Meeting date: Tuesday, May 3, 2022
Finance and Public Administration Committee 03 May 2022 [Draft]
Agenda: Decision on Taking Business in Private, Scottish Fiscal Commission (Appointments), Public Administration in the Scottish Government
- Decision on Taking Business in Private
- Scottish Fiscal Commission (Appointments)
- Public Administration in the Scottish Government
Scottish Fiscal Commission (Appointments)
The next item is evidence on two nominations for appointment to the Scottish Fiscal Commission. As members will be aware, the Cabinet Secretary for Finance and the Economy wrote to the committee recently, nominating Dr Domenico Lombardi as commissioner and Professor Graeme Roy as a new chair of the commission.
Members have received copies of the nominees’ application forms and CVs, along with the person specifications for each role. We will take evidence first from Dr Lombardi, and then from Professor Roy. We have up to 60 minutes for this item.
I welcome Dr Domenico Lombardi, who has been nominated as commissioner. We will move straight to questions. Dr Lombardi, you have a very impressive CV, as one would expect. You obviously have a lot of experience internationally. Will you tell us a wee bit more about yourself—about you as a person, as opposed to your work—and about why you want to become a commissioner of the Scottish Fiscal Commission?
Thank you, convener, for this opportunity. I have acquired experience in the area of multilateral organisations and the management of economic policy, in research institutes and most recently in financial institutions. The interest that has driven my career has been to better understand the complexities and intricacies of economics. I have an academic background. I did a doctorate in economics and I have published extensively on macroeconomics, both in international academic journals and in policy and professional outlets. I have also been exposed a lot to policy decision making and policy processes at both national and international levels. I have been exposed to the trade-offs that policy makers must make as they seek within constraints to optimise opportunities.
I applied for the job as a commissioner because I am deeply interested in learning about and understanding better the complexities of the Scottish economy as it relates to the broader United Kingdom, European and world contexts. That is what has driven my interest, and that is what I have been sharing with the interview panel. That is the reason why I am here, ultimately.
Thank you. That is very helpful. How familiar are you with the Scottish economy and the balance between reserved and devolved powers?
To be fully transparent, I am not a Scottish economy expert. The value added that I hope and am confident that I will bring to the table is more an international and comparative perspective, as well as the method that I have been learning by working in several national institutions and international organisations and by being part of international think tanks. That is the value added that I believe I could bring, rather than having specialised, detailed knowledge of the Scottish economy at the moment. That said, I am a quick learner. I am eager to learn and I am willing to catch up as fast as I can.
What do you feel would be the most challenging aspect of your role as a commissioner?
There are several challenging aspects. First, the commission has a mandate to forecast macroeconomic and fiscal variables. As we all know, forecasting is not a perfect science and is not deterministic, so one has to use a sound method and an eclectic approach, and one also needs to exercise some judgment. What is required is not a bottom-up or a top-down approach, but a bit of everything. In the end, one has to be confident that, when one puts one’s name and signature on a document, it really is the best that one can do.
The most important and relevant aspect is to ensure that the forecasting follows the best possible practices nationally and internationally. Independence is also a key requirement, of course, and I am perfectly aware of and deeply sensitive to that. With my international background, I will be able to bring a fresh pair of eyes and, again, I hope to be able to bring that to the table.
Thank you for that and for your earlier response. I will open up the session to colleagues round the table. The first person to ask questions will be John Mason, to be followed by Daniel Johnson.
Welcome to the meeting. Reading your CV, it strikes me that you have moved in quite high circles, such as the International Monetary Fund. Why do you find Scotland interesting? We are quite a small country—there are only 5 million of us.
To be perfectly fair, I lived in a much smaller country, which is the republic of San Marino. When I was on the board of the International Monetary Fund, we used to represent a number of countries including some very small ones—Malta and San Marino—so I was exposed to the complexities of interrelated economic contexts.
To come to the thrust of your question, I note that San Marino is not a member of the European Union, nor is it a member of the eurozone. However, it has a customs union with the EU through Italy and it relies on the euro even though it is not part of the eurozone. Those are all fascinating and intellectually challenging issues and questions and they are relevant from a policy viewpoint. I hope that I have addressed your point.
