An Independent Fiscal Body for Scotland

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PROPOSALS FOR AN INDEPENDENT FISCAL INSTITUTION IN SCOTLAND:

a response to the Scottish Parliaments Finance Committee

(1310)

1 The Royal Society of Edinburgh (RSE), ScotlandsNational Academy, welcomes the invitation torespond to the Scottish Parliament FinanceCommittees inquiry into proposals for theestablishment of an independent fiscal institution(IFI) in Scotland. This response has been preparedby an RSE working group with appropriate expertise

and experience in matters relating to the Scottisheconomy. The Committee will note that the RSEhas recently submitted a response1 on the NationalPerformance Framework (NPF). Elementsof theresponse on the NPF are relevant to the currentinquiry and should therefore be read in conjunctionwith this response. We would be pleased to discussfurther any of the comments made in our responseswith members of the Finance Committee.

Roleandremitconsiderations

2 In considering the possible scope, role and remit of

an IFI in Scotland, it will be necessary to consider theconstitutional arrangements within which the bodywill be operating. The form of IFI required inScotland is likely to differ under the presentconstitutional settlement as compared to eitherindependence or the devolution to Scotlandof further powers.

3 All existing IFIs have the basic function of forecastingand evaluating the likely-outcomes of current fiscalpolicies; and commenting on the sustainability ofthose policies long term. Thereafter the remits varyconsiderably, including whether they should gobeyond the basics and also comment on the extent towhich fiscal policy is likely to help achieve thegovernments more fundamental objectives suchas job creation, growth prospects, incomedistribution, or structural reform. A small number,including the Canadian Parliamentary Budget Office,have a role in costing and assessing future policyoptions and scenarios.

4 In the case of the UKs Office for BudgetResponsibility (OBR), it is required to provideindependent forecasts of the future fiscal revenues

and budget position, including the implications forgrowth and employment that may affect the fiscalposition. However, it is forbidden from examining or

commenting on the other targets of economic policyor the merits of the other policies that might be usedto reach them.

PossibleapproachinScotland

5 Even under the limited fiscal autonomy to beexpected after the Scotland Act 2012 comes intoforce, Scotland will have an obligation to safeguardthe sustainability of its public finances. As weindicate in paragraph 2, the more powers thatthe Scottish Parliament has in relation to revenuegeneration and expenditure in Scotland, the moreimportant this obligation becomes.

Forecastingthefuture fiscal position

6 The RSE is of the view that it would be valuable toestablish in Scotland an IFI capable of providingauthoritative and independent assessment of the

fiscal position and general prospects for the Scottisheconomy within the context of UK and internationaldevelopments. More generally, as our response onthe NPF demonstrates, there is a need to strengthenin Scotland theindependent assurance of data quality.

7 We would expect an IFI in Scotland to cover theoutlook for public finances and financial conditionsmore generally. An IFI in Scotland could be taskedwith: a) reviewing thefiscaloutlook for thegovernmentand the public; b) reviewing the future revenueslikely to be available; c) estimating current structuralimbalances; and d) estimating thelikely consequences

of current spending and taxation plans.8 The Finance Committee will need to examine

whether the forecasting needs of Scotland arisingfrom the level of fiscal autonomy of the Scotland Act2012 could be met fully and effectively by the UKOBR. We understand that the UK OBR has beentasked with providing forecasts of Scottish incometax, landfill tax and stamp duty land tax. However, werecognise that concerns have been expressed as towhether the forecasts provided by the UK OBR fullycapture the distinct circumstances and drivers inScotland. We would of course expect a Scottish IFI to

take due cognisance of the forecasts produced by theUK OBR at least, but probably not only, whileScotland remains part of the UK.

1 http://www.royalsoced.org.uk/cms/files/advice-papers/2013/AP13_08.pdf


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9 Whatever form the IFI in Scotland may take,it is crucial that the forecasting work undertakenby the IFI is integrated within the processes thatshape the Scottish Governments spending plans andthe setting of the budget. Notwithstanding, theresponsibility for the choice, design and executionof fiscal policy would remain firmly with the ScottishGovernment. This implies that the IFIs task isessentially technical, even if its work would playan important role in the subsequent politicalprocess. However, the scrutiny function of theScottish Parliament and the ability to hold theExecutive to account should, in principle, beenhanced with the establishment in Scotlandof an IFI. The Scottish Parliament would be wellplaced to challenge the Executive in public if it feltthat the Executive has not taken full accountof the forecasts and fiscal analysis provided

by the IFI. This would put an onus on the Executiveto defend its plans in public.

