 Good morning and welcome to the 30th meeting in 2015 of the Finance and Committee of the Scottish Parliament. Can I please remind everyone present to turn off all mobile phones and other electronic devices? Our first item of business today is to decide whether to take item four in private. Are members agreed? Members have indicated their agreement. Our second item of business is to take evidence on the devolved taxes from two separate sets of witnesses. panel will focus on the land and buildings transaction tax. I therefore like to welcome to the meeting Kennedy Foster of the Council of Mortgage Lenders, Philip Hogg of Homes for Scotland and Chris Stewart of the Scottish Property Federation, who was here last week and another guy. Members have received written submissions from each of our witnesses, so we'll go straight to questions from the committee. As always, I start with some opening questions and then we open out the session to colleagues around the table. In no particular order, which support will I start with? I'll start with you with your own name, Philip. Basically, you've expressed some concerns in terms of your own submission, in terms of the impact of the rates and bans. You've said that the changes have given small benefit to a majority of people purchasing a new home and allowed for a smoother pattern of prices in the market instead of having an artificial step at the quarter of a million mark, but then you're going to say that the revised rates are having an adverse effect on the sale of properties in the middle to the high end of the market, although that is, of course, based primarily at this stage on anecdotal evidence. I'm just wondering if you can talk to me a bit more about that. You've said that customers have either requested that transactions be brought forward to before April are delayed until after the introduction of LBTT, so I just want to not only just talk about that, but also about the scale of the delays, et cetera, or the transactions brought forward, as you understand them. I recall sitting in front of this committee, I think it was back in January, February time, when the rates were just announced, and I think at that stage the feedback that we'd had from our members was concerned that the rates on the higher value end of the market could have the potential to dissuade people from transacting, which would have obviously had an impact on the total tax take, and B might have caused stagnation. I also recall mentioning the fact that a fully functioning market with movement up and down the chain is absolutely key. The concept of the ladder of people moving upwards and downwards is quite important. The feedback that we've had from our members in advance of this particular meeting has sought just to confirm that, and there's been no comment back from our members that the concerns have not been found. The impact of the tax at the top tier levels, the ones where the higher tax bands come in, has been quite significant. We're hearing anecdotally a number of our members saying that sales have either been stalled or have not gone through, and we've had feedback that I've covered off in the report showing how the delays of transactions have impacted and some statistics there showing how there was real activity to try and the higher value properties to get their sales completed before the new tax came in, and obviously then a delay afterwards. What we also hear anecdotally is that there's been lots of pressure on developers to help customers to absorb that tax by forms of incentives. Some developers are able to do that, others not, but there's a question about the on-going viability of that assistance. I think also what we've detected is particularly in the north-east, a combination of perfect storm conditions with, it's well known that the price of oil and gas has tumbled, and that's had an impact on employment in the area and also an impact on property prices and the market in general. A combination of the uncertainty in the north-east, the new higher tax bands and also the loss of help to buy has combined together to create a very, very difficult trading conditions in that particular part of the market. I also thought this was quite interesting. I saw this extract in the Herald from two or three weeks back and I'll just read out something that particularly caught my eye from the editorial on the opening page, where it goes on, well it starts to say that LBTT is becoming interesting. This week revealed news that business is booming for an upmarket Edinburgh bathroom company as owners in the million pound plus price bracket up to spruce up their homes rather than move. Now I'm delighted for the bathroom company Mr Ronnie Scott, but what that is, is I think in a nutshell, it sort of brings to life behavioural reaction to the tax. Now whilst I'm not having, you know, coming forward and saying people a million pound properties need assistance or whatever, I think what is important is that properties or purchases at that type of level on the whole can be largely discretionary. There are probably lots of instances where people don't have to make that move, don't have to make that purchase. Just to sort of show you the impact that that might have, let's suppose someone who was considering buying a £750,000 property but instead decides to have their bathroom upgraded, that loss of tax would require 81 additional sales at £175,000 to make up that tax. So 81 additional sales to just to stand still because that person decided to have their bathroom upgraded instead. And I think that that brings into focus that sort of high dependency on the high tax levels, which we think is not only risky in terms of tax tape, but we also think shows that we would say disproportionate impact on those higher property levels. And we're therefore I think going back to our early submission of a more smoothing of the tax bans would be far more sensible in terms of the way the tax is allocated. Okay, thanks very much for that, Phillip. Kennedy, in the Council of mortgage lenders, you've produced a short but excellent report basically on this issue. It seems actually in some ways to contradict a lot of what Phillip was saying, not necessarily at the high end, but what you've basically said is that there's a 39.2% increase in the number of loans in 27.5% in value in the first quarter of 2015. Within those figures there's 8,000 first-time buyer loans, an increase of 50.9%, and 5.3% in the first quarter of 2015. I just want to clarify though, are you talking about the first quarter of the current financial year or the first quarter of the calendar year? I'm talking about the quarter to the end of 30 June, in fact. We just