Yes. That is fair. I was just interested.
I accept the fact that you are fairly new to Scotland and you are still learning but, from what you know of the Scottish Fiscal Commission, are there things that you think that it has done well? Do you see any particular areas for improvement?
I have of course looked at what the commission has done. The way in which it presents issues is very helpful. That is part of a broader trend. There is an emerging literature in economics that points to the importance of making the broader public understand how policy making is done and how to appraise economic policies. The more that one is effective in conveying information, even through infographics, to ensure that things can be read and understood by the broader public and not just by those in a specialised economic stream, the more value added is provided. That approach also clearly fulfils the institutional mandate that has been entrusted to the commission.
I am interested that you mention the broader public. I do not think that the broader public even know that the Scottish Fiscal Commission exists, let alone—
It is still a young institution, and that is a challenge that all young institutions have to face, in a way.
Do you think that we can raise its profile a bit more?
The commission would need to look at that. In my experience, especially from think tanks and economic policy research institutes, what people do and the analysis that they produce is important, but its dissemination is equally important. This is not the result of econometric analysis, but my subjective assessment is that each of those two components carries a weighting of roughly 50 per cent. If we do not disseminate information, do outreach and let the stakeholders understand what we do, there is clearly room to improve.
I begin, in contrast to my colleague John Mason, by saying that I totally understand why someone would be interested in coming to a small country, but one with very strong links to the other countries on these islands and indeed with Europe. However, one of the issues with small countries is that they sometimes do not see far beyond their borders. Especially when we are looking at the challenges that are in front of us right now, it is really important to be alive to the global economic issues.
With that in mind, and given your experience in San Marino, what do you think the issues are and how can smaller countries overcome those challenges and look beyond their boundaries?
As an economist focusing on Scotland and the Scottish economy, it would be important to appreciate macroeconomic risks, sources of fiscal risk and how they would translate into forecasting because, after all, the hard mandate of the commission is to make sound and reliable forecasts.
There are clearly a lot of constraints. Some of them can be explicitly modelled while others require some judgment. At the end of the day, however, the role of a commissioner and of the commission as a whole is to make sure that those constraints and the intricacies, complexities and interrelations translate into sound forecasting and sound forecasts.
The most recent Scottish Fiscal Commission report, which came out in December, was very interesting and revealing. Some of the issues that it discusses are ones that the committee has pursued vigorously. However, even in the short time since that report was published, a lot has changed. We have seen the war in Ukraine and its impact on energy prices, which has fuelled inflation. That was already a concern, but it has been amplified. It strikes me that we are dealing with times in which we are having lots of black swan events. Further back, we had the credit crunch just 10 years ago, and these things seem to be happening more regularly.
Given that the commission’s role is to forecast, what is your view on how we can anticipate and accommodate such risks? Once such things have happened, how should we revise our forecasts? Will you give us some thoughts on how we deal with that?
That is a very relevant question. As I said at the outset, forecasting is not a deterministic science and it requires an eclectic, multitextured approach. You mention a key issue—it seems that we are going through a change of regime right now. Let us look at what is going on in the global energy market and at the recent inflation dynamics. Until a few months ago, we had the opposite problem—there was low inflation, not just in the UK or in Europe, but worldwide.
It is clear that mainstream econometrics can help only so much at this time. We need to bear in mind that, because there might be a change of regime, some parameters that were estimated in a completely different context might not be so robust when we predict future outcomes. That is why one has to rely on surveys and short-term time series modelling.09:45
At the end of the day, one has to rely on one’s experience, use a degree of judgment and be able to quickly recognise changing patterns. In other words, one has to try to be open and be able to recognise change, which means using a lot of high-frequency data. In other, more stable contexts, lower-frequency data might be okay, but here we have to look at high-frequency data and consider what people expect and how they might react to what is going on.
We have to try to bring those expectations back into the modelling and at least make sure that what we forecast at this stage fully and efficiently reflects the information that is at hand. It might not be perfect and there might still be forecasting errors, but at least we will offer a best practice approach from the point of view of the method, the methodology and the rigour.
