WHAT Scotland needs, and needs soon, according to the Scottish Parliament’s finance committee, is a stronger, more independent fiscal watchdog. The committee says it would like to see an expansion of the proposed remit of the Scottish Fiscal Commission (SFC) to include the power to set the financial forecasts on which the Scottish Government bases public spending. In other words, the MSPs are suggesting the Scottish commission should be much more like its bigger brother, the Office for Budget Responsibility (OBR).
But that begs the question: how great a model is the OBR anyway? Economic forecasting is not a science, and is subject to a large margin of error, but since its establishment in 2010, the OBR has consistently got it wrong. In its early years, its mistake was to be regularly over-optimistic about how quickly the economy would recover. The reality, as we know, was the recovery was slow and weak, and it still is.
More recently, sudden changes in the OBR’s forecasts also led to the sight of the Chancellor George Osborne spending £27billion he did not even know he had. It happened because, late last year, the OBR forecast tax revenues would be higher than first thought and the costs of servicing the national debt would be lower. That meant Mr Osborne could reverse his planned cuts to tax credits, using a pot of gold created by an economic forecast.
The episode clearly illustrated how unpredictable forecasting can be, but also the dangers of getting it wrong - a forecast that changes so suddenly it creates £27billion can just as quickly change back again, leading to billions of pounds in cuts or a bigger than expected deficit. However, the principle on which the OBR was founded remains sound and could provide a reasonable model for the Scottish Fiscal Commission too: economic forecasting should be independent from government and also be seen to be independent.
Sadly, the finance secretary John Swinney appears to be resistant to this idea and that may be because he thinks he is better at forecasting than anybody else. And in his defence, there is actually no real reason for Mr Swinney to be wildly optimistic with his forecasts (even though the SNP got the forecasts of oil revenue spectacularly wrong ahead of the independence referendum). Indeed, the pressure on Mr Swinney is to do the opposite for the simple reason that if he is shown to be over-optimistic, he could suddenly find himself having to make cuts the voters were not expecting. It is in his interests to make his forecasts as accurate as he possibly can.
However, economic forecasting is not just about how accurate it is – it is also about perception and removing the suspicion that the forecasts are politically motivated. Mr Osborne’s decision to set up the OBR in 2010 was the right move, as was Gordon Brown’s decision to hand the control of interest rates to the monetary policy committee of the Bank of England, and they were the right decisions for the same reason: the electorate deserves an assessment of the public finances that is as honest and independent as possible. It is a principle that matters right now, but it will become even more important if the SNP deepens its power at the elections in May and, once again, when the new tax powers come to Holyrood. The Scottish Government may not like it, but it needs to demonstrate that it understands this important principle of independence and bring the fiscal commission into line with the OBR as soon as it can.
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