announced this morning our lending figures for the quarter to the end of September, and they will show further growth in the mortgage lending market in Scotland. The number of loans granted for house purchase in the quarter to the end of September is 18,500, with a value of £2.4 billion. As far as first-time buyers are concerned, the number is up to 8,500, and the amount is 920 million. That could be attributed to a number of things. Obviously, the mortgage market at the moment is quite competitive. Obviously, we're still in a very low-rate interest in environment and potential interest rate rises look like they're now being held off into 2016. Perhaps there is consumer confidence to take out mortgages at the present moment. I'm not really involved in the day-to-day sale and purchase of houses, but I do from time to time speak to estate agents and others, and I would echo what Philip said at the high end of the market. When you speak to people who are involved in that, there certainly were transactions brought forward to BTL, BTT coming in, and there has been, since then, compared to the likes of last year, a much lower level of transactions in the higher end of the market. Whether that will return to more of a norm remains to be seen. If you looked back at the history of stamp duty land tax, when changes to the tax regime were announced in advance, it always resulted in distortions to the market. The interesting thing is whether the higher end of the market begins to recover going forward. Philip says that there is anecdotal evidence at the moment of folk not moving and upgrading their properties in whatever manner they consider appropriate. We've gone on to say that we believe that it will be some time yet before the full impact of LBTT in the residential property market is understood, but the first quarter following introduction appears to have been a positive one for the residential property market in terms of mortgage lending. On the lower end of the market, I would suggest that £325,000 or less LBTT changes have been positive, but your concerns are at the level above that. Chris, you more or less agree with that in the last bullet point in the first page of your excellent report. You have said that what you are suggesting is that the Scottish Government should increase the 5 per cent rate threshold to half a million and abolish a 12 per cent rate, which we believe is making a little positive contribution to LBTT revenues. You go on to say that the distortion has been replaced by a new distortion at the point where a 10 per cent rate begins. Yes, thank you again for having me along today. We've got some direct evidence that has been carried out very recently. On the taking-your-point about the 12 per cent rate, I think that the point there is that it is not generating tax take, so what is the point in having it? Our numbers show that, over £400,000 above, there has been a 22.5 per cent decline in sales, and that is quarter on quarter 2014 compared to May 2015, so that is a like-for-like comparable. In terms of the million-pound plus, it has actually been a 54 per cent reduction in sales in that part of the market. Now, this is not about, as Philip says, feeling sorry for people at that part of the market. It's about stopping the market from functioning properly, which is the key point. People need to be able to move up and people need to be able to move down. If there's a whole segment at the market that's static, and in terms of the percentage that's relied upon above £325,000 for LBTT, it's something like 74 per cent of your tax take is above that level. If there's a 22 per cent to 25 per cent reduction in performance in that part of the market, then that's going to have a fairly profound effect. I suppose that what we're trying to advocate is a more progressive system, which introduces an interim band and raises the 5 per cent threshold up. Overall, you should get the best of both worlds. You should get an increased tax take, and the market should perform better. I'm going to stick with you for a minute, Chris. Obviously, you've got a real interest in the commercial end, and you say that the move to a progressive rate of taxation with less radical change in rates and thresholds is active to make the change in tax structure less marked. That appears to have contributed to smoother conversion from SDLT to LBTT, supported by enhanced revenue for the Scottish Government, in line with strengthening the wider economy. Do you want to talk us through a wee bit more about how you feel the commercial sector has been affected? I think that because the 4 to 4.5 per cent market always prices in that tax level. At the point of transaction, the way that it works in the commercial market is that it is deducted from the value of the asset, so it affects the seller. A half per cent change is not in terms of the commercial market, but it hasn't been material enough to see a wholesale change in activity. I suppose that what we have to guard against is the backdrop of the fragility of that market. Our take, Aberdeen, for example, has been a huge part of the Scottish commercial property market activity. Again, our work that has been carried out shows that the value of transactions in Aberdeen for the previous quarter fell from £201 million to £50 million. Because of the downturn in that market, it can have fairly profound effects on tax take. A reliance on the commercial market, I suppose, when it is still fragile, is maybe not the way to look at it. We still need to get the residential market performing at the same time. I want to stick with yourself. It is about the role of Revenue Scotland, Chris. We had them in last week, so it is perhaps unfortunate that the timing of that is because we could perhaps have some of your questions to them at that point. You have said that there is a feeling that the guidance and administrative support side of Revenue Scotland remains weak at this stage. Members feel restricted in being able to voice criticism because they need to have an on-going relationship with Revenue Scotland in order to save their clients' interests. Does that give you concerns on reassessment? Again, it is just about confidence in the market and the ability for commercial developers and investors to be able to plan and to make sure that they understand the mechanisms behind how Revenue Scotland will work. We are keen to see further development of that, and we are keen to make sure that there is a bit more transparency generally. Philip, you have said that you are concerned about expressing the approachability of Revenue Scotland. You have said that it was noted that Revenue Scotland will not necessarily follow LHMRC guidance. To