 Fy ffmwg yw'r cyntafol yw'r Ffynans Cymru yw'r Parlwg ysgolwyd, gydych chi wedi cymryd i'r ysgolwyd y newydd, i'n cael eu cael eu ffmwg yw'r cymryd i'r ffmwg ymlaen i'r cyfryd, i'r gwirioneddau o'r gwirioneddau, ac ubudd yn i unrhyw o'i cymryd i'r cyfryd i'r cymryd i'r cymryd i'r cyfryd i'r cymryd i'r cymryd i'r gyfryd ar bob gydymא�n reddi, ac y gallwn gwrsfawr iawn i gŵr araw o gyntaf. Mae'n gwybod o ran tuadau ysgawr gyda'r rydw i gyrfaenwyr yn rawbredd Gwylchau Cymru o gwaith a gwybod o gylemdd IAAM pan â ar hyn i gael ei ddweud iawn. Gwyn fwy o anrydiad, maen nhw,wrd, a Welcomegwrs, wrth gwrsfawr iawn i gael unrhyw yn cwr ingen? Dyma'r rhain ei ddweud iawn i gael ei ddweud i ddweud ei gwrsfawr iawn i gael ei ddweud, I think perhaps fittingly was April Fool's Day last year following the coalition government's final budget. Obviously since then we've produced two further forecasts, the first alongside the post-election budget in July and the second alongside the spending review in November. I think to all intents and purposes you can think of those as basically two halves of the same fiscal event. The Conservative governments used them to depart significantly from the provisional tax and spending plans that they'd agreed with the Liberal Democrats in coalition last March setting out their own preferred strategy for the rest of the Parliament and beyond. So in talking about what's in the latest forecast it's perhaps helpful to do a bit of the contrast with March so you're pulling together the two elements of what the coalition has done to date. On that I think the first point to make is that neither the underlying forecast for the economy nor the underlying forecast for the public finances has changed a great deal over that period and almost all the action of interest has been in the policy decisions that have been taken and the makeup of the remainder of the post-crisis fiscal repair job. If you take the economy back in March we were predicting that the economy was pretty close to full capacity that it will grow by about two to two and a half percent a year over the next five years and that inflation would move relatively slowly back to its two percent target and we made effectively the same predictions in November and they're broadly in line with the average views of other forecasters. Now those are our central forecasts obviously history suggests that reality is going to be less smooth than that but we think that the fluctuations are as likely to be above those numbers as below. Most of the key uncertainties around the economic forecast I think aren't pretty much the same as they were in March when are we going to see a return to sustained robust growth in productivity and wages how is the economy going to rebalance in response to the continuation of fiscal consolidation how will the UK respond to global events tighter monetary policy in the US slower growth in China developments in Europe. Reflecting the recent stability of the economic forecast the changes in the public finances forecast over the past year also be relatively small compared to those that we've made in earlier years. Following the autumn statement lots of people latched on to the famous £27 billion that we'd apparently found down the back of the sofa over the next five years. The biggest contributors to this aggregate improvement in the budget balance over the forecast period were a fall in the government's prospective debt interest payments, the knock-on effects of the recent strength of some tax receipts and also some changes to the way in which we forecast VAT and national insurance contributions. These positive developments were partly offset by the impact of lower share prices on tax revenues plus judgments that we made on the outlook for spending on disability benefits and property transactions. Now unfortunately £27 billion is not as much as it sounds over five years it corresponds to an average downward revision to the budget deficit of about one quarter of one percent of GDP. Now that's pretty small bear in an economy where the public sector is spending 40% of GDP and raising about 36% of GDP in revenue and where the average error in forecasting the budget deficit at an autumn statement even over the remainder of the year that you're already in is twice as big at half a percent of GDP. Add in the changes to the forecast that we made in July which went in the opposite direction and we have an even smaller underlying net improvement in the budget deficit since March of closer to £10 billion or cumulative over the five years or about one tenth of one percent of GDP again excluding the impact of policy measures. By way of comparison if you look at the underlying changes we've made to our budget deficit forecasts between previous March budgets and autumn statements we had a deterioration of about one and a half percent of GDP in 2011, one and a quarter percent in 2012, an improvement of three quarters of a percent in 2013 and a deterioration of a quarter of a percent in 2014. So I think the lesson from that experience is that what the SOFA gives the SOFA can easily take away and the sums lost or gained have often been much larger than they were last November. So confronted by what are relatively modest changes to the underlying economic and fiscal forecasts, what policy judgments has the Chancellor taken taking the budget and the autumn statement together? I think the key point is that the key decision he's made has been to reshape the remainder of the fiscal consolidation, the fiscal repair job, to rely less on cuts in public services spending and more on tax increases and welfare cuts than the coalition's plans implied in March. The tax increases and the welfare cuts build up gradually and less quickly than the Chancellor said he was going to aim for ahead of the election. So he's also decided to borrow more over the next three years to help reduce the severe squeeze on public services spending in the middle years of the parliament. He then aims for a slightly bigger surplus in the medium term. Combined with the changes to the underlying forecast, this leaves him on course to achieve his objective of getting the budget back into surplus in 2019-20, with about £10 billion to spare. The performance of past official forecasts, hours and the treasuries suggests that that corresponds to about a 55% chance of achieving a surplus in that year on current policy, so by no means a done deal. For public services, the two-stage loosening of the belt, as it were in July and November, means that the Government is now looking for a real cut of around £10 billion a year by 2019-20, much smaller than the £42 billion a year by 2018-19 that has been penciled in by the coalition. That corresponds to a real cut in public services spending of about 1.1% a year over this parliament compared to 1.6% a year over the previous one. It's smaller but it's still quite a challenge. Obviously, a lot of low-hanging fruit has already been plucked, and the cuts are obviously much bigger than that average number in those areas of unprotected spending. On the welfare spending side, the Government announced a significant package of welfare spending cuts or cuts in benefits and tax credits back in July, the proceeds of which the Chancellor banked when setting his welfare cap, the cap on the cash spending on a large subset of welfare spending, but by November, that cap had already been breached, thanks in part to slower than expected progress on disability benefit reform and also the Chancellor's decision to reverse the major tax credit cuts that he announced in July. That's costly in the near term but less so in the longer term because by then most of the people who will be affected are expected to have moved on to the new universal credit. The universal credit was also reduced significantly in July but those cuts weren't reversed in November. Wrapping up, if you look at the evolution of the forecast since the end of the coalition, the underlying economic and fiscal picture hasn't changed very much. We expect the economy to grow steadily but at rates slower than you would expect in a typical economic recovery. We expect the budget to get back in modest surplus over the next five years, having now already more than halved from its post-war peak but there are lots of uncertainties, as always, in the underlying forecast, not least the outlook for productivity and wage growth and what that means for tax revenues and it's also important to bear in mind that our forecasts are based on current policy. They are an assessment of the most likely outcome under current policy and a lot of other forecasters may think that policy might change so some would look at the public services cuts and say can these actually be delivered, some would look at the welfare savings and say can the government deliver the reforms logistically and the cuts politically and some would say well if there are disappointments on either of those two fronts or on the underlying forecasts does that mean that they end up relying more on tax increases or does it mean they look again at their ambition to be running sort of sustained budget surpluses into the future so there are lots of uncertainties but fortunately those policy ones are outside our remit and for other people to worry about so let me leave it there and I'm very happy to take questions obviously. Okay well thank you very much, a fascinating introduction as always and also your executive summoner and the economic fiscal outlook also makes very interesting reading now. I know that a lot of colleagues have good questions they want to ask so I'm not going to exploit my position in the chair but they'll smirk but that's true. So I won't ask too many initial questions but I certainly want to touch on a number of areas which some colleagues will want to delve into in greater depth and the first one I want to touch on is borrowing I mean you said in your introduction you talked about the fallen debt interests and payments leading to some of the government's recent decision making in terms of the money found as you say down the back of the sofa but you know given the fact that you know compared to July forecast you've revised net borrowing down from 0.6 billion to a still quite high watering 73.5 billion pounds. I'm just wondering you know you know in terms of paragraph 1.4 you've said spending on debt interest is also low in all years reflecting on further fallen market interest rates but what would be the impact of our eyes because I mean obviously that you know in America there's been a rise in interest rates and what is the likely impact on the finances if there should be even a more distrisen interest rates? Well I mean you can see that the sorts of changes that you've had between the July forecast and the November forecast I think on average interest rates or yields moved by about 0.4 percentage points and you've had if you look on in aggregate over the five years it contributes about 17 billion of the famous 27 billion so I think it's an important you know in July those numbers have moved somewhat in the opposite direction so it is if you were looking at an uncertainty where you know money can come in in one forecast and go out in the another that would be an obvious place to look. One thing it's it's worth bearing in mind is that we simply take the interest rates that are out there in market prices and apply them. We're not making our own subjective judgment of whether the market is over or underregging the level of interest rates. If you go back a few years lots of people would say well you know they can't fall that much lower and they have and they have to date you've not seen a big movement in the opposite direction in response to the the Fed's move but obviously with the new year underway people thinking about the outlook for the economy and obviously the expectations for the pace of future interest rate movements in the US and the links that were through it's an obvious uncertainty and it's one of those areas where relatively modest movements can make quite big differences to the fiscal numbers in both directions but I think you know if we were we probably did have this conversation some while back and say well this has gone down can it go down much further and of course it has. Just to pursue that a little bit further there will be an impact to see a quarter of a percent increase in interest or indeed a decrease. We do have a ready record in here somewhere I can dig out the precise link but I probably can't find it straight off but as I say if you look at it's we've had a change of about point four has contributed the change you can see here in this also you can scale that down to 25 40th of that. Okay fair enough. Now in terms of GDP growth at 2.4 per cent you talk about higher population growth and also it talks about an increase in mortality among older people actually which is and the fact that higher net and red migrations driven some of that growth how much of the actual growth in the economy is per capita and how much is because I think that gives you a real underlying look at the strength of the economy and how much is just the growth just by I can dig the number out we would have that somewhere the increase in population itself you know yes I mean obviously you're affected here partly by weathery or looking at per capita by head of population or by the working population the impact of net immigration for example does increase overall GDP growth you're increasing the population as well but it also net immigration also increases per capita GDP growth because net inward migrants are more likely to be of working age than the native population on average so things like that are not simply feeding through into headline GDP growth but not into per capita. Okay now you say you continue to expect employment growth to slow as productivity growth picks up now obviously productivity is an issue which we have raised before and it's been a concern you know about how we actually boost productivity what is the kind of changes in productivity that we're actually seeing at the moment? Well you're starting to see we've seen some sorts of improvements then we're going back here we've had a set of GDP revisions since we published this forecast so we haven't had a chance to incorporate that you've had some downward revisions to GDP which may have affected the overall productivity position. I think it's fair to say that you've seen some you know some quarters of good news in comparison to what's come in the past but in the forecast here we took the judgment that it was too early to assume that the flowers were that you can see were representative of a much better outlook looking forward so we continue to assume that you have productivity growth picking up back towards more historic levels but that has been a prediction that we and others have made you know for some time and it's taken longer for that to happen than anticipated as you know there's a long list of potential explanations for why productivity growth has been as weak as it has one of those that people place a fair amount of emphasis on is the difficulties in the financial system getting in the way of the efficient allocation of capital away from relatively unproductive firms towards more productive ones. I think it would be fair to say looking at the conditions in the financial system you know things are easier than they were so therefore it would be a bit of a surprise and somewhat alarming if you weren't seeing some signs of good news in response to that but I think certainly that view we took in this forecast was that it was you know we shouldn't yet assume that you've kicked straight back to a much more historically average performance and therefore assuming a continued slower return. Now that matters a good deal in the in the forecast because obviously it's the improvement in productivity that you assume underline you know would underpin an improvement in wage growth and you need a return to robust real wage growth in order to bring about the sorts of growth in income tax receipts that you're looking for. Well you just mentioned robust real wage growth but in sections 1.3, 1.5, 1.23 you express concerns about the impact of the new apprenticeship levy for example on wage growth of about 0.7 per cent I mean you say that by in 2019-20 at which point 8 billion increase in total departmental spend is laslet offset by 7.2 billion net tax increase mostly in new apprenticeship levy and larger rises in council tax and you go on to say that the on-going costs of auto enrolment and the introduction of apprenticeship levy will weigh on earnings growth these are both economically equivalent to payroll taxes so we assume that most of the cost will ultimately be borne by employees you didn't really talk about that in your introduction so I'm just wondering if you can give us more thinking on that. The view that we've taken of the apprenticeship levy is to think of it as in effect a payroll tax where you know most of the impact of that is going to be felt on wages at the end of the process and so that is an adjustment I would say though that there are obviously uncertainties around the impact of measures like that of the minimum wage which is obviously more on the employment side rather than on the wage side the auto enrolment but the underlying is there going to be a return to historically average rates of productivity growth and the sorts of wage growth that is associated with that is going to be much more important ultimately than the uncertainties around those but we certainly have made an adjustment and it's one of the reasons why we have a somewhat weaker picture for earnings growth and incomes tax towards the end of the forecast it's one of the reasons therefore why the improvement in the underlying fiscal forecast between July and November is at its biggest in the middle of the Parliament and then gets less of an improvement towards the end because you have this weaker view of earnings growth further out so hence the Government having to rely rather more on tax increases towards the end of the forecast period in order to achieve what it wants to achieve on the the bottom line of the budget deficit because our forecast is not helping as much in 2020 as it does in 2018 and the and that judgment on the apprenticeship levy and earnings growth is part of that explanation okay thank you for that now another issue which doesn't touch on your introduction but is in your executive summary 1.13 is the issue of asset sales you say that it makes a difference between debt rising and falling as a share of GDP in 1516 with 30 billion expected in the financial year as a whole and 24 billion realised to date and you go on to say when the government gives away some of the assets as with Royal Mail shares and the planned retail offering of Lloyd shares elin next year the sale will raise less than the asset is worth and the public sector's net worth has reduced again i'm just wondering if you can expand on on that yes i mean the for some while during the last parliament we were forecasting that on existing policy the government was not on course to achieve its old fiscal objective of getting the debt to GDP ratio falling in 2015-16 and for some while the government had basically said okay we accept the forecast but we don't think it would be sensible to further tighten policy in order to bring that about what then happened is that the government announced a significant programme of asset sales in 2015-16 which are sufficient to bring the debt to GDP ratio down in that year in subsequent years the underlying primary budget balance the budget balance excluding interest rate has improved