Does the Fiscal Commission do those things sufficiently in its forecasting? Does it monitor the risks and incorporate the measures and techniques that you have just outlined?
From what I know from what I have seen in the documents, the commission uses an eclectic approach. I have not looked into the detail because I am still not privy to its internal work, but I have seen from the outside that the commission relies on an eclectic and multitextured approach, so the ingredients are there. If my appointment is confirmed, I will need to look at how to recalibrate or re-parameterise the different ingredients, given the current context.
Good morning, Dr Lombardi. You have correctly identified that forecasting is by no means an exact science—I could not agree more with that comment. From your international expertise and considerable experience, do you believe that there are countries around the world where the accuracy of forecasting is a little better, because of the modelling that is used? Would we be able to apply some of the best practice to what the Scottish Fiscal Commission does?
You need to be able to reconcile what the economic science and economics literature have developed, and you need to translate to contextualise those findings, so there is no one-size-fits-all approach. Therefore, it is not a purely academic exercise—I say that very respectfully. You have to reinterpret the findings of an economics literature to the situation that is before you.
In my experience, I have seen very sophisticated modelling—best-practice modelling—and I am confident that I would be able to bring to the table at least some benchmarks and comparisons, and perhaps some different or similar ways of working. One has to be honest and recognise that, in economics, there is not always a straight way of doing things. The reality and context that you are trying to interpret or assess change over time, as we talked about a minute ago.
Whatever was working until, say, six months ago may therefore not be working well any more, not because the modelling was wrong but because the situation has changed.
I asked the question because, if we measure forecasting over a period of time, some countries appear to my mind to be more accurate, shall we say, than others. I am interested to know why that is. However, that is perhaps for another day.
One of the challenges that this committee comes across, as do many policy makers in Scotland, is that we are presented with two sets of forecasting—namely, that of the Scottish Fiscal Commission and that of the Office for Budget Responsibility—and there is a time lag between them, which can complicate things. When we get one set of statistics, other things can happen by the time we get the next set. Will you tell us a bit about how you intend to address that issue?
Because the OBR and the Scottish Fiscal Commission are independent institutions, they will always process the ingredients, or input, that I referred to before in a different way. It will therefore always be likely that the two assessments will differ somehow, because they come from two different assessments that are independent.
That said, it is important to have a strong dialogue between the two fiscal institutions because, ex ante, you can better discuss the hypothesis that you are relying on and compare the methodologies. If there is some improvement to be made without compromising independence, one has to be humble enough to recognise that.
Again, that is not a clear-cut answer, because I do not think that there can be one. As long as they are independent, they cannot be perfectly overlapping. In a way, that is also a test of their independence. On the other hand, having a close and frank dialogue with the OBR is key for the commission, and vice versa.
That is very helpful. One of the bigger challenges is about the timescale and the lag between the different sets of statistics coming out, albeit that they are independent. The committee has certainly had some difficulty with that challenge, in that witnesses have given evidence to the committee arguing that their job is very difficult because of that time lag. It is an interesting challenge.
Good morning and thank you very much for attending. I agree that your CV is remarkable; indeed, when I was preparing for today, I wanted to go away and read a lot of your articles, but I simply did not have time.
I have a few questions. What time commitment are you able to give to the role and what challenges do you see to that time commitment?
As I said at the outset, I decided to apply for the role as a commissioner because I am deeply interested in the issues that I would be exposed to and the learning that I would be able to generate for myself—I hope also for others, but certainly for myself.
I spoke to my interviewing panel about the time commitment, so thank you for allowing me to reiterate what I told them, because it really underscores the reason why I applied for the position. I have offered all the time that is required and expected or simply deemed helpful. Likewise, I have offered my availability to come to Scotland every time that that is helpful and required or simply expected. I would be doing so—if my appointment were to be confirmed—because, as I said, I am deeply interested in the role of commissioner.
As has been commented, the Scottish Fiscal Commission is a relatively new institution. In that respect, its culture is still forming. However, in Scotland, we have a challenge in that the economic culture is often influenced by the gravitational pull of London, the south-east, the Bank of England and so on.