keep that into perspective, we are talking about one or two comments here. Across a broad sample, it may be an isolation, but I can only relay them as they are reported back to us. I am looking at the feedback that we had here and comments that there were indications early on that Revenue Scotland will be more approachable regarding inquiries. However, we are hearing from a number of colleagues that this has not been the case in practice. Members were hopeful that it might be easier to discuss complex LBTT cases on a sort of not informal but a sort of habit conversation, but it is reported to us that it has not been possible to speak with anyone on the phone informally. It seems also difficult to obtain feedback by email. It seems that the remedy is to seek a formal opinion from Revenue Scotland, and this process is reported to us to have been quite slow. It may be early days, teething problems or whatever, but I can report as advised by us. Again, keeping that in perspective, that is just one member that has reported that specific issue, albeit that they undertake quite a number of transactions with Revenue Scotland. Thank you for that. Kendi, you say that there are no noise issues in terms of collection and administration, but to go back to paragraph 6 of your report, you say that we believe that the full impact of LBTT needs to be better understood, and then you are going to talk about long-term impacts. Given what you have said in your report there and what colleagues have said today, are you of the view that there should be changes to rates and bans for residential transactions for 2016-17 at the stage, or do you think that we need to wait to see if further evidence comes in before any changes are made? Where I would come from on this is that, if you look at the history, but as I said earlier, particularly of SDLT, when there have been tax changes announced well in advance, it does lead to a short-term distortion in the market. The impact, as we have already identified, is really at the higher end of the market. It is whether that part of the market will recover to a more natural level over a period of time. If there is one lesson from this, I do not think that you should announce changes in tax regimes well in advance, because people do actually take advantage one way or the other in terms of those changes in the tax regime. It does not distort the market. I think that we are only six months into this new tax regime. I think that you have to at least see it for a full year. You are also in a residential market. I do not know so much about the commercial market. It is very cyclical in terms of your beginning now to go into the quiet period in the housing market with Christmas new year, then also January, February the weather does not help people looking for houses, then it begins to pick up in the spring, then it will die off a bit during the school holiday period, then pick up again after that. It is very much a cyclical market as well, and we have not been through all the cycles as well. That is very helpful. We have now joined by Jackie Baillie, so the committee is here at full strength. I am now going to open out questions to the committee. The first person to ask a question will be Jeane Timfor by Gavin. Thank you, convener. I am following on from one of your own questions. When you talked to Chris Stewart about the 22 per cent difference differential between the property sales at the higher end, I seem to remember possibly something written in the same journal that you cited earlier, Mr Hogg, about the fact that people did have advanced notice of the 12 per cent increase. In fact, that 22 per cent differential is possibly asking you if that might be a bit artificial. We would need to compare perhaps the last three or four years to get a feeling for whether the increase, as I believed it was, in the previous year, in advance of the tax being imposed is, in fact, true. The issue is that, when you look at the market, there will be certainly short-term advancing of transactions when there is a tax change, but it will not roll through the entirety of the rest of the market. People who are thinking of selling in September do not just advance and sell in March to hit the tax point. You will see, which you did see in the figures, a short-term distortion, so in April and May there were clearly less, but then the market would turn to the profile that you would consider to be normal. The point is about a properly functioning market. All aspects of the market need to function for people to be able to downsize to, once they have had their families to be able to move into smaller properties, for families to be able to move in higher properties. The threshold of where it is affecting the market is not just at the million pound market, but it is right down to your tax point at £325,000. It is hitting that main band of tax takes, so it, to me, seems very much out of kilter. Just as a sentiment point, one of the other things that has been picked out is that, take the million pound sales, one of the things that I thought was quite telling, 2014-17, 27 per cent of buyers were international, and that now in 2015 is 18 per cent. Clearly, the tax structure, that 12 per cent, is putting people off irrespective of whether or not it has a meaningful tax take. It is stopping people from investing in Scotland, so the whole tax structuring goes to confidence about why to put your money into this country. That, to me, is a critical point about how the market is perceived. Just as a supplementary to that, we have referred to the oil industry, the downturn in the oil industry and the other general economy of the nation. I would suggest that it would not be right to place it all on the increase in tax. Do you agree with that? No. We are advocating a balanced, progressive system. We understand the need for a new LBTT system. There is no doubt about that. The old slum system did not work, but other anecdotally, take the commercial market, for example, in Edinburgh, the Atria building that is just being sold to DECA, the German Fund. That, I believe, had seven bids, none from a UK institution, all from international capital. If that was in Manchester, there would have been 20 bids for the asset. There is a regional distortion in our market, and it is about confidence. It is about understanding the way in which policy and tax will be structured. Certainly, if there is a reliance on the market for international buyers, certainly in the commercial market, it is not the same in residential markets. Commercial markets tend not to dive into the detail too much of how the market is operating. It is more sentiment. That 12 per cent rate from