sufficiently that it gets the debt to GDP ratio falling off its own accord and you don't need to rely on on asset sales in the same way but you do in 2015-16 so we wanted to be very clear with people that that was why this target had come back into into play having been out of play for some time with asset sales one of the issues that we always address in the forecast is can we be sufficiently confident of what it is the government is intending to sell when it's going to sell it and what price it might get for it for us to be confident enough of putting that in the forecast rather than merely citing it as a potential risk or a potential change so in the scrutiny process that we've gone through we've been very clear with the government about what level of certainty we need to have around particular sales for us to be willing to put them in that said there are some uncertainties for example student loan sales we now expect to be later than they were in the forecast that we produced in July your the final point on the impact on net worth as I say a key issue is if you you know if the government is selling something for roughly what it's worth then it's underlying the underlying health of the public finances is not improved as a result of that you're simply getting money today instead of a flow of money in the future there may also be instances where the government is deliberately selling something for or is deliberately disposing of something for less than its value and the obvious case there is if you're having a sale of shares and you give some of them to the employees for example which is you know that means a diminution in net wealth other things being equal but you know the government obviously has other policy objectives for wanting to achieve that so again we feel that it's important when those sorts of things happen to highlight that even though those sorts of changes in net worth and the full flow the full implications of making an asset sale upfront will have an implication in reducing your revenue maybe many years into the future but it's worth highlighting that to people as one of the consequences of what the government has done. Okay thank you very much I just want to ask you a couple of questions on devolved taxes then we'll open out to colleagues around the table the first one is on land buildings transaction tax obviously being one of the devolved taxes and first when one looks at the OBR's predictions of land buildings transaction tax you know it looks as if there's going to be huge growth you know from 1516 to 2020-21 almost doubling in terms of your predicted revenue stream but then when one actually looks at what the Scottish Government is predicting you actually seem to be quite moderate I know in terms of 2020-21 the difference appears to be the order of some 90 million pounds in terms of what's predicted and of course that includes non-residential and residential transactions I'm just wondering you know if you can talk us a wee bit through how you come to these kind of figures both Scottish and OBR predictions look to me to be very ambitious even take that into account in the predicted you know rise in house prices etc and increase number of transactions over that period. Sure well I'm the key reason I think for much more rapid growth and this will be true of both our forecast and that of the Scottish Government is that you have a combination both of house price increases and in a sense a continued recovery in the rate of transactions to something more like its long-term average so the combination of the two of those is going to give you a much faster increase in revenues than you would see in for example income tax or VAT so taxes on labour income or spending. I think the figures I have for 2020-21 suggests that and I'm looking at the comparison with the draft budget so the more recent Scottish Government forecast rather than the one that we compare it to in here is a difference of about 36 million pounds by 2021 our forecast for residential being about 70 million high sorry there the Scottish Government's forecast being about 70 million higher for residential and about 36 million lower for non-residential so overall the Scottish Government being about 35 million higher on the residential front I think that's three factors the difference is explained by three factors first the Scottish Government is assuming slightly more rapid increases in house prices over this period so about 28 percent in aggregate between 1516 and 2021 whereas we have about 26 percent on the transactions the Scottish Government have a 15 percent increase in transactions between 2021 and 1516 we have about 9 percent so the Scottish Government's transactions forecast as I understand it and commission colleagues will correct me if I'm wrong is based on reaching a sort of long run average of six percent rate of transactions compared to the size of the housing stock and that's the average recorded between 95 and 2014 in our July and earlier forecasts we were using a similar sort of approach assuming UK transactions reverted to their rate from 91 to 2004 on average but in this most recent forecast we made a slight downward adjustment drawing on research that suggested the fact that more of the housing stock is by-to-let and by-to-let properties tends to be bought and sold less frequently than owner occupied or other properties and therefore we've adjusted that down so I suspect that that may be part of the the element so I think most of the difference and I don't regard it you know the uncertainty in particular around transactions means that I think that the the the difference between our forecast and the Scottish Government forecast is small in comparison to the uncertainty that lies around either of them but you have it's partly the Scottish Government taking a slightly more optimistic view of prices a rather more optimistic view of transactions the modelling approaches we use are also slightly different and it may be that the Scottish Government uses a technique that we've been anxious about using in the UK context because we have more problem with the importance of very high-valued properties in London and elsewhere and so I think that there may be a difference in the implied number of relatively high-valued properties in each of our in each of our two forecasts but as I say I would not regard the difference between the two as being large in comparison to the uncertainty that lies around either of the forecast in isolation. Okay, thank you for that very comprehensive response and the reason there was so much scurry in about is we're just checking out the figures we were actually we were comparing apples with apples and rather than apples we were only just here so everything seems okay. It's never entirely clear which tier you're looking at which country it is. In terms of the figures that I quoted earlier now I did say I would ask a couple of questions but I'm actually going to ask three so just two more honestly folks be patient. In terms of block grant adjustment actually you know the draft budget says and I quote until a permanent agreement has reached the Scottish and UK governments have agreed a provisional one-year block grant adjustment for the fully devolved taxes in 16 17 of 600 million pounds I mean that there's no further information in the draft budget and the basis of this figure how it's arrived at but do you feel it's reasonable or perhaps slightly high slightly low what's your view on that? I think you're taking me beyond my remit it's these are these are deep and treacherous waters convener and we simply provide the numbers and it's for others to put them through the political mail and reach policy conclusions right. Right okay then fair enough I won't press you on that then but okay then the last one I will ask at this point is really about landfill tax because you know there's a you've significantly changed the your forecast in terms of landfill tax from july last year the current financial year from 94 to 148 million pounds and indeed over the the next few years up to 2020 2021 the figures you're predicting forecasting go down from 140 million 120 and back up to 140 million but that's substantially different from the Scottish government in proportion at terms they predict that next year it'll be 133 million as opposed to your own of 131 but that'll then go down steadily year on year 123 141 404 94 million I'm just wondering why you're at such odds with the Scottish government and that first of all why there's a dip within an increase in predicted revenues and why the divergence seems to grow year on year the uneven pattern is due to the interaction of what you assume about the volume of landfill and movements in inflation over this period the reason for why our numbers are considerably higher than the Scottish government's one is that the Scottish government is basing its forecasts on the assumption that its landfill targets are achieved whereas our forecast is based on current policy rather than current policy ambitions and so if we had evidence that there were policies in place that would deliver that then we would be inclined to incorporate those sorts of effects so I note the the fiscal commission's comment on this is that they were quote broadly satisfied that there are potential policies which could feasibly deliver the target which underpins the forecast and I think the key thing there is potential it's this is a this is a methodological difference rather than a disagreement we would incorporate the impact of policies that had been announced and that we were persuaded we're going to deliver this whereas the commission perfectly reasonable the government is taking the view that let's produce a forecast on the basis that we're going to achieve these objectives and as the commission said they think there are policies out there that could do that those policies haven't yet been implemented if they were implemented then I would expect the numbers to get closer together okay well thank you very much for that I'm now going to open out the session the first quality task register will be marked to be followed by Gavin thank you very much community now good morning Mr Cho I just want to delve a little bit more into this the 27 billion pounds which I was intrigued when you said that it's not actually that bigger number I wouldn't say no to it but I can I can see the point that you make but I just wanted to test around the vulnerability of that figure I mean I think the convener very you know quite rightly focused on the impact of interest and if there was an interest rate change and we have seen that movement in America which obviously is going to set the hairs running globally but in terms of the tax receipts element and also the VAT and national insurance forecasts what's the what's the vulnerability of those over over the piece I mean what kind of how robust do you feel those are going to be over over the period that the 27 billion pounds is going to be realised well there are considerable uncertainties around most of them I mean looking in particular at what you might think of as the two modelling changes that we've made one of them is in the VAT forecast where we've had a problem that we've been underestimating the amount of VAT receipts by a particular route in that there are deductions from VAT that are partly reflecting the fact that there are transactions which take place within government which don't actually generate money at the end of the day for the exchequer because you're taking with one hand and giving back with the other. We had been assuming all the forecast models for VAT probably since before we were around assumed that VAT reductions essentially move in line with their historical trend. Now the problem is that that works okay if you have public expenditure moving on a relatively straight line however if you have a period in which public expenditure is falling then the amount of VAT deductions arising from VAT refunds is lower than you expect and therefore you end up underestimating the receipts. It's a long-standing and relatively untransparent model where we identified that that's effectively a mistake in the model. It would not have become apparent until you had a period in which there was a clear change in the direction of public expenditure there is and so we've corrected that so that hopefully will produce a better forecast for the VAT refunds element. On national insurance contributions that's an area where we've had an anxiety over the way this is modelled for some time for historical reasons. It's been forecast using a model produced by the government actuaries department which is you know quite untransparent and quite hard to reconcile with what's going on with the income tax forecast so you would get movements in earnings that weren't generating the sorts of changes in the NICS forecast that you might anticipate so what we've effectively done is to say we're now going to forecast NICS on the same basis that we forecast income tax so there's a comparable model it's more transparent we should be able to better check with what's going on in the income tax forecast is consistent with what's going on in the NICS forecast that has the effect of making that change boosts things probably because we're taking more account of there's a more accurate picture of the amount of national insurance contributions being delivered above the or being paid above the upper earnings limit on relatively high earnings so we think that's a bit better so those are methodological changes addressing what we think would be sources of ongoing error in the rest of the forecast there are of course uncertainties around them there are obviously a lot of other things that are moving within the 27 billion or within the changes in the underlying deficit forecast as you mentioned and as the convener mentioned you have debt interest which the way we do the forecast will simply move in response to movements in those rates in the market the largest negative the largest element that was subtracting from this was actually the movement in equity prices between July and November when equity prices are weaker than you anticipate you lose money from things like capital gains tax and inheritance tax so if you have changes in equity prices and there again we make a relatively simple assumption about share prices moving in line with the cash size of the economy that's an obvious source of uncertainty there as well another change is that the bank of england has effectively suggested that it's going to start reversing quantitative easing a bit earlier than it otherwise would have done that produces you some debt interest savings and then there is a set of uncertainties around you know if you have particular sets of receipts coming in stronger or weaker and most of the big taxes were coming in a bit stronger than anticipated in November relative to July you have the decision about is that new news or is that you know temporary good news it will go away again how much do you push that through into the future years of the forecast so as I say you only have to look at the size of the equivalent changes in between previous budgets and autumn statements to see that as I say what what the sofa gives the sofa can can take away and obviously it's for the the chancellor to decide knowing that those uncertainties are there how much room for manoeuvre he wishes to put into his policy plans in terms of achieving the objectives that he's set himself out both in the formal targets and informally and I note in your report you suggest that the the giveaways as you've called them amount to around 18.7 billion which obviously is less than 27 billion but it's still a substantial amount of that and given what you've outlined here which what I'm hearing is that there are a number of a number of uncertainties around the robustness of that 27 billion figure in the sense that it strikes me that it wouldn't take a lot to happen for that figure to be diminished significantly depending on changes that take place over that period so that I guess would lead to some concerns that there may have been that you know even if there were a reduction it could go beyond that that cushion that appears to be there between the 18.7 billion and the 27 billion I wanted to ask further around you'd mentioned a number of areas where policy initiatives delays and policy initiatives particularly around welfare had led to some money being available that wouldn't have otherwise been available had those initiatives been followed through for example the slow slow progress I think you called it on disability benefit reform I guess there are some people who'd be quite glad that it hasn't progressed quite as quickly as it was projected to but assuming then that the progress on that were to pick up does that have a future impact in terms of the projections that are made or is that factored in let me pick up your first point to begin with and the one thing to bear in mind in terms of the comparison of the aggregate giveaway versus the aggregate improvement in the in the underlying forecast over this period is that under normal circumstances you you can think of a an improvement or a deterioration in the forecast that kind of gets bigger over time and maybe a giveaway or a takeaway in policy terms that gets bigger over time so what's going on in year five is like what's going on in year two only more so this both for this forecast and for the one in july that's not the case you've not got a sort of a deterioration or an improvement that gets larger over time you've got an improvement in the in the underlying public finances forecast that's relatively small but also focused in the middle years of the parliament and which therefore ebbs away towards the end and equivalently in the policy giveaway the policy giveaway is front loaded so the government is in his sense giving away about six billion pounds next year in additional in additional public services spending and additional welfare spending by reversing the the major tax credit cuts but that giveaway he's no longer doing a giveaway at the end of the forecast because the public services cuts are increases spending increases are smaller the welfare giveaway that you've had to begin with has ebbed away because most people are by then on universal credit so the impact of the forecast changes and the policy is more substantive in the middle years of the parliament than it is towards than it is towards the end so if you're thinking about how vulnerable are the chancellor's objectives about where he wants to be at the end of the parliament to all of this it's slightly less than over the than the middle years because there's more going on in the near term than there is towards the end I get that but does that mean then essentially if there is front loading of spend if there were to if these vulnerabilities were to be realised then it's a steeper cliff face essentially if for example that 27 billion that you're expecting around the middle of the parliament if it were not realised for whatever reason be it interest rates are moved up be it the the vulnerabilities around tax receipts and national insurance contributions that you've mentioned materialise does that then make the cliff face a bit steeper because that spend has been front loaded rather than spread across the piece because certainly affect the profile of the borrowing I mean quite a lot if you think about some of the uncertainties that you know if you had a change in in market interest rates if your movements in share prices that's probably less likely to have the same lumpy profile in terms of just in focus it might have more effect at the end than it