Analytical commentaryonlong termstrategic issuesand commitments

10 The Finance Committee will be aware that the RSEhas frequently raised concerns about the annualityof the budget setting process. This restrictslonger-term prioritisation of spend by failing totake account of longer term demands. As such,beyond the forecasting role we set out in the

preceding section, consideration should be givento the provision of analytical commentary onstrategically important forward-looking issuesand commitments. For example, this could includeconsidering and commenting upon the fiscalimplications of demographic change. This wouldenable independent consideration to be givento financing implications beyond the parliamentarycycle. This could be achieved without interfering withthe governments preferences, priorities and targetsand could provide analysis of the type and qualityundertaken by the Institute for Fiscal Studies.

The work of bodies such as the Fraser of AllanderInstitute and the Centre for Public Policy for Regions(CPPR) would remain important and would provide acounterbalance.

11 The crucial aspect of this function is the capacity tolook to the future, beyond current parliamentarycycles. This would complement the approach weoutlined in our response on the NPF, where wesuggested consideration should be given toextending Audit Scotlands role in relation tothe provision of independent validation ofScotlandPerforms. We would, of course, expect an IFI in

Scotland to draw on the work of Audit Scotland.

Hosting theforecast andcommentatorelements

12 Recognising the resource implications associatedwith the establishment of an IFI in Scotland, we

suggest the Finance Committee explores whetherthe proposed forecasting and strategic commentaryfunctions could be hosted within a consolidated bodythat includes SPICe. This would not negate the needfor additional resource in order to deliver theforecasting and commentator functions, includingthe provision of staff with expertise in data analysis,statistical modelling and econometrics. However, itcould avoid issues related to a proliferation ofbodies. This suggested approach would seem tosatisfy the requirement for the IFI to be independentfrom government, which is expanded upon in thenext section.

13 It is important to be clear about the distinctionbetween the technical forecasting of likely outcomesand the commentaryonmajorstrategic issues andcommitments that have long-term implications.The latter activities will inevitably involve some levelof involvement with policy choices. In order topreserve the objective integrity of the technicalforecasting work, it should be contained in a cycleof publications which is clearly separate frompublications which contain commentary onlonger-term strategic issues.

Independenceandaccountabilityconsiderations

14 While many countries have IFIs appointed by, andreporting directly to, Government, in order tosupport the reputation, impartiality and hencethe credibility and impact of the IFIs analysis,a Scottish IFI should be appointed independentlyby, and directly accountable to, the ScottishParliament. Appointments to the IFI should bemade by the Crown. This approach recognisesthe importance of ensuring the IFIs freedom

from political pressure while balancingthiswith an appropriate mechanism of accountabilityto assure its effectiveness and democraticlegitimacy.


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Additional InformationandReferencesAdvice papers are produced on behalf of RSE Council by an appropriately diverse working group in whose

expertise and judgement the Council has confidence. This Advice Paper has been signed off by the Chair

of the group and by the General Secretary.

In preparing this Advice Paper we would like to draw attention to the following RSE responses which are

relevant to this subject:

The Royal Society of Edinburghs response to the Scottish Parliaments Finance Committee on the Scottish

Governments National Performance Framework (August 2013)

Any enquiries about this Advice Paper should be addressed to Mr William Hardie

(Email: [email protected]). Advice Papers are published on the RSE website

(www.royalsoced.org.uk).

AdvicePaper (RoyalSocietyofEdinburgh) ISSN2040-2694

TheRoyalSocietyofEdinburgh (RSE) isScotlandsNationalAcademy.It is an independentbodywitha multidisciplinary fellowshipofmenand womenof international

standingwhichmakes ituniquely placedtooffer informed, independentcommentonmattersof nationalinterest.

TheRoyalSociety ofEdinburgh,Scotlands NationalAcademy,is Scottish CharityNo. SC000470

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15 A Scottish IFI should not take instructions fromthe Government or its agencies. It should havethe right to develop its own framework of analysis,data sources and methodology. It should havefull access to data and any related analysis

or evaluations made elsewhere. Given itsindependence, a Scottish IFI will need todemonstrate a high degree of transparency inits operations. This calls for the publicationof all material relevant to its work. A parliamentarycommittee (or committees) could be charged withreceiving and considering the reports of the IFI andholding the Executive to account in relation to thepolicy and budgetary implications of the IFIs work.

Establishmentofan independentworkinggroup toconsider theestablishment ofa Scottish IFI

16 Within our response we have made it clear that the

form of IFI required in Scotland might well differunder the present constitutional settlement ascompared to either independence or the devolutionto Scotland of further powers. To assist itsdeliberations, the Finance Committee shouldconsider setting up an independent expert groupto examine and report on options for theestablishment of an IFI in Scotland in the contextof the possible future constitutional arrangements.In undertaking its work, we would expect the expertgroup to consider the IFI models operating in othercountries. The expert group could also consider the

extent to which, if any, an IFI in Scotland should havea direct role in setting the policy agenda in Scotland,including the costing and assessment of futurepolicy options.

Documents

An Independent Fiscal Body for Scotland