I was going through your CV and I noticed that you have written a couple of articles in which you reference
“Uncertainty, Irreversibility, and Heterogeneous Investment Dynamics”.
Perhaps that picks up on what Daniel Johnson was talking about earlier. How can you bring your international experience to influence some of the prevailing economic culture that resides in the UK, considering the backdrop of where we have been with the financial crash in 2008 and so on?
I can confirm that I have no links with UK institutions, whether in London or elsewhere, apart from some affiliation that I share with my alma mater, the University of Oxford.
You refer to some of my papers, in which I assess the statistical properties of macroeconometric processes or statistical distributions. When we aggregate those micro processes into a macro time series, what sources of bias does that aggregation entail and how can we correct for those sources of bias? That is clearly relevant.
There are some sources of bias that we can investigate, appraise and quantify ex ante, and that has to be introduced into the methodology. However, the limitation of that approach is that it relies on past data. We must, therefore, be open to recognising that those parameters might not fully or accurately describe the situation at hand. That is why a sound and eclectic approach is needed. I have studied a lot of econometrics and I have applied a lot of statistics and econometrics to macroeconomic processes, as well as to broader macro time series.
Thank you. I suspect that we could talk about that for some time yet.
To what extent do you think that, with guidance from you and the rest of the team, we could turn some of the outlook of the Scottish Fiscal Commission into leadership, moving away from the prevailing view of the world in the UK? Do you think that you would be able to influence that?
Certainly, I hope to fulfil all the expectations that come with being a commissioner. Wherever I have been, I have tried to bring some innovation and to leave a mark on what I have tried to do. Looking at what other fiscal councils do is always a good thing and provides a good lesson.
My commitment would lie in trying to assess the methodologies, ensuring that they can be rapidly adapted to the evolving circumstances that we are going through. This would need to be agreed within the commission, but I would like to establish strong links with other fiscal councils. I referred earlier to having a strong dialogue; from a methodological point of view, the same could be said for fiscal councils in other countries.
From what you have read so far, what do you think are the key challenges that the Scottish economy faces at present?
The Scottish economy faces a number of challenges because, being part of the UK, it has some policy levers but those levers can only partly address the challenges that the economy has to face. There is clearly an issue with demographics, and there is an issue with devolved fiscal policy.
All those aspects need to be better understood and translated into sound forecasting. It is not a clear-cut case, because there are many interrelations that are not textbook-like. The effort should go first into understanding those interrelations accurately and trying to model them, to ensure that the forecasting that follows as a result is defensible, rigorous and accurate.10:00
Thank you very much. That concludes our questions for the moment. We will let you know, Dr Lombardi.
Thank you very much, convener and members of the committee.
I call a five-minute break so that members can get coffee and so on before Professor Roy steps up to the plate.10:01 Meeting suspended.
10:03 On resuming—
I welcome to the meeting Professor Graeme Roy, who is nominated as chair of the Scottish Fiscal Commission. As before, we will move straight to questions. [Interruption.] Who stole my questions during the interval? Ah, that is what it is—I wrote them on a completely different set of paper.
You have made it clear in your statement that you are passionate about the Scottish economy, Professor Roy. Why do you want to chair the Scottish Fiscal Commission and what would you change, introduce and improve to enhance the work of the commission?
Thank you for the opportunity to come along today. It is a privilege to be nominated and it would obviously be an honour to take up the role, if that were approved.
With regard to being passionate about the Scottish economy, I have been working in and researching the Scottish economy and fiscal policy since about 20 years ago, when I started my PhD on fiscal decentralisation, before tax devolution was really a major thing in Scotland. In the past 20 years, I have had a variety of roles, as a civil servant and as an academic, looking at the Scottish economy and fiscal policy issues. That longevity demonstrates the passion that I have for the role and for seeing Scotland succeed. In that time, more powers have come to this Parliament and an independent Fiscal Commission has an important role to play in that landscape.
You asked what I would change and develop. It is important to note the success of the Fiscal Commission since it was established. As was discussed in the earlier evidence session, setting up new institutions is not easy, and setting up a new fiscal institution, when it has new powers and is developing the data and processes to be able to do that forecasting, is not easy. The first few years of the Fiscal Commission have been a significant success.