does in the middle so you would you know it would change the profile of the way in which borrowing is moving over time and you might find that the positive or a negative surprise shows up proportionally more at the end of the forecast rather than in the middle than what's actually visible here from what's happened between July and November and then obviously if there are movements in these things it's for the Government to decide you know whether and to what degree it wants to change policy to affect the profile of the deficit through the next five years or whether it's really primarily focused on where it is in 2019-20 when it has a target to be in surplus or thereafter so if you look at the overall policy changes that have been made between March and July obviously the Government has been willing to borrow more in the middle years of the Parliament but it's aiming still for a slightly bigger surplus towards the end so it's been willing to sort of you know to to let the deficit take the strain in the middle but is not change you know is not going for a looser position towards the end and those are judgments that it will have to make each time that you see the changes in the forecast. Sorry, we will come to the point. The point that I was making was that if for whatever reason that sort of bump that was being expected as a result of that £27 billion uplift is in any way deflated or I wouldn't suggest that it would completely fail to materialise but in any way deflated below the levels of input that the chancellor is putting because you've mentioned the sort of front loading and then tapering that then leads to a position where potentially the chancellor could be standing up midterm and saying I either have to borrow more or cut deeper in order to make up for a 27 billion that I was expecting which is now not going to materialise. Well I think that you know if you had if the improvements in the revenues in the middle period don't materialise to the degree that's anticipated in the in the forecast then obviously he has a choice about do I in response to that find some revenue from somewhere else through tax increases do I cut spending which could be in public services or in welfare or do I borrow more. He has shown himself between march and november willing to borrow more in the intervening years in order to make the toughest of the squeeze on public services less tough at a time in which he hasn't raised sufficient money from tax increases and welfare cuts to do that on its own so he could do that. As I say whether he changed policy to affect the middle years of the forecast or whether he's focused primarily on the fact that he has a target for a particular to get a surplus in 2010 and a reveal preference for having something like a 10 billion pound surplus in that year there are different choices and you know he could respond to them in different ways so there's nothing automatic about if you know there is a particular weakness in revenues in the middle of this of the middle of this parliament whether you have to respond in a particular way you know he's got his formal targets but he also has the what he wants to see the rest of the profile of the deficit looking like that's you know there's there's many ways in which he could respond to that there's no you know definite requirement that if there's a weakness there he has to go back and revisit the spending plans for example those are you know pretty much inked in now through the remainder of this parliament history suggests it's not impossible to go back and change those plans but you know this is not like a normal budget or an autumn statement in which you know there's another one coming around the corner and you can come back and tweak things again in the same way this one has slightly longer term consequences because you are inking in spending plans for departments over that period so you are you know the stakes are somewhat higher but you know as I say there are plenty of responses you could make on the spending side or on the receipt side if you did and then obviously the question that I had initially asked before before I then sidetracked you was around the the initial slow progress around some of the welfare reforms and were those to pick up pace or to be implemented effectively over the next trial of the parliament and will leave aside the ideological differences that exist in relation to that what impact if any does that have on the projections or are they factored in yes essentially the reason we've pushed up one of the reasons we've pushed up the forecast for disability benefit spending is that a reform designed to move people a money saving reform designs to move people to a less expensive system the reassessment of people from the initial system to the later system is not going as quickly as anticipated there are also changes related to the you know the proportion of people you expect to succeed in receiving the new the new variant of the benefit there may be changes in terms of the the the case load the number of people you know applying coming on but if you have a money saving reform that is going less quickly than anticipated that's obviously an upward pressure on spending if it ends up moving more quickly than anticipated and it saves the amount you expect per person moving from the old regime to the new regime then that forecast that deterioration that forecast could move in the other direction there's a separate set of forecast changes around the fact that the the rollout of universal credit the the new benefit to which people would be moving over the longer term has tended to be pushed further out into the future that that through most of the forecast changes we've done that doesn't actually cost the government money it saves the government money because in the original plan a universal credit was going to be a more expensive more generous system than the one it was replacing although the difference between the two was as narrowed as as changes to the future generosity of universal credit have been made but no we are I think we are struck partly because this is following the same pattern that we saw with the changes to incapacity benefit that these reforms you know recent history suggests do not move as quickly and don't save as much money as fast as the government initially hopes and our forecasts have reflected that and we've ended up pushing up our forecasts on spending there each time we look at it we try to you know not get ahead of that but get the right way and respond to that adequately but there does remain an uncertainty which we which we flagged that and just finally just following on from the the convener's questions around LBTT forecasting obviously you've undertaken a significant downward revision of your initial forecasts and I think that that that's been done in a kind of staged way I think you've down downgraded the forecast on more than one occasion in terms of what you anticipated would come in forecasts now seem to be more in line with what the Scottish Government or predicting but you seem to indicate that you're not pursuing the same methodology as the Scottish Government in order to achieve that forecast so I wondered what the explanation was then for your forecasts at the initial stage being much more optimistic if you will in terms of what would what would come in to now moving to being more in line with what Scottish Government are predicting if you're not following the same methodology well I think that the changes the main the reason for the reduction in this forecast is primarily about the story about the UK as a whole rather than Scotland relative to the rest of the UK and it comes back in part to the judgments that we've made about assuming that transactions you know do not grow as much over the five years as we had originally anticipated because we've taken on this evidence that a higher proportion of by-to-let properties there is a higher proportion of by-to-let properties and those are likely to turn over less frequently than they did previously and we assume that that applies in both cases I think in terms of the difference between the residential lbt forecast at the moment it's primarily the sort of you know that the the Scottish Government has a stronger forecast for transactions a slightly stronger forecast for prices I suspect that the methodological difference you know I think it goes in the same direction but I doubt it I you know I don't think it is by any means statistically significant as I say it's not a disagreement we don't think that the Scottish Government methodology is wrong they use a process based on what's called a log normal distribution which academic colleagues will be able to explain in much greater detail and correctness than I can fitting a distribution and then moving that whereas we use a micro simulation a more detailed picture of the distribution of house prices and move that forward the difficulty of using the Scottish Government methodology in the UK context is that it you don't put enough weight on what's going on with relatively high value properties and for the UK as a whole obviously what's going on with very high value properties and properties in particular in London is much more important to the to the forecast so we've seen weakness in stamp duty receipts reflecting a fall in the number of properties sold at 2 million plus you know there aren't many of them but they account for quite a large chunk of stamp duty receipts so I wouldn't place too much emphasis on differences in methodology as a source of major differences in the forecast I think as I say the the difference between the two now and I think probably beforehand is just not significant relative to the uncertainty around either of the forecasts and the primary primary source of uncertainty around those is what goes on with transactions in aggregate just because obviously when it comes to the discussions around block grant adjustment the UK government will use as its basis for those discussions the forecasts that you've made generally and therefore that's why I wondered about whether there had been a change in order to perhaps enable a because obviously we had a big discussion that took place around the block grant adjustment in the initial stages of LBTT coming into effect and I guess anything that could prevent such wide disparity in future would be welcomed yeah well I think it's um I mean we have a very good relationship with the fiscal commission we have regular discussions with the Scottish government and the fiscal commissioner obviously uh not in the room they are electronically in the room when we're having the the meetings which we discuss with revenue and customs our pre-measures forecasts in each round and so we're we obviously ask whether there is particular information or you know interpretations of recent outturn data that we should take on board what I certainly can confirm to you is that we would certainly not make any decisions on methodology based on what consequences that might have for a discussion about the block grant we're producing the best forecast we can on our professional judgment and it is for the UK and Scottish governments to use or misuse those as they see fit. Obviously you've produced your economic and fiscal outlook at the tail end of November I mean has anything significant happened since then that would give you different result if you're writing that same report today? Well as we haven't gone through it so it's hard to give a firm answer to that we have had some GDP revisions looking you know what's happened to GDP growth in the far in the past which is the office for national statistics have shown a slower growth picture you know that's obviously something we'll have to to take into account it's not something that typically makes a big difference to our assessment of how much spare capacity there is in the economy because we assume it's you know a revision both to the potential of the economy and to and to its actual level of activity I think if you're thinking about you know the key things that could move by the time we get to the next forecast in March always the most important between the autumn statement and the budget is what you get in in self-assessment income tax and some other receipts in January and February I mean some people I think were surprised that we did not revise up our forecast for the deficit this year by more we actually reduced it slightly leaving aside the issue of the new treatment of housing associations we think there are good reasons to expect the deficits to look better in you know the first quarter of the next calendar year relative to the same quarter a year ago than we have done over the previous three quarters there are a number of reasons for that one of which is that there are past policy changes which should boost self-employment as self-assessment income and that will show up in January and February there are changes to the the change in the UK stamp duty regime was implemented in December and therefore has a different impact in the post-december and the pre-december period there's also the UK government announced some in-year public expenditure cuts back in June which haven't shown up in the numbers yet so if they're delivered you would expect that to that to improve the numbers coming forward and there are also a relatively small volume of tax receipts that the office for national statistics has said it's going to include in the official measures of receipts but hasn't yet done so but we've included them in the forecast because we're trying to forecast the numbers as the ons will eventually define them and so that again we change so for all of those reasons we think that there could be or there should be a bigger improvement in the in the budget deficit fourth quarter of the fiscal year on fourth quarter relative to the previous three but there are big uncertainties and I would cite you know always the uncertainty around what's going to come in terms of self-assessment as a key one for the the January February period and it's further complicated by the fact that we have policy changes that are affecting that as well as things like you know what's happened with financial sector bonuses which can be an impact as well okay thank you I want to move on to the devolved taxes forecast me you've always had a couple of questions on that already my first question is around income tax and I want to just look at page 11 of your of your document now you obviously project fairly steady increases to income tax and I suppose that's linked to growth in the economy and wages and so on you then make the point though that the Scottish share of income tax is on a downward trend and specifically you look at table 2.3 on page 11 you can look at what's happened between 12.13 and 20.21 now from 13.14 up to 20.21 it goes from 2.91 per cent to 2.87 per cent so a fairly consistent drop but from 12.13 to 13.14 there's quite a big jump in a single year which is you know seven times bigger than any of the other drops so are you able to just do you know what happened between 12.13 and 13.14 that made that quite a big jump in a single year because if you had that every year obviously it would be extremely alarming but what happened that year do we know well I think the the data for 12.13 only became available in January 15 so that would you know because it's based on the survey of personal income it comes in with a considerable lag that lag fortunately will go once we have people flagged a Scottish or non Scottish tax post and the main reason why you see changes in the share is that you've had a series of policy changes that are in effect giveaways at the bot relatively low incomes particularly the increases in the personal allowance and there have been measures on the other hand which increase income tax at the top and because of the differences in the income distribution between the Scotland and the rest of the UK if you have policy measures that are a giveaway at the bottom and a takeaway at the top that is likely to shift the Scottish share down because you know there are fewer people paying the increases and more people benefiting from the reduction so I presume the 12.13 to 13.14 is because of the concentration of those sorts of measures that were taking place in that year although I can't remember precisely which ones took effect in that year okay and you so you would then get the official data for 13.14 round about now then is that right or this this month at some point yeah certainly I think between now and the the time we do the next forecast so the next forecast will have another year of SPI data and another you know another estimate of the of the share now it's important to bear in mind because it's a survey there is going to be uncertainty about whether that has captured it so the movement in the share between any two years might be affected by the fact that the survey is giving you a slightly high measure in the year one a slightly lower measure in year two so there will be some additional volatility which hopefully will come out once we no longer have to rely on the SPI to to give us shares but instead we can rely on HMRC flagging people okay no that's all thank you from move on to to lbt t in a particular page 20 then of your of your document now the convener has asked you I think already about some of the disparities between your projections in the Scottish government projections and you've given a number of answers they are higher house prices over slightly higher house prices over time quite a big difference in transaction forecasts over time and different treatment of a bite ellipt to explain some of it and so that I guess probably explains what happens over the course of the forecast period but if we look just specifically at next year i.e. 16 17 table table 3.3 you're saying for next financial year residential lbt t will be 253 million pounds whereas a Scottish government for residential lbt t for the next financial year are saying it'll be 295 million pounds so while I would see by the end of the forecast period these factors would come into play and that would explain the disparity I just wonder is there an obvious explanation why there's a difference of you know 42 million pounds just for next financial year for residential lbt t it may reflect the most recent outturn data that each of us had available at the time we were doing the forecast and how much of that you pushed through into into future years as it were the baseline so that you could have a baseline difference and then the size of the difference differs if you have the variance moving in different directions that's one possibility I don't know whether at that stage you still have the the the differences we have in the amount of assumed forstalling is having an impact by that year where that's obviously mostly showing up as a 15 16 story I think we have a higher number for forstalling than the Scottish government do for residential and we also I think have one that the Scottish government doesn't for non-residential so I'm not sure that may be affecting the year on year comparison as well but it might well be the fact that the more you know we're working off different you know starting data of what's coming in through the year and pushing that through the rest of the forecast okay thank you so you gave explanations about the differences over time for residential in terms of non-residential transaction I guess that the position is reversed in a way in that the Scottish government are less optimistic than you are for next year but over time so again if we take non-residential LBTT you're saying or your projection is 243 million next year the Scottish