a residential perspective will pick up on and they will say, is this a progression towards a higher tax structure and do we want to be in that market? Evidence from last week as well was about aligning policy with market sentiment, because I think that that is critical. We'll just start on that point then, Mr Stewart. You gave the example of the Atrium where you felt there would have been more bids had that property being in Manchester at this point in time. Obviously, the figures overall, the tax take overall for commercial property at the moment seems to be, if not ahead of schedule, slightly ahead of proposed schedule, but drilling down, what impact has having a marginally higher top rate of commercial property at 4 per cent instead of three and a half? What impact has that had, either anecdotally or evidence-based? The transactions that are going ahead have not changed because of that half per cent increase, as I said earlier. What happens is that the seller gets the price adjusted, so it is a deduction from the price that happens. The four and a half per cent commercially seems to be working, but please bear in mind that we should be looking at a profile of an increasing market, so the market should be making progress no matter what the tax banding is. We've gone from an all-time low and our market is starting to recover, so if we are just meeting our expectations on tax take for LBTT relative to last year, I would suggest that that is not good enough. Maybe the commercial market with increased transaction activity and a more confident market should be delivering more tax take on the same banding, if that makes sense. We would like to see more transaction activity happening and more confidence in the market, which leads to more tax take. The fact that it is only just slightly ahead or the same as it was previously, I would suggest that that does not show enough confidence. That is certainly borne out by the lack of depth in the commercial market for acquisitions, which is pretty significant. The bigger point is that Edinburgh and Glasgow will do okay, but that international capital does not roll into Kilmarnock, Cercoddide and Firmland. Commercial transactions in those areas need to be pushed on, so it would be interesting—I do not have the figures—to understand what the impact is in secondary markets in Scotland, not the prime ones where H is being sold. The official SPF position is that you would call for parity with the rest of the UK at the top rate. I think that our view is that that system is not creating the same issues as our current system, so it would be sensible to meet that. The question for Mr Shear and Mr Hogg, because Mr Foster has answered the question already, in terms of what you would call for for the changes to the residential bands and rates, you have outlined that the 5 per cent band threshold should be increased so that the 10 per cent hits at a later time. It is no secret that I was sympathetic to that over the course of the last budget, but, if the Government were minded to look at that seriously, rather than to have a view on whether a change will be made in your favour—at least in the direction of your favour—do you have a view on when such an announcement should be made? Should it be made on 16 December, when we get the Scottish draft budget, or is it something that Mr Foster pointed out that should happen right at the end of the budget process? Shortly before it takes effect. In terms of the overall health of the market, do you have views on when that ought to be announced if it were to happen? One of the key points about the health of the market is that house building, for example, relies on being able to forward project its activity, being able to start its development, bring in labour, start ordering, contract with subcontractors and all that sort of stuff. If it sees segments of the market where it is not going to be able to build, so we are not going to get take-up at the £325,400,000 above, it will pull back on its programme. I think that one of the key things—and maybe Philip can talk more about house building—is that certainty of environment and the behavioural patterns that have changed as a result of the LBTT. The sooner that those are communicated, if there was an inkling to do that, I would have thought that the market would respond with more activity, and it is not just about everybody from second-hand sales to production of new homes. The production of new homes part is critical for not just the property market but for the wider economy. The earlier that is communicated, the better. The question of relief was whether there would be a change when should that be announced. I think that Kennedy made a very good point that on things like LBTT, stamp duty, the further and advance the market is aware it will affect by a behaviour, positively and negatively. There is an argument that to minimise those artificial transactions, the least notice possible is probably best. In our submission, we have said that we think that it is too early to take a definitive view, but we remain concerned. There is nothing in, albeit still relatively early days that has demonstrated to us that there is not still a concern on the way that a tax structure is configured. We do welcome the removal of that ban. We do welcome that progressive system. We think that that is to be applauded and we think that that is great. We do welcome the lower tax burden on the purchases at the lower end of the market. I think that all of those have been excellent and the Scottish Government should be applauded for that. However, our concerns remain, as announced originally, that we think that it is too steep at that higher end. The example that I gave earlier on of the amount of additional transactions needed to offset just one lost sale is where the risk lies. I think that we have to understand that transactions in the residential market fall broadly into two categories. There are discretionary purchases. We do not need to move, but it would be nice to move and then you have those that are essential moves that may be due to family circumstances or change of job, etc. What we need is a tax system that encourages discretionary purchase. It encourages and rewards people that want to move up the housing ladder because that creates movement in the system and it generates tax revenue and it generates GDP by activity in the system. We know that for every home built it creates over four jobs. We want a tax system that encourages people to want to aspire to move and move up the housing ladder. Our fear here is that the tax system actually does not do that. In fact, it does the opposite. It makes people stop and think twice and