Looking forward, the interesting thing is how to build on that success over the next few years. The committee has touched on some of the issues, such as expanding and improving the forecasts. There are also issues around communication and what more can be done to improve the visibility of the Fiscal Commission, so that it communicates, both more broadly and with this Parliament about the information that it needs. That is not a criticism of what has gone on before, but we all collectively agree that improving information in these debates is really important. Largely, those are some of the areas where we can develop, and I would be really keen to work on and prioritise those areas.
What areas would you develop and prioritise?
Obviously, there will be work ahead on fiscal sustainability. That is a really good example of the importance of being clear in how we communicate issues of fiscal sustainability and what they mean in a Scottish context. That will be a key part of the work of the commission over the next few years.
The committee heard earlier about challenges in forecasting in the current time. I was coming through as a graduate in the period of great moderation: we had cracked macroeconomic stability; inflation was low; growth was high and fiscal policy was sustainable. As the questions have mentioned already, we now live in a world that is much more uncertain and challenging. We have to think about how we communicate in a world like that, where point forecasts will have to come with a significant margin of error. We have to think about how we communicate and talk as much about those uncertainties and variations as we do about the immediate forecasts. There are lots of interesting areas that could be worked on, and it would be really interesting to have that opportunity.
You have talked a lot about communication; for example, in your statement you said:
“I would be keen to use my networks, including via the ESRC Economic Observatory, to extend the profile of the SFC.”
Can you talk a bit more about that?
Obviously, it is about how we communicate, engage and position the Fiscal Commission in a leadership role within Scotland, but, as we heard in the earlier session, there is also a real opportunity to look at how we do that internationally across networks, as well as across the UK. The economic observatory is a good example, because it is a network of academic economists across the UK who are trying to inform the latest policy debates and key issues in an engaging way. It is really important to tap into that network, not only to showcase the work of the Scottish Fiscal Commission and the work that is taking place in Scotland, but to use that network as a way to get fresh insights and ideas into how we do activities in Scotland. The Fiscal Commission is a leading economic institute, not just in Scotland but across the UK, so it is important to tap into those networks and use them to help inform the work of the commission.
You talked a lot about instability, as did Dr Lombardi. For example, we had questions about the huge changes that we have seen just since the last forecast. Data is the fundamental building block of producing forecasts and, in previous years, the commission has expressed frustration over data limitations. What more could the Scottish Parliament, the UK Parliament and outside bodies do to provide you with the data that you require in order to do your job to the absolute peak of efficiency and effectiveness that you would like?
I will say a number of things about that. First, over recent years, there have been significant improvements in the quality of the data that exists at Scottish and regional levels. Steps have been taken in that regard, but there are still some significant gaps, particularly relating to the timeliness and robustness of earnings and employment data. Such issues make confidence intervals and bands of error in forecasts that bit bigger. Work needs to continue to be done on what we can do to influence the core data-providing institutions to produce the information that we need.
As was touched on in the earlier session, in a world of change and instability, where the economy changes rapidly, what new sources of data and information can be used and taken advantage of? Lots of developments are taking place—not only in Scotland but across the UK and internationally—on nowcasting, for example. How can we use the current data that we collect to update forecasts much more regularly? What can we do with surveys in relation to levels of confidence in the economy? Can those non-official sources provide much more timely and robust information about what is happening?
In the academic world, we have been doing some work on online job adverts, which are timely and, in many ways, much better indicators of what is happening in the job market. That data exists and is updated daily, so how can that sort of information be used to improve intelligence in forecasting?
There are quite a lot of broader developments relating to how different types of sources—beyond the traditional sources, such as official statistics, that we have relied on—can be used to improve the quality of forecasting.
Thank you very much.
Good morning, Professor Roy. Thank you for attending today’s meeting. You are well known to us, and you set out in your CV how you can utilise, and how the commission can benefit from, the extensive networks that you have in Scotland and your long hinterland in economic understanding and supporting roles. However, it occurs to me that, although that is a benefit, it could also be a downside in relation to being able to differentiate yourself in a leadership role at this level. What challenges do you see in being able to do that, and how will you address them?