government projection is 220 million for next year and over each of the next five years you're predicting more than they are for commercial or non-residential are you able to explain the difference in in those figures is there a different approach taken by each of you well there there is a somewhat different approach again on the on the methodology the Scottish government I think uses our determinants to drive their forecasts but the starting point is a three-year average of the out turns rather than the latest year because we're using a micro simulation model we use a single base year of 2013-14 and then say how is that going to look if you push it forward into into the future so how much of it is that's that is a difference how much exactly of the of the difference between the two is explained by that I'm not entirely clear obviously fiscal commission colleagues may have a view on on that as well okay but just so I'm clear on that one you're using a single base year and they're using a three-year average that's right so I mean there's you know and that's all that's always with these sorts of things a choice you have to make about you know do you want something that's more stable or do you want something that's more timely and there's no right answer to to that but given the given the techniques and the use of a micro simulation approach then we have to it's more likely we lean in that direction okay no thank you questions on landfill have been dealt with already can I go back to the your executive summary then of your general economic outlook so moving away from the devolved taxes paper again a number of questions have been dealt with that already can I look at page page 12 of your executive summary just a couple of things a couple of questions in that table table 1.1 which is sort of most of the page in terms of expenditure components of gdp the third one of those is business investment and so please take 2014 as the starting point 4.6 percent goes up to 6.1 7.4 so you're seeing fairly consistent and healthy growth of business investment when you get to 2020 though it's a pretty sharp fall back down to four and a half percent which is a smaller percentage growth than we saw in 2014 what is happening in 2020 to business investment I suspect that that's a consequence of the changes in the expenditure plans the public expenditure plans which in the last year there was there was sort of quite the the government introduced a sharp increase in public sector capital investment but they've had less of an increase in the overall public services spending so I think it may be the fact that we're effectively you start with a path for gdp as a as a as a whole if you have movements in you know the the composition of the the fiscal giveaway and takeaway in that sort of year we'd assume that because it's right at the end of the forecast it's something that will come out in the wash in terms of its overall impact on the economy on the on the growth rate of the whole economy because the Bank of England will take that into account in setting interest rates in a way in which it wouldn't take into account changes that happened you know very near term but that it would change the composition so you know if you're having more going on and the in the public sector at that level than you had in the previous forecast to get everything to add up you're making movements in the other elements of it so I suspect it's probably it's a constant rather than a particular view that there is something that businesses need to be terribly worried about as we move into 2019 spring okay thank you helpful and last question just on i mean on that same table just slightly further down inflation cpi the figures you put there i mean are they bank of england projections or the are the your projections for cpi no they're our projections for cpi i mean we still in effect assume that the bank of england is aiming to achieve the inflation target that it's been given of 2% at the end we have inflation returning to target slightly more quickly than we did back in july that's partly because of greater assumed pressure from unit labour costs pushing those pushing those up i think the bank of england if memory serves me right has inflation returning to target you know somewhat more quickly still than we do but if you look at the differences you know we're talking about 10th of a percentage point below the inflation target so again i wouldn't overstate the significance of any differences there but they are our numbers not you know we we take the market's assumption of what is going to happen to interest rates but we do our own forecast for inflation thank you thank you jackie as ever most of the questions have been asked but nevertheless seeing as you're here we'll go through some of the the detail i'm absolutely clear about what you're saying about the Scottish share in tax revenues declining as being fewer tax higher rate taxpayers changes made in terms of policy decisions but is there anything else that's underlying that because i'm conscious that you know employment rates are different unemployment rates are different there's population declined here where it's projected to increase across the UK so i'm wondering how those other factors might potentially come into play i don't think that we're asleep you're right that there are those sorts of differences between employment rates nine point rates what would matter in terms of the share is whether those differences the size of those differences changed over time very much if there's a relatively stable relationship between those those things even if they're different that's not going to have the share moving around a great deal so i don't think it's an important driver of what's going on with the share in the forecast we're not making any implicit or explicit assumptions that the relative performance of the scottish labour market versus the rest of the uk labour market is is materially different okay um what about gdp scottish gdp relative to uk gdp levels what are your predictions for there or do you not do that at all well again there we don't produce a a we we disaggregate our forecast for the economy by different types of spending by different types of income but we don't disaggregate it geographically or by different industrial sectors there are other forecasters who do that uh but uh it's complicated enough to do it the way that we have to uh to do it and obviously the one of the issues which has come up before obviously in discussions of the commission's job and our job and how one should base the scottish is that the the availability and timeliness of the data to do a full blown scottish macroeconomic forecast uh you know it's it's more difficult than it is for the uk as a whole the task of doing one that is simultaneously consistent with the uk forecast is is greater still so uh we don't we haven't made an explicit uh or implicit judgment about sort of the relative performance of scottish and uh and rest of the uk gdp over the over the forecast might be something that is of interest as we we move forward but there you go i notice just as it might be a side issue in your report you talk about the reclassification of housing associations um you may be aware that we've had discussions in scotland with urostat and ons about classification of of private or public sector capital projects is this something that's on your radar is this something that is more properly considered by the scottish government because it will have an impact it's not something i'm aware of but it's certainly if you think we should be aware of that and uh all my colleagues may well be aware of it uh then very happy to look at that as you say on the housing association stuff i mean it does underline the fact that what euro stat says is appropriate matters as well as what the domestic authorities do and often these sorts of changes are a you know are a reflection of the interpretation and implementation of rules that come up at the at the at the european level i mean the the reclassification of housing associations was something that we'd warned might happen back in july given the fact that the decision is taken on the basis of where effective control is exercised rather than ownership and because the government was effectively telling housing associations what rents to set and and other things that that might be something that the ons would look at and indeed they have done the government has of course said that it wants to undertake a liberalisation which would move it back in the other direction we have not assumed that in our forecast if the ons indicates that the government has has done enough to make that a likely outcome we'll address that but for the time being we're assuming that housing associations stay in the public sector for the duration of forecast could you give us a kind of order of magnitude of what impact that has on the budget on public sector borrowing because we're grappling with the same issues here and obviously classification is at the heart of this and discussions continue with ons but it's what the consequences of having it reclassified as a public sector project that i don't think is fully understood well on the housing association side it's pushed up both net borrowing and net debt net borrowing i think by about four billion or also diminishing over over time the net debt change is about 60 billion pounds about four percent three four percent of GDP the business model as it were for housing associations is essentially you know you know they have grant income they're trying to run an operating surplus on the properties that they're owning already they have grant income they then leverage the income by borrowing in order to do more house building so one of the reasons why we've had you know the the impact on the deficit declining over time is the decision to restrict the way the the rent increases would mean less income for housing associations would mean less ability for them to leverage and to borrow more and has less impact on the budget deficit though there have been complicated sets of you know in addition to the changes in what rents housing associations are able to charge the government has restructured the grants to housing associations quite a lot in the autumn statement so lower to begin with higher towards the end of the forecast more skewed towards shared ownership rather than standard social housing and i think one of the uncertainties surrounding this new element of the forecast is that the government is in a sense trying to pushing housing associations towards a new different business model from the one that they probably were sitting there thinking they were pursuing and it remains to be seen how willing or able they are to be pushed in that direction which will then feedback on to the size of those changes okay i think that's that's helpful for us although a different context we we face some of the you know similar discussions and issues moving forward can i move on to the devolve taxes and and i have to say that there was criticism of you being over optimistic at the beginning of this process and now i'm just curious that you are less optimistic than the scottish government and i wonder what happened in between now i hear what you say about assumptions made about prices sort of pattern that you would expect to see over time if one of us is more optimistic than the other continuously then you probably have more concern when you're both on the same page that will be interesting but according to the scottish government have made assumptions about prices and about the number of transactions that are greater than your model suggests that's right as i say from the the transactions on the transactions difference is larger than the prices difference as i say the scottish government is basically taking approach which we've taken for for some time as well of assuming that transactions get back to some historical average now the difficult that we i mean we've wrestled with this before this became an issue with lbtt being a separate tax of you know the changes in housing tenure that you've seen over time such a big reduction in housing transactions relative to what you saw prior to the crisis in those circumstances a big challenge in producing a forecast is you know what's the what's the medium term new normal to which you think you're going to be returning and there's obviously a lot of uncertainty about that and both we and the scottish government have to make judgments about that as i say i think one of the reasons why there's a difference at the moment may be that we've explicitly assumed that the normal level of transactions to which you return is lower than we had assumed in july because we've taken on board this evidence that you know if you have more by-telep properties those will be bought and sold less frequently but as i say the uncertainty around i mean i think this is a this is always going to be the challenge with this area reaching a judgment on quote unquote who does the better forecasts is that the length of time you would need to distinguish between luck and judgment when so much is dependent upon the level of transactions in the UK context a lot a lot also depends on the relative movement of high value to low value properties that would also be an issue in Scotland but not to the same degree there's less of a you know less of the smaller proportion of the revenue is coming from relatively high high done properties but they you know the transactions is probably the large one but as i say i wouldn't put a great deal of faith about anybody's firm forecast for transactions in any event i think the one thing that that we have discovered is that you can't account for people's behavior and this is something i'm sure we'll pursue with the fiscal commission shortly but you know to what extent does your model account for kind of behavior because i think the degree of forestalling that we saw exceeded your estimates and indeed i think probably exceeded the Scottish governments and it was only when data came forward that we were able to estimate that to what extent do you try and model for people's behavioral responses to tax changes because that's something that i don't think we do in Scotland to any great degree yet well we always we always try to do that because it's always as you say it can be very surprising how how big the numbers are and the classic case within the UK context is the movements in the higher rate of income tax from 40 to 50 to 45 if you pre-announce that you're dealing with a part of the population that is able to manage its financial affairs in such a way that you can move income from year to year and the you know and the sums of money that moved over those periods are you know enormous and make the task of working out what the underlying behavior of income tax over those periods extremely difficult and still debated now in terms of lbtt specifically i think we have uh we've raised our assumption of the amount of or estimated the amount of um forestalling from 20 to 30 million i think and again fiscal commission colleagues will correct me if i'm wrong the scottish government had a sort of range of 12 to 37 which they initially thought it would be towards the lower lower end of that but i think the commission's report on the draft budget if i read it correctly was pointing at something in the sort of low 30 area but i may be misinterpreting them so to please check um i we have also 10 million of forestalling effect in the non-residential forecast i don't know whether the scottish government has one in there at all there's a separate issue about whether you think that the move to to lbtt and the higher rates at the top is going to have an you know an impact on behaviour in the long term above and beyond what goes on with with forestalling there we do assume that uh the you know higher uh average tax rates towards the top are going to lead to low you know fewer transactions and also have an impact on prices as well as well we incorporate those effects we explain the numbers that we've used but again uh the uncertainty around them is uh is significant final question convener is the 30 million forestalling figure that you've arrived at the final figure or is there likely to be further discussion i don't know if further discussion is certainly going to be more you know there's going to be more data coming in over time um so you know the one's best estimate of what this has done you know again i mean it's a much larger and more difficult example with the income tax rates as you come back and look at your forecast after a few years and then you know the interpretation of what was going on in the underlying picture and therefore what the unexplained bits that he's best explained by what was going on with forestalling can change well after the event so i would be very surprised if this is the last word on that on the last number on that subject okay thank you very much okay thank you very much and thank you to committee members for the questions just got a couple of further points actually before we wind up the session in terms of our paragraph 136 um in your executive summaries you say that um taking account of expected underspending against the Government's plans we expect resource departmental expenditure limits spending to be cut by 10.4 billion in real terms by 2019-20 what's the kind of level of expected underspend it's a relatively small number i mean this is a reflection of the fact that departmental expenditure limits the clue is in the name it is a limit that the government sets in aggregate on on spending and historically even when public expenditure is rising quite rapidly you have departments and the treasury coming in below that number so you know the departments know the treasury standing there with a big stick the treasury is obviously keen on ensuring that these things are met and they tend to come in the underspends you know we've had historically relatively large ones at the sort of six billion a year further out you might you know the numbers are typically in the sort of three to four billion a year i can probably again find you a precise number for what it is later on but it's normally in the low single digit billions we are allowed point six percent of resource and one point five percent in capital in terms of the ability to you know to be below that but i'm just wondering i was just wondering what the scale of it was because you mentioned it specifically in terms of how you affect that expected to impact on the on the resource limits and just one one another point to what extent your forecast sorry is on the table page 127 we have assumed the assumed underspending against the limits in each year of the forecast so 2016-17 assumed underspend of one billion on current spending two billion on capital by 2020 one and a half billion on current four billion on capital okay five point very well okay well thanks very much on that now so just i was going to continue the accuracy of your forecast relative to Scottish governments i think we'll soon find out over time by looking back at what was forecast and what the outcome figures were but i'm just wondering to what extent before we have a firm answer to that question all right now you've just been looking you've just been looking at your own morbid report here about how the number of older people are pretending to pass away in greater numbers according to your report so don't be too pessimistic quite in that category yet but just to what extent are your forecast for the devolved taxes based on the available outturn data well you're each time you come to do the forecast the the the outturn