably starting in the next legislative year um as a result the Scottish Government officials have um sat down with us and um just given us a bit of history a teaching if you will to to get us started in terms of our thinking yeah add to that we also had a kelly conference um one of the ones which worked yes that's true we have problems with bt um I had to get that in um with the with the obr people doing the same thing view from London um so the extent to which we've engaged is trying to understand how they do it and to understand how the process is supposed to work over the next few years rather than do something on it and say we expect this kind of number to come out and and we're conscious of the fact that this is a shared tax it's different from the ones we've been dealing with great thank you thank you what's your convener thanks convener um i mean i have to say when the convener was asking you about you know your budget of 20 000 and um you know the kind of settling in arrangements i have to say i felt personally a little bit uneasy that we're expecting you to do quite a lot of work on really very little resources i mean maybe i should just relax and say while we're settling in i mean i mean is that how you folk feel about it that we're in a kind of settling in period so we just accept and then things will settle down in due course i think we're past a settling in period i think that um what we've learned over the piece is that there's a whole lot more to the development of a budget than the draft budget in october and um we've learned what the work is i mean if if you were to ask us and we're not scientific about this but i think my two colleagues would say they're putting in in terms of time at minimum a day a week and and sometimes more i'm doing probably double that um for people who are excuse me for saying this unremunirated and doing this against a backdrop of day jobs um that's a you know that's more than just over settling in um so so you know this is becoming serious business let me put it that way yes well that that's exactly my feeling i mean i personally think very highly of the three of you and uh you know i think you should be properly resourced and we've talked previously about the independence of yourselves as a commission and part of that surely has to be that we get a fixed budget at some stage and fixed arrangements and then you are much more distinct because i mean the number of times you mentioned the government's involved speaking to the university i mean all of that gives the impression of you not being independent now that's not to say you aren't independent in your forecasting but there's a kind of on-going close relationship there which i'm not altogether happy about let me say that i think if you we were given a so-called framework document by the government um which i assume you will have seen at some point this is the end of last summer but in there it talks about how some of the budgetary matters specifically will will operate um so the government at the end of the day foots the bill um so if we um you know travel uh you know take a train to Glasgow or something and there's a travel expense there uh we put the expense request in on to the public sector system and it goes through the hopper that way so i think that there is a role stated for the government in relation to the monies um but we are the ones trying to build and we have already submitted some numbers but we think it will cost us we are really um a real estimate what it will cost to run the office this is office supplies and phone calls and photocop you know those kinds of things based on some guidance we got from Glasgow university colleagues and it had nothing to do with the government came up with a figure of and this includes some travel as well obviously around 18 000 pounds for the year so um we're building that budget from our own base but they have been involved in ascertaining the transitional piece from Glasgow paying to us paying okay but we don't disagree sorry to interrupt we i don't debate the point at all we do need to be on a proper uh proper footing in terms of budget yeah interesting intervene on that a wee bit um i think ultimately it's very important that we become a budget line yes a separate budget line when you say settling in i think it's not so much settling in we're in limbo somewhat because we don't know what is going to come further down the track both of the regards to further devolution and any other which seem to have pop up every now and ag