I would argue this, but my background and experience will give me a lot of strengths in the role. The Fiscal Commission includes a broad group of people because that allows a diversity of experience to be brought in. The committee heard from Domenico Lombardi about his international experience; it is really important that the commission has such experience. Differences of opinion, divergence and international experience add real value to the commission’s work.
On being able to differentiate myself, I will be able to tap into my experience, networks and contacts relatively quickly in order to improve communication and visibility. I will not need to develop those networks; I already have those relationships. I will provide that role in this different role—there will be the Graeme Roy before his appointment to the Fiscal Commission and the Graeme Roy after that. I immensely look forward to doing that, which I will really enjoy.
I am on the record as expressing my frustration that quite a lot of people have a fundamental lack of knowledge about macroeconomic policy. The focus tends to be, particularly from a scrutiny perspective, on what we need to count and account for. How will you be able to use your extensive knowledge—this goes back to John Mason’s point—to create more general knowledge among the populace about the importance of macroeconomic frameworks and policy, and knowledge that, as Dr Lombardi said, our current policy levers can address only some of that? How can you help to heighten and broaden the thinking among the Scottish populace, not least among those in the Scottish Parliament?10:15
That is a great question. I have talked to the committee before about issues to do with communication beyond the narrow confines of, say, the fiscal framework or the budget, as we get into the wider debate about understanding the drivers, opportunities and challenges in the Scottish economy.
It is important to break down the audiences with whom we speak. As much as you or I might like everyone to have an interest in macro-economics, that is not likely to happen. We need to consider how we communicate with the Parliament and ensure that the outputs of the Fiscal Commission fulfil the needs of this committee and the Parliament more broadly, so that you have the facts and information in an accessible way that lets you do your scrutiny job. There is then a question about how we engage with the public sector, public finance and academic communities in Scotland. We need to consider the type of information that we provide to those communities and the engagement that we have with them. Then we need to consider, more broadly, how we deal with the general population. How do we engage with the media? How do we engage in an accessible way and ensure that we are visible and inform the debate as best we can?
For me, it is about splitting all that into different chunks as we communicate. When it comes to trying to improve the level of macro-economic acumen or fiscal understanding, we will have different voices, depending on who we engage with.
I will build on questions that have been asked. I am interested in the point about communicating with the public, on not just the Fiscal Commission’s work but wider issues of tax and so on, in which it is difficult to get the public involved. I fully accept that you are a good communicator. Susan Rice, for whom I have a huge amount of respect, is also a good communicator. However, it is difficult. Should everyone in Scotland know about the Scottish Fiscal Commission? I do not think that that is the case at the moment. Should they know what it does? Where can we go with that?
That is a good question. I am keen to think about what we can do to improve the level of understanding of macro-economic and fiscal issues, and the Fiscal Commission has a key role in that regard.
I am optimistic. I think that people have an interest in issues to do with budget and tax. Perhaps not everyone is interested, but I think that there is a genuine interest out there. Part of the challenge, as you know, is that the issues are very complex, and once we start communicating and explaining the issues—even to people who have an interest—things get complex very quickly. We need to be able to think about the audiences with whom we want to communicate and how we can explain the complexities of the framework without always getting into the weeds and details, so that we communicate the broader trends that people need to understand and be aware of.
There is a lot that we can do, particularly with the younger academic community—the people who are coming through universities and colleges—to get people to take an interest in the future of the Scottish economy and in debates about the public finances. The Scottish Fiscal Commission has been part of lots of initiatives in recent years, such as the economic futures programme, which supports young undergraduate students around Scotland to get experience in such issues.
There are ways in which we can do more to improve the level of debate about and understanding of economic issues in Scotland. Whether that means getting everyone thinking about the Fiscal Commission might be an issue for future years.
I think that you accept that there is a big problem. I get frustrated, because so many people—intelligent people in trade unions, business and elsewhere—keep demanding that we spend more on something while saying, “Where the money comes from is nothing to do with us.” I hope that you can play a part in getting people to think about both sides of the balance sheet.