data that you have the latest available is an important input and you typically look at you know how that's comparing with the forecast that you had for the year as a whole what does that imply would need to happen over the remainder of the year for the original forecast to to look sensible so it's obviously helpful when that data is relatively timely and relatively frequent so i think it's the case that for LBTT it's sort of it's monthly numbers whereas with landfill it's less frequent and you've got you know less less to go on but it's it's always an important input and i think it's one of the one of the key judgments it comes back to the you know the you know our job and the commission's job in judging reasonableness is each time you come to do a forecast there are broad questions of methodology but then there's the question of how do you interpret what has happened in recent outturn data if it's higher than you thought previously is that good news that you expect to persist and you push into the remainder of the forecast or do you essentially say this is noise and will assume that either it comes back down to the level where you originally anticipated or maybe it'll undershoot next year to offset the overshoot this time that's a key judgment about which reasonable and unreasonable people can always differ fascinating stuff is there any further point you would like to raise with the committee before we wind up this session no no i think that's you've covered the territory admirably okay well thank you very much actually for your contributions and your response to questions again today robert that being the end of this session we'll call a recess and we'll restart the session at five past 11 let's get this show back on the road our next piece of business today is to take evidence on draft budget 2016-17 from the scottish fiscal commission we're joined today by leary susan rise and professor cambell leaf professor andrew hughes hallot had hoped to join us from the usa by video conference but unfortunately technical issues have meant that this is not possible and jim was unable to lend his private jet to get him over here in time for the committee so i'd like to welcome our witnesses to the meeting and invite lady rise to make an opening statement lady rise thank you very much convener thank you for having us back so soon after our last visit to the committee um and could i offer on behalf of the commission good wishes to all of you for the new year um can i also offer andrew's apologies he really had wanted to be with us but um i would assure you of two things one is that yesterday we spent many hours the three of us on on a phone call so we're we're very current with his thoughts and his thinking as we did it in the run up in the the writing and the finalisation of the report if there are questions that we think really are in his area of expertise we would let you know that he might be able to add something further uh that he can't do just at the moment um since we last met in November 25th the commission has published its report on the draft budget 1617 as you know we concluded that the forecasts were reasonable and we also made a number of recommendations in the report and we'd note in particular that the forecasts are now being done on a five-year basis which is good that makes them consistent with other forecasts in the in the UK um it also perhaps adds in our eyes some urgency to uh some enhancements to the forecasting methodologies that the Scottish Government uses um which would uh be more suitable for that five-year timeframe um you will have seen that our report itself has evolved um it's longer it's fuller in explanation and background it contains appendices not just of our activities over the year but minutes of our challenge meetings with the Scottish Government uh we started producing these minutes as you know in August when we had a resource to do so and I would state that the minutes are as minutes of meeting should be agreed by all participants there um so the report has evolved it even has a cover and paragraph numbers uh and we uh I say that tongue-in-cheek but we expect it to continue to evolve uh over time our way of working has also evolved and we hope that that's apparent to some extent in the report um I want to say that we have valued our engagements with the finance committee and we've taken steps such as producing these minutes to provide evidence we hope of uh transparency and of independence two themes which have come up in our discussions with you uh over last year um we also want to note that the finance committee has published its report on the draft bill and that that will clearly lead to further evolution of the commission uh over time and once uh once the bill is actually finalised in the report uh we've made some promises for the future we've promised to develop in the coming year a protocol on how we go about working uh on how we interact with the Scottish Government and we've begun some early thinking on that um we state that we will do our own analysis of the outturn numbers once we have a full year's worth of outturn numbers for the devolved taxes that's really important we know the Scottish Government will do that as well and clearly we will need to see where that takes us uh and we also state that we will begin a programme of producing some technical papers uh and we are just starting to think about what they might comprise uh we don't have any in the hopper at the moment so please don't look for them in a week or two uh but they will come um to conclude I would say that our key concerns um out of this year's uh assessment uh uh and scrutiny of the Scottish Government forecasts uh are and I'll just state them very succinctly for LBTT um we were pleased that the Scottish Government as it looked at the additional tax or the the tax for additional properties um it at least speculated and talked about behavioural factors we think these are important for all aspects of LBTT transactions and particularly so with the five-year forecast time horizon and so it is of increasing urgency in our minds that that modeling for LBTT really move on and really begin to incorporate appropriate behavioural factors um in terms of landfill there was discussion in the earlier session about policy today's policy tomorrow's policy we're all keeping an eye on whether the Scottish Government's policy is in fact having the effect that that is it is expected to have so that's an area of real focus for NDRI and this is um Andrew's key area of focus um and you'll see in the report um we have to bottom out the nature of the impact of buoyancy through the cycle and particularly um you know what what happens uh you know cyclically in terms of buoyancy once we really have our arms around that then we can begin to pull in um and look at wider and broader economic factors and finally on the additional properties tax um there's no no real data we're very very little to go on for this particular segment in Scotland we don't know a lot about um who and how many and uh there's speculation about what the the pool of properties might be um but clearly there has to be some further work um that area as well uh finally it is about out turns which I've just mentioned we need to see what really happened in relation to previous forecasts so those are our areas of concern um we've expressed those in the report we've also expressed them verbally to the Scottish Government we expect the Scottish Government to come back to us as promised um with um their views and our recommendations uh what their plans are and how they intend to um to react to these uh and we have stated in various fora and we'll state again that we believe that they will likely need to enhance their forecasting resources in order for instance to develop the LBTT model further so um that's really what we expect from the Scottish Government that leaves me to close simply by asking the finance committee for any feedback um you might have on the report in addition to your questions thank you very much for that uh Lady Rice um Professor Leith as you get anything you wish to add to the spread no nothing is okay thank you very much well I think it's an excellent very comprehensive report and it certainly it does fulfill transparency criteria and that you've given great detail of all the meetings you've had for example with Scottish Government officials and what's been discussed at these meetings but let's go into the report itself um obviously what I'll do is I'll open with some questions and then colleagues will come in subsequently I'm intrigued by um paragraph 1.21 where you say um in the analysis of residential LBTT the commission proposed that the forecasters might benefit from a review of the work of best in cleven 2015 which examined the impact of property taxes on the timing volume and price of housing transactions and then you say in each case the forecasters choose themselves whether or not to pursue these alternative approaches just wondering you've mentioned that you know that um further on your report I'm just wondering um if you want to tell us a wee bit about that because see if you've given us a wee bit of a teaser there two aspects to that what is the importance of the best in cleven work and Campbell obviously is is best equipped to to speak to that um but the other is to make the point and it's really the last sentence in that paragraph um that in our conversations in our challenge meetings with the Scottish Government we might propose that they would look at a particular instrument in a certain way or bring in work that has been done externally but at the end of the day um we are not agreeing with them and they don't agree with us that they will do that all we do is challenge them to do these things they then make a choice about whether or not they will do and I think they address some of those choices in the appendix um to their forecasting methodology papers so um that's why that last sentence appears there but in terms of the actual value of best in cleven um over to you Campbell okay well the best in cleven papers uh it's not academic paper looking at the impact of changing property transactions taxis on the property market and it is one of a relatively small number of papers that look at this issue so when the Scottish Government were looking at the potential impacts of for stalling we recommended that they look at this paper in depth and maybe try to replicate what the paper did using Scottish data to try and assess the magnitude of for stalling and behavioural effects so it's an example of the we've kind of dipped into the academic literature provided to Scottish Government with these these resources and suggested it might be something worth looking at in order to enhance their forecasting efforts okay thank you for that I mean um in paragraph 3.5 you said that what drove the commission's initial concerns is that the current forecasting method is essential amount to an extrapolation of historical data for housing prices and transactions towards along that average and the following paragraph you then see some kind of on-going assessment of the sustainability of developed housing market by a useful way of monitoring possible corrections to the market and the impact that would have on forecast revenues and then thirdly as you emphasised quite a lot of thought in your opening statement I should say that the current approach contains no behavioural responses to changes in tax regime and of course again that that's repeated further in your report so I'm just wondering if you can extrapolate a wee bit more on these comments okay so the current approach to forecasting residential lbt t revenues is essentially is built up of a forecast for house prices and a forecast for transactions which are then applied to a probability distribution of which gives the probability that you'll observe a transaction at a particular house value so the the driving factors are prices and aggregate transactions prices are forecast using what's called an arema model which is essentially just a statistical approach which says well house prices next year will be some function of house prices in the past so it's a kind of statistical extrapolation of historical house price growth the transactions data is not modelled in a statistical way it's an extrapolation from more recent data towards the kind of long term average that Robert talked about earlier today so both of these approaches given the estimates of the arema model and given just the fundamental approach of extrapolating transactions both of these approaches essentially take historical data and move house price growth towards its long run average and transactions towards their long run average as well so if you were in a period where the economy was going into a boom and house prices were moving away from the long term average or transactions were moving away from the long term average this approach wouldn't capture that so it wouldn't get a boom in the housing market it wouldn't get a bust in the housing market the statistical evidence from the literature also suggests that it wouldn't capture the transition from a boom to a bust so if there was a bubble in the housing market which was then going to burst this kind of approach wouldn't really capture those kind of turning points and what the literature suggests is that you need a more multivariate approach which uses a range of variables possibly with more theoretical grounding in the inherent modelling it's incredibly difficult to do but there are approaches out there they work in some instances we would encourage the Scottish Government to pursue those they may work they may not okay thank you for that now in the in terms of non-domestic rates income in paragraph 5.4 you've said in the forecasting and buoyancy for the 2015-16 draft budget Scottish Government forecasters use the range of macronomic data to justify raising the buoyancy forecast above its historical average the commission discourages its approach as no link between the macroeconomic variables and buoyancy had been formally demonstrated to justify the magnitude of the government and then you talk a wee bit further about buoyancy obviously it's I'm just wondering if you can give us a wee bit more about your thinking in terms of the issue of buoyancy and how the Scottish Government can improve shall we say it's forecasting in that area okay so last year the the way the Scottish Government's approach the whole issue of forecasting buoyancy was to essentially start from the long run average and then it looked at a range of economic indicators was GDP growth higher was unemployment going down business confidence going up a whole range of factors that it had and if it believed that the economy was strengthening would then shift the buoyancy forecast above its average if it believed the economy was not strengthening would then shift the average down the problem we had with that was that there was no there was no formal assessment of supposed GDP growth has increased by half a percent what how does that half a percent translate into the deviation of buoyancy from its long run average should buoyancy go up by half a percent as well or by one percent by less than there was no formal link between the two so i think our position was until that formal link was demonstrated it was advisable not to me it was essentially an ad hoc adjustment what we then subsequently recommended was that there was a very limited span of data for buoyancy so it was very difficult to do any kind of modelling work on buoyancy at all so we recommended that they find what they try to obtain a longer historical series for buoyancy so they managed to obtain such a series and they managed to create a kind of second proxy series from non-domestic rates income receipts as well so we've we now have two historical data series for buoyancy and what you note is if you look at these two series historically there seems to be a cyclical pattern in them so every time there's a revaluation cycle there's a kind of peak in buoyancy which then slowly declines and then there's another revaluation year that jumps back up again and slowly declines and given the way the buoyancy numbers are constructed revaluation cycles should have no impact on buoyancy so it was a bit of a puzzle why this pattern was there so throughout the year we've kind of pushed Scottish government and they've explored with the Association of Assessors why this pattern may exist given a priori we're not quite sure why it should exist and they've come up with this story about the relationship between the revaluation cycle and what are called rolling revaluations and the idea is that you can appeal kind of reevaluate where you can appeal the rateable value of properties at any point in time if the nature of that property changes but you can only appeal revaluations in the year that the revaluation occurs and what tends to happen is that these these kind of rolling revaluations are only resolved once the revaluation appeals are resolved so this gives a mechanism for explaining this cyclical pattern which we've encouraged the Scottish government to quantify whether this can reasonably explain the pattern we now believe that it can we're looking for further work on this to to strengthen our description of this cyclical pattern because it's really only by controlling for this that you can then extract the residual information from the series to do to assess to what input to what extent buoyancy is affected by other economic variables such as GDP growth unemployment and all the rest so we're halfway through a process of enhancing the data the description of the data to allow a more formal modelling of buoyancy in the future okay thank you very much for that comprehensive answer now moving on to land and buildings transaction tax new for 2016-17 pager 7.1 you say the proposed three per cent slab taxes envisaged to be applied to additional residential property property transactions in excess of 40 000 pounds with revenues generated between 45 and 75 million however what you've said basically is that the transaction tax will effectively wipe out return in the first year of buy to let investment for the reasons you explain and then you say that this will affect the price distribution of the first homes at present this is not the forecasting model and so you're suggesting therefore ultimately in 7.9 that a final revenue estimate for 2016-17 is between 17 and 29 million which of course is significantly different from what the Scottish Government is actually predicting so I'm just wondering again if you can talk us through your thinking in that a wee bit more obviously because that's quite a significant difference okay I think this is what these are the Scottish Government's figures it's just talking through the various adjustments they've made to the underlying forecast so there's a there's a base forecast if you just say well let's try to identify the transactions that would fall under this tax if everything precedes as it currently does so there's various bits of information about the extent of buy to let mortgages the number of purchases of such properties through the year and so on and these give rise to the kind of first paragraph headline figure there's then various adjustments that the Scottish Government have made to try and reflect behavioural factors so that this is one case where the Scottish Government is actually trying to take account of these behavioural impacts and there's a whole series of adjustments that ultimately downgrade the forecast once these behavioural responses are taken account of that's essentially what this notes details okay that's