say, do you know what? We will stay where we are and we will go and get the bathroom upgraded. That is great for the bathrooms industry and maybe for the smaller builders and all the rest of it, but I would suggest that it does not create the impact, does not generate the tax and it probably does not generate the GDP and the value to the Scottish economy. We remain concerned. We are not calling for an immediate change, but we think that this should be kept under a close review with a view to adjusting it or to tweaking it at some point in the future if the trends continue, as the evidence suggests at the moment. Obviously, in the run-up to April, we saw an increased volume of high-value sales. The immediate post of April, we saw a reduced number of high-value sales, which was anticipated. It might be too early to say, but six or seven months on, what is your sense about the likely volume of high-value sales going forward? Was this a temporary response to the changes? Or is your evidence, whether it is anecdotal or otherwise, is your view now based on that? Unless there are changes, we are likely to see a reduced number of high-value sales as an almost permanent feature on the housing market. I would say that, based on the evidence that we have, we would see a continued lower volume of activity in those middle-upper ends of the market. Based on the information that we have and based on the feedback that we get from our members, evidence of changing the product mixes on their developments to recognise the impact that LBTT is having. In addition to other market forces, I should add that into the mix. The evidence that we have is that there will be continued, for the foreseeable future, continued lower levels of activity at those levels in the marketplace. Is what I wonder whether other panellists are hearing similar or different things? No, we again think that the trend is not a blip or an adjustment. It is more of a behavioural change because of the cost to move. It is widely reported about the amount of activity in upgrading your home to make it fit for purpose rather than moving. It is the consequence that it has on the broader market, which is the issue. It is not just about higher-end homes, but about how the whole market functions as a whole. That is critical. The question for Mr Foster, in your paper, pointed about the current position with mortgage applications and their mortgages being granted. Your paper seemed to quite buoyant in terms of overall numbers, but you then explained that that does not necessarily correspond with tax take. Nonetheless, the mortgage market appeared to be doing fairly well. Do you have any sense of how that compares to the mortgage market as a whole across the UK? Are we broadly in line with them, or has LBTT made at least a part of the mortgage market slightly healthier, or are those increases broadly in line with the UK? I do not have the UK figures in front of me, but I am sure that first-time buyer figures in Scotland are higher than elsewhere in the UK. Broadly, the mortgage market in the current year has followed roughly the same pattern. At the first three months of the year, we are pretty depressed, then it picked up for the second quarter. Our lending figures at UK level for the month of October, which were announced last week, show the highest level of mortgage lending since September 2008, so there is definitely an up-pick in the mortgage market in the present time. That can be caused, as I said earlier, by a range of factors. It is not just simply LBTT or SDLT. I appreciate that you do not have the exact figures in front of you. Your sense is that the mortgage market as a whole has performed similar to the UK, but in terms of first-time buyers, your sense is that the mortgage market is higher in Scotland. One other question is to any of the three of you. We were aware of forestalling, where people brought transactions forward to avoid higher taxes. To what extent did we see the opposite of that? For houses of lower value financially, there was in some cases a tax benefit in holding off, because the threshold went up to 145 instead of 125. For some buyers, there was an incentive to hold off. Did we see in some parts of the market people holding off and then, suddenly after April, an increase in transactions at certain levels of the market? We do not have any evidence that there was any significant delaying, if you like, to benefit from the new tax levels at those lower levels. I have got some statistics here, but I do not think that that is particularly revealing. Again, I reported in my paper that 60.9 per cent of transactions in Q1 2015 were below 145 compared to 2018-14, so that does not really give a massive picture. The feedback that we have had is that the tax amounts at those entry-level prices would not gain changes in themselves to persuade people to move one way or another. There was just actually one point that I almost would like to ask Kennedy. I know that it is not my role to ask questions, but I think that it might. I would just be interested to know, Kennedy, whether you have any evidence or any data for property purchases in the higher price bands. How many of those are mortgage properties compared to cash purchases? I think that that could be quite significant. We do hear that there are a considerable number of transactions where mortgages are not required, so using the mortgage figures might not paint the full picture. Sorry, Kennedy, to throw that at you. I actually do not have that particular data on what higher-end purchases or cash purchases are. The figure that I have heard is in terms of the buy-to-let market, which is obviously the private rented sector. At least 20 per cent of transactions in that sector are cash purchases as opposed to folk needing to borrow to fund the purchase. There is quite a higher level of cash purchases, and not so much here in Scotland, but if you were to go to the likes of London, a lot of the investment in the property market in London is through cash purchases coming from overseas investors from China and the likes of the Middle Eastern Russia. Last but not least, Philip, just to make sure that I managed to clear on this, again, in terms of your saying that there is not exact evidence, a lot of it is anecdotal, but your members were saying to you quite specifically that we have sped up some transactions to make sure that we get them done before the April deadline, but those same members weren't saying to you that some people are delaying until after April. Is that fair? There were one or two, but we are not talking big numbers here. Again, the number of those it would be with bill programmes is sometimes difficult