You made the point that you are well connected in Scotland. You have been a civil servant. Some people might say that that means that you will not be as independent as someone who comes in from outside. How do you answer that?
There are a couple of things to say about that. First, I think that I have held on to the civil service values of honesty, integrity, impartiality and trustworthiness. Those values have been fundamental to my approach, not just as a civil servant but in subsequent roles, for example in the Fraser of Allander Institute and in speaking to the committee, where everything that I say is said in public and people can read it. I stand by my record when it comes to independence and integrity.
There is an important role for people such as me and other colleagues who have that balance between having been a senior civil servant and then moving into a senior academic role. Such people give public service and understand not just the latest research and academic outputs but the wider public policy and political process issues. There are not many of us. It is really important that people such as me and others have that role.
I am therefore relaxed about the situation. As you mention, in a Scottish context, everybody knows me, as I have been around giving evidence to committees. I hold my independence and impartiality very dear, and I am very proud of them.
You have said that communication is absolutely key. Included in that, would you say that there is scope for better communication between the Office for Budget Responsibility and the Scottish Fiscal Commission? Are there areas of that communication, which is obviously critical to the economic analysis, that could be improved?
Obviously, I have not been party to any of the internal conversations and engagement between the two institutions. However, as an outsider looking at it, everything that I have seen shows that the Office for Budget Responsibility is more than happy to engage in the Scottish context and to give evidence to the committee. I would want to maintain and develop that relationship.
The broader question picks up on your earlier point about timings. You mentioned that people have expressed frustration about that in the past—I was probably one of those who gave evidence about timings.
The Fiscal Commission responds to the budget process and, in essence, has to adopt the timings that it is given. It is about explaining clearly where things have changed because of timing issues and what is different. To come back to the point about communication, you can walk people through why things have changed and show that the two forecasts are not just completely separate. You can say, “Actually, this is what we might have done six or eight weeks ago, and this is how things are changing and how the story is evolving.” It would be useful to start to think about that sort of approach.
Is there any scope to reduce the timescales between the two sets of forecasts, which obviously are extremely important and have huge implications for economic policy making? Would you like some effort to be made to reduce the timescale?
As I have said, I am not part of the Fiscal Commission yet, although I hope that I will be. However, I do not think that there is a role for the Fiscal Commission to influence that. It is important that it is for the Governments and Parliaments to decide the timing of budgets.
The point about timing is a good example of the broader question around the evolution of the fiscal framework, a review of which is on-going. Timing is the sort of issue that, as I have mentioned in the past, we never really thought about when the fiscal framework was being designed back in 2016. Such issues arise as time goes by, and it is therefore important to reflect on the framework. Having a situation in which there are different flexibilities in the budget simply because of the timing of budgets being laid in Parliament does not strike me as the most efficient budget process. However, those sorts of issues are not for the Fiscal Commission; they are more for the broader review.
I first want to follow on from some of the previous lines of questioning. An interesting point was made about public awareness of economic issues and the role of the Fiscal Commission. However, more fundamentally, I wonder whether we need people to understand how the fiscal framework works and, in particular, how block grant adjustment works. Frankly, I am not convinced that most people in the Parliament understand that. How possible is it to achieve that? The block grant adjustment is a very synthetic beast. It is not as simple as just counting up the tax receipts to find out how much money you have, as the UK Government does—it is a very hypothetical system. How do we improve awareness and understanding of that?
You are right. We have done some research on that with colleagues in the Scottish Parliament information centre, and we held a session with the convener at which we talked about levels of understanding among the public and in Parliament of the block grant adjustment and the various mechanisms to manage forecast error. It is an exceptionally complex framework. It is really important to spend time explaining how the framework works and what are the core bits that one really needs to understand about how it operates.
One can get into specifics and details on management and so on, but getting people to understand the core basics and the broad measures—the block grant, the devolved taxes and the relative performance of those taxes compared to those of the UK—is a really important first step.
Again, one of the things that I would be really keen to do in this role is to see what more we can do to support parliamentarians and the general public to understand the issues by explaining how the framework works. With a lot of these issues, people do not always want to put their hand up and say that they do not fully understand. The question is what we could do through working with colleagues in Parliament to improve the level of understanding.
