• Text size      
  • Send this article to a friend
  • Print this article

Vital that forecasts are transparent and at a high level

Some 10 days ago Scotland benefited from the annual visit by Robert Chote, chairman of the UK Government's Office for Budget Responsibility (OBR).

EVIDENCE AND ADVICE: Robert Chote, chairman of the Office for Budget Responsibility, was in Scotland for his annual visit.
EVIDENCE AND ADVICE: Robert Chote, chairman of the Office for Budget Responsibility, was in Scotland for his annual visit.

In these visits Mr Chote provides important, informed and very clear evidence and advice to the Finance Committee of the Holyrood Parliament.

He also finds time to chew the economic cud with friends of the David Hume Institute. The work of the OBR is extremely important, for economic governance in Scotland as well as at the UK level. Further, there are lessons to be learned from his wise words regarding both the present and prospective state of the public finances and how Scotland's public finances might be managed in the event of a Yes vote come September — or indeed in the event of a No vote and the further fiscal devolution that would then be likely.

Mr Chote describes four main jobs for the OBR at a UK level:

* Twice a year to produce five-year forward looks at the economy and hence the public finances. These OBR results are then, perforce, used by the UK Government for its work on the Budget and the public finances. To put it starkly, the Chancellor cannot say: "Thank you Mr Chote but I disagree and will use my own forecasts". The OBR forecasts are required input into UK policy formation.

l To use these forecasts to check if the UK Government is on course to achieve its stated objectives, for example with respect to reductions in the annual deficit or the total stock of debt. They score Government's performance.

l To examine the revenue and cost implications of individual Budget measures. These estimates have always been adopted by HM Treasury.

l To consider the long-term health of the economy and produce a public-sector balance sheet looking forward well beyond five years. This allows it to examine the impact of longer-term factors such as demographic change. The long term can be neglected when politics dominates.

The significance of this OBR role remains under-stated. One great benefit is transparency — everything is out in the open, results, assumptions and all. But it is also crucial that the OBR is not just a body commenting in a transparent and informed manner on Government data (as was and remains the case with the equally meritorious Institute for Fiscal Studies) but the body producing the forecasts and figures that the Government has to use — and further commenting on whether Government objectives are or are not being met. It is significant that, following OBR checks on progress towards targets, the UK Government at different times has changed both policies and targets. The OBR has teeth and impact.

The OBR also has a formal role in Scotland in the context of extra devolved fiscal powers set out in the Scotland Act. Unless and until replaced by a Scotland-specific body, the OBR will be forecasting revenues from the Scotland component of income tax, stamp duty (until replaced), and landfill and aggregate taxes.

Of course, the Holyrood Finance Committee is interested in the OBR's overall view of the public finances. (In brief, the continuing squeeze could take the day-to-day running costs of public services down to the lowest level since 1948 — ouch!) But in addition the Finance Committee is seeking OBR input to help form a view on public finance issues relevant to Scotland. The classic example here is revenue for taxation on North Sea oil and gas.

A substantial gap has opened up between OBR forecasts for this crucial revenue stream and the estimates in the Scottish Government's White Paper. This was perhaps inevitable, if only because this revenue stream is inherently both immensely complex to forecast and also volatile and uncertain. To forecast North Sea tax receipts requires estimates of production, oil prices (in dollars), the £/$ exchange rate and the extent of capital investment — as this is set off against tax. Changes in actual receipts from one year to another of 60% are not unusual.

Where such a revenue stream makes up a significant share of total revenues — as would be the case in an independent Scotland — its unpredictability and inherent volatility provides a major complication for policy makers. I do not know if the Scottish Government's forecasts will prove nearer the mark than those of the OBR. Indeed, nobody knows.

What I would argue is that we would need the best and most transparent efforts at forecasting; and that it would be unwise to base public finance policies on anything but a conservative estimate of these revenues. It would be much easier to use up any windfall surpluses in due course than it would be to cut back drastically in the short term if revenues disappointed.

We await news as to plans for an OBR-equivalent for Scotland. Such a body would be of great value now, of even more value as the Scotland Act measures come into force and nigh on essential in the event of a yes vote.

We have no organisation in Scotland with the resources of an IFS to critique in depth Government's forecasts and plans. It would be great if one could emerge to work alongside a Scottish OBR. But what I would really welcome would be a move as soon as possible to create that Scottish OBR. This should be a body which, like its UK counterpart, is not just an informed commentator on Government figures but the actual provider of key forecasts. This has worked well for the UK in very difficult circumstances, and would add even more value in Scotland, adding real credibility to the foundations of decisions and expectations regarding Scotland's public finances as financial devolution evolves and extends in one way or another — as it inevitably must and will.

Jeremy Peat is Adviser to the University of Strathclyde International Public Policy Institute

Contextual targeting label: 
Local government

Commenting & Moderation

We moderate all comments on HeraldScotland on either a pre-moderated or post-moderated basis.
If you're a relatively new user then your comments will be reviewed before publication and if we know you well and trust you then your comments will be subject to moderation only if other users or the moderators believe you've broken the rules

Moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours. Please be patient if your posts are not approved instantly.

231145