to vary that, but there wasn't any evidence that there was a large volume of transactions that were delayed until after the new tax system. One of the anecdotal pieces of evidence on the market is that in a low transaction activity market, which is what we have at the higher end, you would expect an oversupply of stock on the market, the market dynamics of oversupplying people not taking up. The market is quite unique at the moment in that there is an undersupply of stock and an undersupply of buyers, and that goes to this behavioural activity of not wanting to put your house on the market because the cost to move is so—I think that market dynamic is really quite telling. Also, the duration of time that properties at the higher end of the market are sitting on the market is markedly longer, substantially longer in some instances in areas where you would expect. Edinburgh, Glasgow, primary areas of movement very quickly are taking over a year, a year and a half sometimes to sell, whereas previously on the SDLT position, the market would have performed, but the lower level markets are actively working reasonably well, so it shows a dysfunction in the market. I am looking through all the evidence that the committee has received, and what we have heard today. There have been various pieces of evidence that suggest market depression at all levels. For example, the National Association of Estate Agents has said that there is a lack of stimulus at the lower end of the market, where there have been fewer transactions since the introduction of LBTT compared to comparable periods in the previous years. We have heard evidence today about the higher end market depression, and we have heard about the 325K+. On the other hand, we are hearing evidence from council mortgage lenders about increases in mortgage lending and mortgages. I wonder from the untrained eye perspective how those two pieces of evidence tally and what the explanation that lies behind them would be. I do not know whether the evidence on mortgage numbers segments what refinances remortgages. As Philip has said, the amount of cash activity in the top end of the market, unless it relates like for like, suggests that it is not easy to make a direct comparable and say mortgage lending up, so market overall is good. I do not think that is the right way to look at it. We should be looking at a market that is moving out of its lowest position in reality since 2008-2009 and moving forward. We should not be looking at a stalling market. I do not think that the evidence necessarily aligns. Mr Foss, I heard you saying that your figures did disaggregate between what was mortgage lending and what was remortgaging in refinance. Our press release is all split between loans for house purchase, then the spread out from loans for house purchase, first-time buyer purchases, and there is a separate section around remortgages. The remortgage market is pretty flat at the moment. The increases that you have been speaking about are around first-time buyers and mortgage lending and house purchase. In that data, does it disaggregate around values within that data, or is it purely that there has been an increase in terms of mortgage lending, but it does not disaggregate across the value of mortgage? Another thing that I wonder if you might care to comment on is that I noticed certainly in a lot of the press reporting at the time leading up to the introduction of LBTT, that there was a great deal of reporting that, for example, if you purchased a house over £750,000, you would pay 12 per cent on the entire purchase, which, of course, was not how the banding works. In fact, in one newspaper, I think that I saw a correction to a previous report and then on the following page a reiteration of that very same reporting. I wonder if you have any anecdotal or otherwise evidence around behavioural impact that was had as a result of some of that reporting that suggested quite significant hikes in terms of tax on property purchases, which was not actually the reflection of how LBTT was to be introduced. Mr Hogg, if you want to maybe go first on that. I am not aware of the specific reports that you refer to, so I cannot really comment on all of that. I think that, as with any new tax system, there is a period of time for it to be understood and for it to be communicated correctly. The only thing that I would say, and I would encourage members to maybe go online or pick up property supplements maybe after this meeting, but a quick scan of the property adverse, particularly new build, and you will find—I am taking a gamble here, but hopefully I will prove them correct—you will probably find a fair number of incentives along the lines of LBTT paid. That seems to be the incentive that most new home purchasers are looking for just at the moment. I think that that is symptomatic in itself. That is a reflection of that. It appears to be the stumbling block for many people. Again, that is the market responding to what is thrown back at them as the barriers to purchase. In terms of your specific comment, we are not aware of the misunderstanding of the LBTT amounts, so I cannot comment on that particular point. I would suggest that, at the higher level of transaction, people are very well advised, whether they are ex-agents or lawyers or whatever. Any press reporting of a level would be very quickly qualified, but I do not see that there is any evidence of people fundamentally misunderstanding the position. Obviously, the mortgage lenders would have perhaps been approached by people asking about LBTT and its impact. Is there any evidence that you have picked up in that relation when it was first? None whatsoever. I note that, of the three of you, the Scottish Property Federation has gone out on a limb in terms of making a suggestion for changes that would be made. I wonder, Mr Stewart, looking at the changes that you have suggested, whether you have done any modelling or any hypothecation about the likely impact that that would have on revenues if those changes were to take effect, both in terms of market activity but also in terms of the likely revenues that could or would be collected if those changes were made? We certainly have done some modelling, getting the specific numbers for you. I do not have them immediately to hand, but we would be happy to. I think that that would be quite helpful for the committee to see what the impact would be. I guess that the question that follows on from that and perhaps this is one because I know Mr Foster and Mr Hog have hedged their bets in terms of suggesting changes because they feel perhaps more information or more data would be required. Given that we have spoken