The basic principle is relatively straightforward—it is about what we would have got under the block grant and the difference that policy makes—but the implementation of it is fearsomely complicated, which is tricky.
To move on a bit but following my previous line of questioning, it really strikes me that we are now facing inflation, and that it is the first time in around 30 years that that has been a major component of what we are doing. Your point about the contrast between the current context and that of the 1990s is well made.
What difference does that make to the business of forecasting, especially when the anticipated inflation rate is changing quite quickly? Six months ago, we were alarmed at the prospect of a 5 to 6 per cent inflation rate, and it now looks like the rate might well hit higher peaks. What difference does that make to the work of the SFC and to forecasting in general?
You are right. At the SFC, we were talking about a 4 to 5 per cent inflation rate in December and we are now talking about 9 per cent. It is another example of noise in the system and in forecasts, which is generating unpredictability in the movements of macroeconomic variables. Trying to pinpoint what will happen next is exceptionally difficult. In a Scottish context, it is difficult, because we do it within the relative position of the UK. The question is about where we might have different effects of inflation relative to the UK and how that might impact on forecasts.
In these times, the most important thing is to unpick the drivers of and what is happening to inflation and to be able to explain that and trace it through to what might be happening to forecasts. There are several questions to consider. To what extent is some of the inflation likely to be temporary and to fade out relatively quickly? To what extent might it be more structural and permanent—if it is, say, in the labour market? If inflation leads to faster wage growth, what does that mean for things such as income tax revenues? What does that mean for legacy effects in the resilience of the economy?
The work is about trying to unpick those questions, being clear about the various components of the spike in inflation, assessing what might happen to the different elements and tracing that through to the forecasts. That comes back to the point about communication and being very clear about what is driving uncertainty and how the different components of that uncertainty might impact on the forecasts.
You are right: the general point is that we are living in times of continual change in our economy. There are legacy effects of Covid, and we still do not know their long-term structural implications when they are added to inflation. It is a challenging time for any forecaster. The important thing is to be really transparent about what we do and do not know.
Leading directly on from that, and similar to my previous line of questioning, it strikes me that, over the past 10 years, we have had the credit crunch, Brexit, Covid and, now, the war in Ukraine; it seems that our black swan events are turning into a bit of a flock.
Having looked through the Fiscal Commission work to date, I see that it has responded to those things. However, I do not necessarily see, either in the body of its main forecasts or in what it publishes more generally, a risk register, for example, or a forward look at contingencies and potential risks. Are those things that should be thought about in terms of some sort of counterfactual assessment and longer-term forecasting?10:30
The Fiscal Commission has a particular remit to make estimates of income tax and gross domestic product and point estimates for the nature of the fiscal framework, so there is a reason why it gravitates to that particular point estimate.
However, your broader point about how to communicate the risks—both positive and negative—around that and how they might evolve over time is entirely fair. Clearly, that has to be separate from the point estimate that you have made, but understanding why something has changed or how things could change is really important, so that people do not say, “Well, you said it was 4 per cent in December; now it is 9 per cent. Are you just wrong?” when there are clearly strong reasons for that change. It is about being able to unpick those reasons. That is why it is important to have an evaluation of the forecasts, too. It is about looking back at where you could have made better forecasts and where you could make improvements, but it is also about looking at where there is just genuine noise, as we are living in a time of significant structural and macroeconomic change.
Yes, we might have been able to predict the impact of Brexit, to an extent, but not necessarily what other major global issues might happen, such as the possibility of a war in Ukraine. I do not envy you your task of trying to predict events that could transpire in the future.
Just to wind up, are there any further points or comments that you wish to make?
No. As I have said, it has been a privilege to come along and speak with you all this morning. If I were to take on the role of chair of the Fiscal Commission, it would be an honour, and I would very much look forward to working with the Finance and Public Administration Committee.
We thank you and Professor Lombardi for coming along and answering our questions in such a forthright manner. We will decide in private session later today whether to agree the appointments; we will then make a recommendation to the Parliament.
We will have a break to allow for a change of witnesses.10:32 Meeting suspended.
10:36 On resuming—