fine that's great and in terms of improving the forecasting process what you've said is that in 8.2 is that data limitations replace a constraint on the forecast's ability to apply more sophisticated methods and we're increasingly concerned about the residual LBTT forecast which still assume no behavioural responses so we've got two issues here what is the data being availability been improving that's an issue that's concerned the committee for a number of years so and again what you said and we were talking about non-domestic rates income you talked about the limited span of data with regard to buoyancy so if there's issues in terms of data which are clearly are in your view what areas should we should the Scottish Government try to focus on improving the data availability where possible okay it's so well there have been a number of improvements in action in terms of data availability through the year so for for the buoyancy figures we now have it's not a tremendously long but a longer historical time series and there's two versions of that time series as well so that that's a clear improvement we're starting also to get outcome data from the taxes themselves which clearly helps us assess the validity of the forecasts and so on there's also a new series from HMRC on transactions property transactions for Scotland which didn't exist before for the non-residential sector which is also allowed us to undertake for the evaluation of the the validity of the underlying forecast so data is is coming on stream we're also encouraging in some of our recommendations the Scottish Government to look at data that should exist on more more micro data on transactions to look at both individual transactions so you can get the kind of distribution of transactions across the price range of properties for example so we believe that there is cases where there's data there and we would ask Scottish Government forecasters to to utilise that data but as always there's never enough data any piece of data historical data as long a run as you can get the better and more emphasis on behavioural responses uh yes that's that yes if I could just add a footnote to what Campbell said um there may be instances where it may not be possible to get data for instance if you look at the high end of property transactions the numbers are low enough in uh Scotland that um releasing data at HMRC release data for instance it might be possible to identify um taxpayer and property and so forth so you know at some point at the when you look at micro data there may be some restrictions and limitations on this okay thank you for that okay I'm going to open out the session now and the first colleague to ask question will be Joan to followed by Mark thanks convener and thanks very much for your report which I think makes good reading just a few things that I picked out on the way through you mentioned lady rise 2 in your introduction about having a protocol that's referred to I think in page 5 1.24 scrutinising the forecast and receipts and you'll that will develop into a protocol can you just maybe explain what that would mean yes it was searching for the right word so it may not be a technical word but it is to to respond to some of the conversation we've had with the finance committee in the past because you've wanted yourselves but anyone to feel that they really understood how we operated how we worked and the protocol is really to building on most recent years experience which was a much fuller and richer experience for us the protocol would be a description of of how we interact with the Scottish Government what we do you know what our our program of work is during the year just how we go about doing these things so that's as I say really in response to some of what you've helped us focus on from past conversations okay that's helpful so there'll probably be an agreement between the two between yourselves and the government but on this is more from your angle how you view it all and this is how we intend to yeah to to go about doing our work yeah that's great thanks for much yeah just add to that the way we develop the protocol will also be well obviously be contingent on the remit that we ultimately get from the bill and the response to your report as the bill goes through parliaments so yes i'll come back onto that afterwards i was going to come on onto that what your remit might be yes some of the other specifics on page eight it talks about three point five this is concerns about the current forecasting methods being an extrapolation of historical data and then the point that if the housing market was drifting away from its long term average would that be picked up and i was quite interested in that i think mr troat can i mention that in his evidence which i think you were in for about this whole thing about you know are we on a long-term trend are we returning to a long-term trend or is there a new trend just starting and how do we know the difference between all of that so is it is that can you explain what your concerns are around that yes i mean that's the the kind of nuts and bolts of forecasting are trying to be able to discern what's going on is this a long-term trend is it a cyclical components is it just random variation and there's a whole host of techniques you can use to try and identify what's going on in terms of specific variables so the approach currently being adopted by the Scottish government in terms of the housing market is is a kind of straightforward extrapolation technique which which works well in normal times but but wouldn't capture these kind of instances where a new trend was developing and we were moving away from what we had previously. Are you trying starting surely it's impossible to predict? Well there are techniques for identifying time variation in trends so you can see that your trend that you had historically is no longer applying to the current releases of data. Should it be a question of picking up a new trend once it started? Well it depends so in simple statistical models you can use techniques which would allow you to pick up new trends as they develop so the idea is that you pick up turning points very quickly there's more structural modelling which tries to say well fundamentally house prices should be driven by the earnings of the people that are buying the houses the state of the economy and so on it's a far bigger economic modelling exercise but with that more structural modelling exercise you may even be able to anticipate that turning point which that's the kind of holy grail what we call the holy grail of forecasting to be able to do that and there are examples in the literature where people claim that certain techniques can do that at certain points in time. I suppose that it remains a little sceptical whether you'll ever get the holy grail but anyway. I mean I think probably linked to that the convener kind of touched on it but page 14 3.2 3 talks about it remains unclear to what extent there's a temporary phenomenon and the market such as the market will reduce activity in the longer term so again it's this question of what is temporary and what is a kind of more permanent and I mean I wondered that there's also been mention of the fact that maybe the private letting sector or buy to let is expanding over time is that the kind of longer term change that we're wondering if there's an impact here? Well it's various factors I think if you maybe if you turn to table one on page 10 that might help frame the answer to this question so it's on table one I think it was I think evidence we gave to you earlier which was trying to assess how well the out turn data mapped to the forecast so what table one does in the first couple of columns is it allocates the forecast of 235 million for residential LBTT across months given the seasonal variability you get in house prices and transactions we then contrast that with the out turn data to get the size of the of the forecast error and that's a kind of measure of the kind of for stalling could be interpreted as a measure of the for stalling that's going on in that that market and what we were interested in seeing is to what extent does that forecast error taper away as we move away from the the date the tax was implemented and we now have an extra month of data since we constructed this table which for the first time actually has a negative forecast error so more revenue was generated than was forecast so the 3% the next tax change coming in haven't we so presumably there's for stalling started already for that well it should be starting now yeah so not not for the November numbers but yeah yep there'll be those so then we start having the two for stalling interacting with each other oh there's for stalling on top of for stalling yes yes but the interesting thing from table one or the updated data that goes into table one is is that what we were concerned with before was that it looked as though for stalling was tapering away by August but then it seemed to bounce back again in September the two subsequent months we now have for October and November seemed to suggest that the forecast is back on track at that point so as a kind of initial initial look at this it looks as though the for stalling has maybe bottomed out around 30 million by this point in time right okay that's helpful thank you and i mean also well with the point about headline forecasts page 16 3.31 talks about the unfortunate inconsistency in the Scottish Government OBR presence of for stalling effects while they're included in the headline or not is this is this important or is this just a presentation it's a very minor minor side right okay i'll leave it that one then now except the point i think the convener said that he understood the whole report and that was good but there were some words in it that i was kind of struggling with and i just wondered if you could explain the following paragraph 3.32 it talks about the simple univariate forecasting of house prices i wasn't quite sure i knew what univariate was univariate versus multivariate so univariate is when you take the historical data for house prices and you use that to extrapolate forwards to predict house prices so house prices are the only variable being used to forecast house prices a multivariate approach would use house prices interest rates mortgage availability all kinds of data to forecast house prices so it's just one variable forecasting one variable in a unit so is it fair to say that univariate is simplistic or is that unfair well it's simpler simpler another one i'm not sure understood page 18 3.39 we're talking about where we pressed the natural logarithm and i do vaguely remember logarithms at school but toiling a little bit can you just explain what we're trying to do in here we're saying that are we saying that the question is as the UK market changes is the Scottish market changing in exactly the same way on a slightly different way yeah so what we what we have what well what the Scottish Government we're using for the forecast is the kind of the OBRs forecasts for transactions in the non-residential market but i think it was was october the HMRC published data on the Scottish equivalent data so we now have data for non-commercial property transactions for scotland so given that we now have those two data series we can now we can now look to see to what extent do these two data series move together is it a good assumption to use the OBR forecasts in the Scottish forecast for non-residential LBTT so what we do is we take the two four take the two data series for the UK data and the Scottish data and we see well suppose the UK data goes up transactions go up by 1% what percentage increase in transactions in Scotland should we expect and we should roughly expect there to be a 1% increase in Scotland too therefore using the UK data for Scotland in this instance doesn't seem like a bad thing to do now i mean you end up in the next paragraph say well it ends up saying that 89 or 87 percent of the variation in Scottish transactions can be explained by the UK transactions and then it says since neither estimate is statistically significantly different from unity so 87 89 percent is okay the different from unity is the elasticity so we measure that how much Scottish transactions change when UK transactions change by 1% and that estimate is 0.94 in one case and 1.08 in the other which is not statistically significantly different from one so basically when UK transactions go up by 1% Scottish transactions would be expected to go up by 1% as well right okay that's helpful thank you and going on to page 36 which also mentions elasticity 7.10 you really your emphasis in there i think is there's a huge amount of uncertainty around this is a 3% LBTT i think the new transaction tax because the closest example we've got is the stamp duty holiday of 2008 so you kind of seem to me to really emphasise the uncertainty of all this and then you say bearing these caveats in mind we are prepared to endorse these forecasts as reasonable can you just that that seems a little bit strange to me that we're saying it's very uncertain or we're just saying it's so impossible to know that anything's reasonable yeah well it's a bit like i think we've discussed in the past the bank of england's inflation forecast has this kind of fan charts which they've got the central estimates and then they've got the range of uncertainty that widens as you push that forward in time we're essentially saying that this central estimate is is a reasonable one but that the uncertainty around about it is is really very large okay i'm a final point then moving on to his 8.2 on the following page page 37 talk about the forecasting methodologies and about the challenge meetings you've had and i mean it strikes me i'm very impressed with this report there's bits in it which you know at the edges of my understanding as far as some of the terminology is concerned but you know i'm glad that somebody other than the finance committee is out there challenging the forecasts because i don't think the finance committee could have done this kind of work and that makes me think that if you as the commission were producing the forecasts is there somebody out there that could challenge you and have all these challenge meetings and how would we handle that and i think that that is an absolutely pertinent question if that were to come out of the the bill and in due course um right now and we've said this i think before we have a system where the official forecasts are produced by the government and the commission assesses those if we were to produce the official forecast by capital F from our last meeting we would absolutely you would certainly want our forecasts to be challenged and scrutinized by another body so in order for us to do that i think that parliament might have to think about who would that other body be would a new body have to be created to do that yeah i mean it would i would have thought cause great concern if the commission simply produced the official forecasts and that was it yeah ok that's my plan thanks so much convener it's been quite comprehensive there from the deputy convener so I have a couple of additional questions. It touches on, Professor Leith, your remarks around the holy grail of forecasting, if you will, the ability to predict boom and bust. I guess the question would be if this were possible, wouldn't somebody be doing it in terms of being able to predict those things? Secondly, how much of it becomes a self-fulfilling prophecy, particularly in terms of predicting a bubble burst? If you say in year X that the housing market bubble is going to burst, does it become a self-fulfilling prophecy because you essentially predict that it will happen and therefore the markets react accordingly? There is quite a large literature on all aspects of forecasting, and this is just one of them. There are examples in that literature of people constructing models that, out of sample, are able to forecast key events. There is also lots of evidence of models that looked good in the past, but then, when there is a big change, they miss it completely. It is an imperfect science. There are lots of approaches. My own personal view is that what it is best to do is to have a range of approaches employed so that, if one of them is ringing alarm bells about a possible bubble in the housing market, you look into that more deeply. If the other approaches are not, you try to reconcile them. The Bank of England employs a whole suite of models to forecast the economy, not just one model. I would recommend that you use all the analytical tools that you have available to come at it from every angle. I guess that the question would be how much does that add to both the time element in terms of the time required in order to undertake the forecasting and the challenge element of that, but also is there an additional cost in terms of human resource that would be required in order to undertake that more complicated forecasting methodology that you have described? I think that the last time we discussed this in some detail, what you would probably do is undertake the simpler forecasting methods on a day-to-day, year-to-year basis as your fundamental driver of the forecast, but then you would want to do maybe deeper, more sophisticated, one-off pieces of analysis, which help to identify those turning points or whether there are significant behavioural factors that you need to take account of or maybe do not need to take account of. It is a complementary approach where you do more, what I would describe as more fundamental, deeper economic analysis, to assess whether or not there are issues that you really need to take account of when applying your simpler day-to-day forecasting techniques. That analysis may indicate that you do not need to worry about that issue or it may flag something up as being important. Setting aside the convener's caveat regarding the commission's role and what the remit of the commission will be once the bill has gone through, but on the basis of what is proposed in the bill at present, is that a function that the commission itself would perhaps carry out in terms of its challenge or would that be something that the commission would expect the Government itself to carry out following challenge or to then be challenged and probed by the commission? How would you see that evolving? At the moment, we have the possibility of producing our own technical working papers and we have a number of projects under way that are looking at various issues, which would be our own pieces of research. Depending on what those pieces of research then deliver, we would then take them to the Scottish Government and say that, in light of that research, it suggests that this is an important issue that your forecast, which you own, should ideally take account of. It is then up to the Scottish Government whether or not it incorporates those extra pieces of analysis that we have performed independently. On to the devolved taxes, specifically the LBTT and the discussion that has been had around for stalling. The deputy convener, I think, very helpfully highlighted the slab tax for buy-to-let properties or second properties, which are generally buy-to-let, but not always, that will apply in the coming financial year and the potential for a forestalling effect in relation to those properties to begin to emerge. The two questions that I would have is that you have mentioned that the forestalling would require a longer-term analysis of LBTT transactions to understand how much of the figures were affected by forestalling and how much were affected by a deeper market changes