about, for example, in the north-east of Scotland, which myself and Mr Baker are very familiar with, obviously, as representatives from that corner of Scotland, there have been other external factors around the price downturn employment issues. How confident or otherwise can we be that simply readjusting LBTT rates in and of itself will lead to that market stimulation compared to perhaps other factors that might affect them? Obviously, if changes were to be made on the basis that it was assumed that it would kickstart purchases, that then did not happen. That then obviously has a further effect in terms of collected revenue, particularly if the threshold has been reduced at part of the market. I would be grateful for your thoughts on that. I mean, I think it, you know, they take the 12 per cent down, for example, that the level of activity in that market, I mean, there's been a, as we've said, a huge drop in volume, but there's so little activity in that market from a number of units perspective, you know, it goes towards sentiment, you know, putting that band in place. The reliance, you know, 74 per cent of tax take above £325,000. So, you know, 7 per cent of your market, you know, you're relying on 74 per cent of your tax take, there is going to be a benefit if there is an adjustment downwards of any of those rates positively, you know, because you probably can't get any less out of that top end than you're already getting, you know, so, you know, a realignment would make a difference, I'm sure. Okay, I don't know if Mr Hoggan, Mr Foster, you want the comment on the sort of broader issue, perhaps, rather than the specific proposal? Just to close the loop on, I mentioned looking at the press so that, you know, there's a real example of, you know, of what, of how home builders are trying to overcome what, where the objective, or the objections to purchasing are, so I'm sure there's plenty more of those. Returning to your question, I recall that the finance secretary, his objectives were for the new system to be revenue neutral. From the information that I've seen, and I'll stand to be corrected on this, I think the forecasts are that it's looking as if that may not be achieved, so if the, if the tax take isn't, if the system isn't delivering the tax take, then that surely suggests that it needs to be reviewed and investigated, so I think that's the basis that we have to say, well, why isn't it delivering the forecast revenue and look at where the, look at where the sensitive areas are? I mean, in terms of developing an alternative system, we propose that that 5% ban be widened, and I think that's still, still our view as to that's probably the area which needs investigation, but clearly our colleagues at Scottish Property have come up with alternative systems, and I'm sure that there'll be many other different ways that it could be done. So we haven't come to the table today saying here's a pre-prepared one, but they say all we're coming here today saying our concerns remained as originally reported. Decision to invest in a house is a range of factors involved in taking that decision, and obviously if you're going to borrow one of the things, is it affordable for you to take on? The mortgage, what are the predictions in terms of the licentious rate rises going forward? So consumer confidence, employment prospects, house prices all play a decision in the decision to invest. I would echo what Chris said and I think it's something probably the Government do need to focus on, and I don't make this comment from a political perspective, but I would make it more from a risk perspective. When so much of your tax take is coming from such a small number of sales, it must be a risk to you if that part of the market actually declines by such an extent. As I say, I don't make it from a political context, I make it purely in terms of risk. I think that Mr Stewart spoke about the impacts at the UK level of the changes there. Do you have any evidence around what the impact or otherwise has been of the changes that were made to stamp duty land tax south of the border? I suppose that I don't have the statistics for the residential market, but we certainly know from a commercial perspective that the transactional levels that we would expect in our regional markets, if you like Edinburgh Glasgow, are substantially—the amount of investment into those markets is substantially reduced. The way that we measure that is about the likes of the comment about how many bidders would go for a prime asset in Manchester relative to Edinburgh. There should be no difference in their approach because they are both very strong regional cities, but at the moment the way that commercial property is valued is on the basis of its income and a percentage, a yield is applied to that. Edinburgh trades a discount to that of Manchester, which historically should not be the case. We have, as I say, the difference between 20 interested buyers in a prime Manchester asset from seven in an Edinburgh asset. There is something not quite right that is not allowing those investors to be attracted into the Scottish market. That is what creates its fragility. Changes in tax just add to that fragility or the sentiment around tax. That is one of our overriding concerns about how potentially unstable the market is. I am sure that you would agree that drawing a wider conclusion based on perhaps one example or two examples is difficult to do. If you have other data in the same respect in terms of the data that I asked about previously, it would be very nice to see some of that, which would allow for a slightly more reflective picture of what is happening. We would be delighted if there is lots of information that we can pull together to support because there are a number of different strands to that, not just LBTT, clearly. Thank you very much. Jackie, to be followed by John. Just pursuing that last point with Mr Stewart, is there anything to suggest that that fragility will remain? Yes, there is. It is pretty well known that UK institutions and institutional investors, who are the big funds that we all know, are not making the same level of investment that they historically did. In a lot of instances, they have filled their books with investment, so their 7 per cent allocation of their funds, for example, is not extending. That means that there is an increased reliance on international activity and international capital, which SPF has analysed about 70 per cent of the Scottish market. You have to understand the profile of those investors, because that international capital is not a domestically based, locally based institutional fund or bank. It is probably headquartered in New