Forecasting Scottish tax revenues

The Scottish Fiscal Commission (SFC) is a non-ministerial department, which is independent of the Scottish government and accountable to the Scottish Parliament. It is required to produce independent forecasts of:

• revenue from fully devolved taxes and non-savings, non-dividend income tax receipts;
• onshore gross domestic product (GDP) in Scotland; and
• devolved demand-led social security expenditure.

Highlights of the economic forecast: The document, published on 31 May 2018, is more robust than its predecessors, as Scotland’s data collection methods have evolved in the interim. Revenue Scotland has placed increased focus on the quality of its data, improving the kind of data being captured, ensuring its relevance and effectiveness and consulting extensively. Whilst there is still some way to go, it is clear that the data being captured now is assisting, rather than hindering, the SFC. Similar changes are being made in terms of local taxes, such as business rates and property transactions, via Registers of Scotland.

A new protocol (as provided for in the Fiscal Commission Act 2016 s 6) (see bit.ly/2lLo2Ag), agreed with the Scottish government in March 2018, has also been utilised in this report. Section 8 of this protocol sets out the main principles and covers, amongst other things, taxation forecasting methodologies.

Highlights in the report include:

• Scottish income tax (SIT) revenues are forecasted downwards by £209m, compared to its December 2017 forecast. (The more progressive rates and bands structure in 2018/19 is expected to raise £220m.)
• Non-domestic rates are forecast to fall by £24m, due in the main to weaker growth in the tax base and higher anticipated losses on appeals from the 2010 rates revaluation exercise.
• The first full VAT forecast is to be published in December 2018, in line with regulations introduced to allow the SFC to support the introduction of VAT assignment.

The downward forecasting of the SIT figures provoked a strong reaction in the Scottish Parliament, which called the SFC in for questioning a week after its 31 May 2018 report was published. In spite of the new protocol, the Scottish Parliament needed to understand why the forecasts were so different to December 2017, despite relatively unchanged economic and employment forecasts.

This has been explained as follows:

• Growth remains at less than 1% for the period covered by the forecast, which leads the SFC to believe that the outlook for real wage growth is weaker than forecast in December 2017 – and is likely to continue like this for the next five years.
• Productivity growth has been revised downwards for 2018 from 0.5% to 0.2%.
• Key influencing factors for the forecasts include Brexit uncertainty, oil and gas sector weaknesses, a downturn in global trade outlooks, and specifically Scottish demographics (population, geography, industry).

Are the conclusions reasonable? According to Fraser of Allander Institute’s blog, these conclusions are reasonable, but could perhaps with the benefit of hindsight have filtered through the December 2017 report, so as not to produce such a shock in May 2018. The critical issue is that whilst the SFC’s forecasts have taken a downward turn, the Office for Budget Responsibility’s forecasts for UK tax receipts went the other way – the result of which will require a higher level of block grant adjustment of around £181m. The combined effect of these revisions is a deterioration of £389m to the Scottish Budget outlook, compared to a few months earlier. What is not always appreciated is the impact of block grant adjustments to the Scottish Budget.