or other external factors. The first question is how long a period would be required for that. The second question would be at what point would you be able to make a reasonable assumption of a forestalling impact in relation to the newly introduced slab tax in relation to the current financial year? At what point would you be able to look and say that that is because of that and not because of something else? In the table 1 that I referred to earlier, that is an attempt, a first-pass attempt, to try to see whether a forestalling has come to an end or not. What we see by looking through the forecast errors is that they were large immediately after the introduction of the tax, but they have now essentially tapered away. That, as a first-pass, gives us some confidence that, by November, the forestalling effects have come to a close. However, we want to look at that more deeply. We will try to look at the microdata. We want to look at the distribution of individual transactions to assess whether or not, maybe at the top end of the market, there is still an on-going effect that is just being compensated for some other effect, some other part of the distribution that is driving those figures. We have some initial evidence. We will look at the issue more deeply. It could well be that, by this point, we should be able to pull together the data necessary to reach that conclusion. Does the fact that there are not figures prior to this financial year in terms of Scottish stamp duty hamper some of that effort? It hampers our ability to look at the mirror image of the forestalling, which is the transactions that were brought forward. I think that we present some evidence anecdotal to some extent on what happened before, based on the evidence that was provided to the previous session that we had. However, it is not comparable with the quality of data that we have post the introduction of the tax. The following question was about the potential impact of forestalling for the next financial year of those properties that would be subject to the slab tax after the commencement of the fault of the next financial year. Obviously, those will not necessarily be easily identifiable because they will not be paying that slab tax, so you cannot disaggregate them on that basis. If we were to see a spike in one or more of those months, how easily would it be to point to that and say that that is a result of forestalling rather than a result of some other market impact? It would be extremely difficult to disentangle. Effectively, you will probably have to look until after the tax has been introduced and see how the revenue figures for that evolve over time. That would probably be more than one fiscal year. You would have to see what patterns came in the future in order to do that. At the end of the day, embedded in forestalling is a conundrum because you do not ever really know who has changed their mind and who has not gone in for a transaction because of the change in tax. You just do not know. I guess that the question is about variability, but you said that we need to look at it over more than one fiscal year. That is what I was driving at. At what point could you legitimately say that we have enough data now to be able to assess what the impact of LBTT rates has been versus taking into account forestalling effects, etc., versus any other impact that might be in play? What you can do is take the forecast for what the new measure will deliver—pre-forestalling and post-forestalling—and see whether or not the out-term data matches the post-forestalling figures. Your assessment is contingent on the forecast itself and the underlying forecast being right, as well as the estimate of the forestalling being right. It is very difficult to disentangle. At the end of the formal part of the report, you conclude on the whole that the commission found those forecasts within the constraints of the available data to be reasonable. Just for clarity, are you saying that the forecasts are reasonable for financial year 1617, or are you saying that the forecasts are reasonable for the whole of the forecast period? We are saying that they are reasonable for the whole of the forecast period, but we would emphasise that the error bands around them are widening as you go forward in time. In terms of the word reasonable, it is for the whole period. It is not just for 1617. It is the forecast that embodies the five years. I just wanted to be clear on that. If we move on to LBTT first, I do not have any questions on non-residential, and I quite like what you have done there with the reverse logarithm and so on. It leads me to no questions on that area. I do have questions on residential, as you might expect. The Scottish Government forecast for the next financial year for residential ignoring the transaction supplement, so it ignored the additional tax. On the purely residential transactions outside of that, the forecast for the next financial year is 295 million which you obviously think is reasonable. I am just trying to get a sense of what sort of a figure in your opinion would be unreasonable, both at the upper end or the lower end, just to get some sense of—you might not have an exact number, but just to get a sense, at an upper end and at a lower end, where are we beginning to get into unreasonable territory? I think that my assessment will go first. You could, but it might be going to say the same thing. For me, a large part of what I would then define as reasonable is contingent on the method that has been used to generate the forecast. I have gone into the spreadsheet which details all the underpinning assumptions and all the technical modelling aspects that underpin this forecast. I go through all those assumptions and the way that modelling works. I am looking for things where that is obviously inconsistent with data and that is a bad assumption to make. I just do not believe that assumption. Those are all the things that would lead me to believe that that forecast, as a result, was not reasonable. The whole scrutiny meetings are going through those methods with lots of detail, giving very tough challenges. Why are you doing it that way? The data does not suggest that you should be doing it that way. It justifies why it is done this way. It gives us the evidence that explains why it is done that way. That is what underpins reasonableness. That is an important question. If anyone assumed that what we were doing was looking at the output numbers and saying that is a right number, that is a wrong number, that is better, that is worse, we are not looking at the outputs, we are looking at the inputs. That is a really important distinction to make. That is what we are making our judgments on. What is the basis, what are the factors and therefore what are the numbers and the time series, whatever they are, that are going into each of these forecasting models. We are not then saying that that number is the right number. We are not making that judgment. You are not coming down on the right number, but if you go back to the fan chart points that you talked about at the Bank of England, I am pleased to hear that you are playing about the model, you are looking at all the assumptions, that is what I would hope for and expect. However, in doing all that, can you not get a sense of what an unreasonable number would be at a higher or lower end, or is that simply impossible? If the forecasters failed to include some important factors as they ran their model, we would likely say that this is unreasonable because you are not giving us enough evidence to say that that is legitimate. The number is just the output of the sausage machine, if you will. We are looking at what goes in. Given other examples, it is going back to the report from last year. Last year, when buoyancy was being forecast, as I think we have already discussed, it took the long-run average and then it adjusted that depending on the forecaster's view of the general state of the economy, but not in a way that formally linked that measure of the state of the economy to the adjustment to buoyancy. The adjustment that was made pushed the increase in buoyancy to the kind of level at which it would be one of the largest increases in buoyancy that we would have seen in the limited span of data that we had. We described that as being very optimistic. That was on the cusp of just about becoming unreasonable if it had been pushed any further than that. In that sense, we would reach a limit at which point we would say, no, that is just unacceptable. Stigging with residential LBT, I have read through all the comments that you made about LBT on a residential sense and you make a number of areas for development and a number of concerns. When I take them all together, firstly, you think that there should be a multivariate approach, then you think that there should be an examination of the distributional changes. You then think that, to your usual words, you are increasingly concerned that there is no behavioural analysis whatsoever on the primary part of LBT. You then raise some questions about £188 million of £545 million coming purely from fiscal drag. Four concerns, two of them I have to say to me seem quite major, but, despite all those concerns, how can you then sign off the residential LBT as reasonable, given that you have used the term increasingly concerned? In terms of economic theory, you would expect there to be a behavioural response to relatively high tax rates. Given the fiscal drag effects that we document, more and more transactions are being pushed into that part of the distribution. The issue is that we do not quite know how big those effects are. Are they significant, are they small, are they something that we really need to worry about or are we worrying about nothing? There is not enough evidence to tip us against saying that the forecasts are unreasonable at the moment. However, we do wish to look at this and gather the evidence that would then say that, while no, those forecasts really need to take account of this, or that it is not such a big deal as we thought. I suppose that the reason I asked whether it pushes you towards unreasonable is this. When I read the Scottish Government's devolved taxes forecasting methodology paper, when they look at the supplementary charge on LBT, the bit that was announced at the budget, they have looked at the behavioural impact. They accept entirely that there will be a behavioural impact. Their projection for that part of the tax is that they will collect £23 million next year, but they reckon that £23 million has been affected by between £8 million and £13 million due to behavioural impact. On a £23 million tax collection, that has changed by between £8 million and £13 million because of a behavioural impact. That is quite a huge slice of it. My concern is that, if that is how much that £23 million is affected, what sort of effect could there be on a £295 million? If it is of a similar magnitude—that is just a big if—but if it was of a similar magnitude, in my personal view, those assumptions or those forecasts would be unreasonable if you are just assuming no behavioural impact. What needs to happen on behavioural impact? You mentioned it to the Government last year. You have mentioned it at every meeting that you have been at from what I can see. You are now using phrases that are increasingly concerned, but they still say that we are assuming that there is no behavioural impact. At what point does that become unreasonable? In relation to the additional measure, first of all, it is a very specific segment of the market where you would probably expect behavioural effects to be far stronger than the markets as a whole. They are slightly separate bits of the market. We are hoping that the Scottish Government will give us a response in the near future to our recommendations, indicating how they plan to respond to those. I move on to non-domestic rates. I appreciate that Professor Hughes-Hallot is specialising, so there may be other comments that he wishes to make in due course. From what I can see, we are only getting a one-year forecast for non-domestic rates. Is that correct, or have I missed something? A five-year buoyancy forecast is what we evaluated. It takes account of the cyclical pattern that I discussed earlier, so what we looked at was a full five-year buoyancy forecast. On the actual numbers, I can only say a one-year's worth of numbers in the budget. Have you seen five years' worth of actual numbers? A remit tells us to focus on buoyancy, so buoyancy is the thing that we have been evaluating. I am not sure if we saw the revenue implications of those buoyancy forecasts or not, but I cannot remember, to be honest. I appreciate that your remit is different from that. I was just wondering if I literally missed it somewhere, but maybe not then in that case. Your remit is looking at buoyancy, so it is harder for you to comment on the numbers, but in terms of patterns, if one looks at the budget itself, the projection or the forecast for non-domestic rates is lower for the next financial year, in 2016-17, by about £30 million than it was for 2015-16. Given that the economy is growing, given that there are projected increases for the other taxes that you have looked at, although you obviously do not look at the exact numbers, does it not strike you as unusual that non-domestic rates in cash terms are projected to be lower in the next financial year? I wonder if that was discussed with the Government. The reason for that is the cyclical pattern that I discussed earlier. In previous years, there was no adjustment made for the cyclical pattern. The data span was not long enough to allow us to identify that pattern, but now that we have found it to exist, the Scottish Government has adjusted its buoyancy forecasts and, therefore, the non-domestic rates income to account for that. Given the position that we are in the revaluation cycle, that would reduce the revenues that we would get at that point in the cycle. To me, that might have reduced it against the initial forecast, but given the rate of economic growth, are you saying that that buoyancy change could effectively be bigger than the economic growth and therefore in cash terms you collect less? The buoyancy forecast does not take account of economic growth, so that was another issue that we have discussed. Previously, we were adjusting it, but in ad hoc fashion, given broad brush evidence in the state of the economy, what we are asking them to do in our report, what we are asking Scottish Government forecasters to do in our report, is that, once we are completely controlled for the cyclical pattern, we then want to squeeze whatever remaining information that is in that data series and relate that to the economic determinants of buoyancy to take account of those kind of factors. If I wrote it down correctly when the cabinet secretary gave his statement to Parliament on the budget, he said that he was increasing the large business supplement of non-domestic rates and he thought that that would bring in an additional £130 million. Were you asked to look at that at all or was that outside of your... Inside of our remit, yes. Okay, thank you. That's all I'm going to do with that. Into and for by Jackie. Thank you, just for a few short points really. In paragraph 121 on page 4, you discussed the challenging meetings that you have. Is that going back to the kind of relationship that you have with the Scottish Government and your independence? Is that something that, in time... Am I right in assuming that at the moment that's you who are doing that? But in time with staff and so on, is that something that would change? Well, at the moment, the fiscal commission is present and we have two part-time research assistants as well who attend the meetings as well, largely in our observational capacity. And to take away some work assignments following the meetings? Yeah, just so they know that the discussions that went on and that can inform the work that they are doing for us. And when we've taken evidence from the cabinet secretary, he has always, well, two meetings at least, been absolutely adamant that whatever changes you propose to the budget or to the outcomes that are being forecast that he will accept that. Is that what you understand it to be? So whatever you're reading and seem to be reasonable in the figures that you produce or any changes that are made, these changes would be made and presented by the Scottish Government? I think our understanding is, I believe, what he said, looking at some of your transcripts, is that he would want to go to Parliament with a draft budget only when the budget was seen to be reasonable, because now I interpret, why would you bring a budget that was not seen to be reasonable to Parliament to discuss? It doesn't make any sense. That's how I understood his thinking. I may or may not be correct on that. What we are not doing is advising or guiding. We're not doing that kind of work. So all we can do is go in and say, give us the evidence for why you've included these numbers and why you've approached this particular instrument this way and why you haven't looked at such and such, or can you take a look at such and such and come back and tell us whether that makes any difference. At some point, we think, well, they've provided adequate evidence and they've followed their model and so forth. That gives us that judgment of reasonable or not. If, for instance, we were talking about this yesterday, a forecast model might be or the forecast might be judged as being reasonable and then perhaps the next year they would stay with the same model, but a major policy change might actually knock it out of that reasonable space. So we would have to speak to that and again challenge them. That's what we do. We don't say at the end of the day, these are the right numbers. Again, it's this difference between the input numbers and the output numbers. As you might also emphasise, in this series of challenge or scrutiny meetings that we have with the Scottish Government forecasters, at no point do we say, that's it. You've done enough by this point to get a gold star and everything's going to be judged as reasonable. We're critical all the way through. We wait for the final forecast to come out and then we write our reports. I think that I said this earlier today, which is that we don't come to a point of agreement with the forecasters. We don't say, fine, we'll sign off on this. We continue simply to challenge at the end of the day. They then create the forecast, if that's helpful. Lady Rice, you mentioned earlier in this response that you didn't come with new ideas or anything. You were simply reacting to the information that you're given at the challenger meetings. In answer to Mark McDonald earlier, Professor Leith said that there were a number of issues that you were thinking about or working on and whether the Government would accept those other issues. My next question is related to that, because it seems to me that one of the biggest change—well, not to me, but to everybody—is the biggest change that's coming down the line as the outcome of the Smith's commission and eventually Europe. How are those issues dealt with in your thinking in terms of Government thinking? Two parts perhaps to that question. I don't recollect saying that we brought nothing new to the table—I mean, the best and cleven paper, which is already just discussed as an example, that was something new that was brought. A lot of the challenge, that's all new to the conversation, so I'm not sure what I was saying at that point. Yes, of course we do, but that's the nature of challenge. We're looking for areas that may not have been addressed or thought about, or sometimes the challenges explain to us what you're thinking as in what goes into it. That's one aspect. We've been in terms of the second part of your question, and I'll give Campbell time to think of more response as well. We've been quite careful to consider and look closely at what might be the future, but we have a present right now, we have a remit right now. What we need to do is meet the exigencies of that remit at this stage, and we can't start developing a report that then starts speculating about what the legislation will mean or what the outcome of the Smith proposals will give to us. We know that there will be changes, and we are starting to plan for those and think about them, but that's really separate from the job that we have to do today. We've felt it was important to focus on what you are expecting from us and to do that as well as we can do, and not conflate those. Your question is correct if the implication is that there's a lot of change to come, and we need to be on top of that. Is that something that you can do independently, or would you be asked, for example—I suspect that lots of people are going to want to know what the financial economic implications are for Scotland in or out of Europe in the arguments that have been made—is that something that the Scottish Government would charge you to do? Assessing the cost and benefits of leaving Europe would be outside of our remit at present. Personally, given the position that I now have in the Fiscal Commission, I'm undertaking quite a wide research agenda myself, so I'm undertaking a number of projects that directly relate to what we anticipate coming down the line for the Fiscal Commission. With colleagues at the University of Durham and a PhD student in Glasgow, we're starting work on building a macro-econometric model for Scotland. We're looking at dynamic laffer curves, so how variations in tax rates affect revenues. We're looking at those calculations for Scotland as well. With another colleague and another PhD student, we're looking at big data analysis of newspaper articles to build uncertainty indices for Scotland vis-à-vis the rest of the UK and things like that. There's a whole bunch of projects under way that hopefully will be of use to our future scrutiny work. There may be others as well, because looking to the academic community is probably a first place that might look for some of those answers. I was curious to your response about when reasonable becomes unreasonable. I absolutely accept the distinction that it's not the figures, it's the method by which this is all assessed. I enjoyed reading your report from last year. I enjoyed reading your report from this year. You're consistent in asking for data on behavioural responses. You're very consistent in asking for that for residential LBTT. In fact, your recommendation is framed in slightly stronger language. I don't know whether I'm implying a frustration that you haven't received it yet or not, but I'm curious as to when you think you've given enough time for the Scottish Government to respond to that. As you described, we all can recognise the behavioural response arising from LBTT and for stalling and OBR. We're now going to get an additional behavioural response from the additional LBTT. It seems as if we've just stuck our finger in the wind to assess that. I'm curious as to when you will become increasingly impatient. I think the forecasters would concur to say that we have been more impatient this year than obviously in the previous year. If you look at their appendix, page 21 of the forecasting methodology and which the Government submitted to you, there they talk about the recommendations we made for the 15-16 draft budget and their response to those. There hasn't been much response to those, and we know that. We've had discussions about that. We know that we see the behavioural factors in particular as being quite important, particularly now that we're in a five-year forecast time horizon. That's what creates the urgency, not that we're personally getting impatient with others on a personal level, but that the forecasts are now not two years but five years. We need just better texture to what's coming out. We would hope to see some changes coming in the next round. That was the language that Professor Leith used, which was hope. Have you got more than hope? You're quite right that the action plan doesn't really tell you much about what they're doing to take forward that. In fact, there's no mention of behaviour under LBT-TT residential action, so I'm curious as to when you get beyond hope. It's up to the Scottish Government to respond, but what I would add to what Susan said is that, as our remit becomes clearer and as our own resources come on stream, we will start to do the analysis ourselves. If we think it's an important issue, we'll look at it. If it turns out to be in our judgment, we then that is a challenge of a very major sort and becomes more urgent because we've got the evidence. That's very helpful to know. I thought the minutes were extremely helpful in describing some of the discussions. What I was less clear about is, for example, in August, you asked for something quite specific on LBT-TT that was in relation to seasonality. You repeated the request in September and I didn't know whether there was anything from the November minute that indicated you got it. I'm assuming you did, but I wondered for the sake of clarity if somebody reading through not being present at the meetings whether that could in some way be recorded. Maybe a list of action points and when they were resolved. Can I look at the helpful comparison between OBR and Scottish Government forecasts in relation to LBT-TT, both for residential and non-residential? Whilst Mr Choate diplomatically didn't want to comment on whose forecasting was better, I note that their forecasting for 2016-17 is considerably lower than the Scottish Government's. 42 million is a substantial amount of difference in the residential forecasting. Is there an explanation for that in your view? OBR numbers incorporated more of the recent outturn data when it came to LBT-TT both residential and non-residential than the Scottish Government did. The Scottish Government also smooths the past few years of non-residential transactions and formulating the basis that it projects forward because of some variability from year to year in the non-residential market. That would tend to reduce things by smoothing. However, as Robert MacDonald indicated, those are not statistically significant differences given the uncertainties attached to those forecasts. They are much of a muchness. I just look at 42 million, and if we have to forego that from the budget, it is maybe quite significant in monetary terms. In terms of you said that the OBR included outturn data, is that not key in measuring what is likely to happen in the future? I think that there are different approaches. It is the part-year outturn data. The Scottish Government forecasters for landfill tax used the two quarters of data that we have on landfill data, and that is the base on which the forecast is then pushed forward. For the LBT-TT forecasts, they used the last complete year of outturn data and not the part-year data that we have been discussing in our previous session. One of the recommendations that we make is that, particularly in a year like this, where a large part of the year's outturn data has already been revealed, it might be useful to update the forecast in light of that outturn data. I was not quite sure where Gavin Brown got his figures from. At the top of page 11, the Scottish Government is forecasting revenue of £45 million to £70 million without accounting for behavioural change and for stalling. That is the Scottish Government's starting figure. The fact that it is now down to £17 million to £29 million is of considerable concern because of the drop. I accept all the analysis that they have done to get there. Does the budget include the lower figure or the higher figure as to revenue generated? The lower figure is the ultimate figure. £17 million to £29 million is what we would find in the budget, not £45 million to £70 million. Two more points, convener. I will be very quick. Non-domestic rates. At paragraph 5.14 in your report, you talk about is not your job to report on the scale of the forecast errors. How big are the forecast errors, just out of curiosity? They are relatively small, because the buoyancy is essentially a forecast of the increase in the stock of rateable value properties. The revenue itself is generated by the stock, not by that increase. You can make pretty bad forecasts of the increase, but the stock is fairly constant, so the forecast error in terms of revenues is usually relatively small. That is helpful to understand what you meant there. I hear what you say about revaluation appeals happening at the beginning of a revaluation process, but is it not the case that, if you buy a property for the first time, you have six months in which to ask for a revaluation and, therefore, throughout the year, not just at key points, you would have revaluations occurring depending on the number of house sales that there are? The revaluation data that we had access to suggested that those effects were relatively small, but the revaluation cycle itself was a great deal more significant than that. Finally, on the Scottish rate of income tax, it was tantalisingly mentioned on page 57, I think that was your minute of the 23rd of September, as a discussion paper 6, and not mentioned at all in your report other than in the minute. I am curious what you see the Scottish Fiscal Commission's role to be, given that a lot of the assessment is done by the OBR. We will have a role, and we have been given some briefing on the nature of the Scottish rate of income tax. We had that early in 2015, and we have joined challenge meetings hosted by the OBR in talking about this, so we have spent some time when we could in this past year becoming more familiar with the actual tax. Our job is, as current, not future, but current, to scrutinise or assess forecasts made by the Scottish Government. If the Scottish Government produces something in relation to SRIT, we will have a role in relation to that forecast. That is on the capacity for the models that have been developed to take account of variations in regional economies. I am going to be quite parochial here, and Lady Rice, you know the north-east economy well. That is going through a particularly tough and very different time from the rest of the Scottish economy at the moment. I imagine that we have an impact on issues such as LBTT. To what extent, given the fact that this is at a very major difference in that economy, has a big economy in Scotland as an impact across the country, to what extent are the models able to take account of that kind of scenario at the moment? The current forecasting models do not have any regional breakdown at all. For example, the committee last year had evidence that the Aberdeen housing market will not return to its position last year for five years in terms of non-residential property. That is a massive impact that we have heard as well. If that comes through in the Alton figures for this current year, will that be able to be factored into models for the future? It seems to me that it could have a significant impact in terms of the results going forward. The current forecasting approach implies the distributional model of housing transactions across various price bands, but that is for the whole of Scotland. You could construct a similar distribution for a particular region that you thought was going to be behaving differently from the national average and was going through significant changes and subtract one from the other in producing the forecast. There are potentially ways of incorporating such regional effects if they were felt to be imported. The current forecasts at the moment do not take account of what is happening in north-east Scotland. The fund is quite surprising in one sense, given that we know what is happening. There is evidence there about the number of transactions dropping. I guess that I would feel insintively quite surprised if there was not an effect on the numbers next year. I appreciate that point. Perhaps we can take a way to consider it. The other related point is that the additional properties, particularly by-let market, are particularly big in the north-east. We need to think about that new tax, possibly, from that perspective. We will take that away. Thank you very much, Richard. That has concluded questions for the committee members. Some more just want to ask just to finish off the session. In terms of Jackie's question, we talked about out-term data. In 2015-16, it does not feed into the forecast for LBTT, but it does for landfill tax. I think that you said that it appears in the report, but I do not see anything in the report on that. Did I pick it up wrongly there? An explanation as to why that is a situation? It is a choice in the part of Scottish Government forecasters, but it is a recommendation that we make in the report that, particularly in years when a significant span of out-term data exists for the year that is factored into the forecast. You clearly believe that it should. That is the one thing that I always wanted to clarify. In terms of the annex 1, which was touched on, I say that it is a recommendation to the Scottish Government that it has investigated developing alternative models for forecasting house prices and transaction volumes. Examination of the requirements to develop new techniques suggests that it would take a significant period for a Scottish Government economist to produce outputs that are sufficiently robust quality standard. As such, the view is taken that forecast using these methodologies could not be utilised within the budget cycle with any degree of assurance. There is a potential to develop such methodologies over the long term with a view to utilising them in a future forecasting cycle. What kind of time period are we talking about? It is obviously a concern that it would take a significant period to produce output to a sufficiently robust quality standard, does it not? Is the Scottish Government's response in response to us pushing on this issue saying that we could look at this, but it would take a while to develop and build the expertise in house, is the word not there, in order to do this. It could give you a sense of that time frame, but at the beginning, in my opening remarks, I suggested that, in terms of what worries us or the concerns that we have, one of them might be that the Government needs to enhance its forecasting capability. That might cover the subject. You are not concerned that there is no timescale in order to produce such output to a sufficiently robust quality standard, as I have said? Yes. Of course, we have only just seen this report come out with the papers, so we have not had further discussion with the forecasters yet about what they mean. How soon would you want to be able to see that and how soon do you think it is practical to be able to achieve that? Research is always hit or miss whether it works out the way you are hoping it works out. Is this how long a piece of string looks to be the kind of response there? It should not take years and years, the initial round of modelling that we are looking for. We would like work to start on it. I think that that is maybe the most important thing. Yes, the knowledge that there is an issue. I understand that. Obviously, there is one thing that you want to acknowledge. You want to be able to deal with it. I am not supplementary on your point, convener, because I was not quite sure whether I got this right, that you have only just seen that response to your recommendations from last year's report. We have only seen this report. This table, yes. Obviously, we have had discussions about this issue in meetings and so forth, but we have only seen this report just now. I just make the observation that it might have been much more useful if you had seen it much earlier and were able to then challenge that response, because it was of course for last year. However, we have had those discussions in our challenge meetings, so that has taken place. This is the forecaster's summary of their position here. Table 5 of the Scottish Government's methodology paper shows non-residential land-building transaction tax rising by £10 million annually to 2016-17 in 2020-21. However, there is an increase in the forecast of £74 million over that period. I am just wondering if you know why that is. Sorry, which table is it? Table 5. Table 5 of the… Sorry. Is it why one tax is why the revenues from one are increasing more dramatically than the other? The figures seem to add up, basically. This one is increasing £10 million. The reason why there are differential trends between the two is that the residential one is based on this probability distribution model, so that, as prices rise, you are pushing more and more houses into higher tax bands. Those figures assume that you obtain the revenues from that. The non-residential forecasts going over the five-year period are to take the original tax base and raise it by revenue and prices without factoring in any of the fiscal drag that dominates the residential forecast. I know that it seems a bit odd that there is a £74 million increase in one year in the forecast. We are seeing only a £10 million rise increase in the methodology paper. Those two figures do not seem to add up. I am not sure which two figures are you talking about. The seven-year period is from which… 15, 16 and 17, there is an increase in the forecast of £74 million, but Table 5 of the Scottish Government's methodology paper shows non-residential IBT rising by only £10 million annually. Do you know the jump from last budget forecast to this year's forecast? There are various factors for that. It seems that there has been a huge leap. I misunderstood what you were looking at. What the Scottish Government did before was to smooth the tax base for three years of out-term data before beginning the forecast, but it did not take account of the fact that you would expect prices to be rising over that period, so it was not really aggregating like with like when they were doing that smoothing. That would impart a downward bias to the forecast. They removed that downward bias in the new forecast. Also, prices and transactions are a bit higher than they were anticipating when they did the original forecast. Those two things combined result in the increased forecast. That is very clear. In your report on the draft budget 2015-16, you recommended in relation to non-residential land-buildings transaction tax that new data sources should develop as a high priority, and since then, HMRC has begun to publish data on commercial property transactions to Scotland. Does the existence of the new data mean that we can now develop a Scottish model rather than relying on UK-level transactions for the non-residential forecast? There is a reasonable span of data, so you could start to do some fairly straightforward modelling work-up based on Scottish transactions rather than using UK transactions, which is one of the recommendations in our report. Is there any follow-up point that you want to make? Thank you. We will wind up the session there. I would like to thank you very much for your contributions this morning. We agreed earlier on to move into private session, so I will have a one-minute break to allow the members of the public witnesses and the official report to leave.