York or the Middle East. Money comes into Scotland, and it really focuses around the prime asset that it is investing in. If you think about Bank of Scotland of old and RBS, they were locally based here, so they were in the market and they had an interest in funding the market. The capital now looks at investing in Edinburgh alongside multiple European cities, so Barcelona, Madrid and London. It tends to come here as a result of not being able to invest in London because the market is too hot. The reliance on that type of market is very fragile. What we are trying to encourage is a more consistent market, where there is an encouragement of that capital to stay. If what has happened with both our banking system because of slotting and the changes in capital requirements means that our banks cannot invest more to support local businesses, there is a ceiling to what they can deliver. All those factors mean an increase in dependency on a more fickle international investor. That would be our concern, so that fragility is evident. Will you be in a position to model that behaviour and estimate the likely risk if that information is out there already? I think that the behavioural assumptions become more macroeconomic, global conditions. If an investor in New York gets a better return in Spain for the same allocation of capital, why would he put it into Scotland? All of a sudden, it is about your competing structure and how you look as an economy and how attractive you are for that capital. If we had more local capital, we would not be having the same conversation, so to model it, you need to look at the global markets. Others have explored lower transactions at the high end of the market. I think that Mr Hogg should definitely be on commission with that bathroom company. I counted three times now, let's see if you can manage a fourth. I want to look at the level of receipts for residential transactions in particular. I want to understand a world that you guys understand, which is seasonality. Typically, by the time that you get to the end of October, you should have expected 62 per cent of the receipts to be in, with 38 per cent still to come. Is that your feel? Can you describe to us what is likely to happen between November and March and let me start with Mr Hogg? I won't mention the bathroom company. I can assure you that I have no affiliation in any professional or personal with that bathroom company. Seasonality, I think that Kennedy might have described it fairly early on, I can articulate it in a way that many of us would understand. Immediately after the new year, we find that, typically, consumers tend to have that period of post-festive depression. We start to see bookings of holidays and purchases of new homes, typically, or the searching of the process of buying a new home starts to pick up, and I have modelled it by internet traffic. We start to see round about 12, 13 or 14 January, we start to see massive hikes in internet searches for property. That is the start of the cycle. That is when people start looking, start visiting showrooms, start looking online. The purchase process, from the day that you first look to the day that you maybe get the keys to the door, depends on how well advanced the construction program is. I am talking of a new build, not existing property, but if we talk around about three months, maybe a little bit longer. We will find a peak in transactions, a sales completed round about the Easter period. We see a rapid rising activity, Easter and early summer. It dips off again during the summer months, for the reasons that Kennedy described the school holidays. We see a second peak of activity immediately after the school holidays, the September-October period, before the period we call Tinsolitis, which seems to get earlier and earlier, just when the tinsel appears in the shops and then buying a new home is because people again have targets. If I am going to buy in that autumn period, I want to get in before Christmas, and logistically for some people that is just too squeezed. We see a second peak of activity, a lower level of activity in the autumn-winter period. We see a curve that looks like that, that is the shape. We have modelled that with our transactions years gone by and it does not change. The only things that change are if there are any stimulants in the marketplace such as help to buy or changes in the tax regime might accentuate some of those patterns, but the overall pattern is fairly predictable and fairly consistent of a pattern that looks like that. Sorry, I know that does not work very well for the reports. No, the visual works for me, but I love tinselitis. That is a new word that I have learned today. Typically, you have had your two peaks already contained within those figures. Is that right, Kennedy? I was just going to add that I used to in a previous life run a mortgage processing operation for a major lender and one of our business periods used to be in the lead-up to Christmas. I think that that is people who are out in September, October, looking to buy houses. They are actually completing. They want in their house before Christmas. I think that what you have to bear in mind is that the LBTT is actually paid at completion, so I would not necessarily have seen it here. I think that you could still have strong receipts through to just before Christmas, but it will die off as we go into the new year if it follows the pattern of mortgage borrowing. Basically, you would expect January, February, March to be very, very quiet, but there is still activity right the way up to Christmas. If I could just add another small point on that, which may have a distortion effect this specific year, the Scottish Government to help to buy scheme will—all of those properties that are eligible under help to buy have to complete by Christmas, so again that will create, if like an artificial, a higher peak than probably normal because those transactions have to be completed to ensure that the funding is delivered. That is helpful for me to understand. Scottish Property Federation commented very specifically on this area, and I do not think that the others did in their submission. Chris, your paper forecast, you compared it, and there is a 5 per cent shortfall against 2013-14, a 25 per cent shortfall against 2014-15. Can you maybe just explain that to us a bit and what your thinking is on however difficult this might be to estimate but the estimated year-end figures? So your 60 per cent of £246 million, which was the kind of projected take across the bands in residential, so that should be your benchmark for this time in the year, your 60 per cent, if it follows the normal pattern. What we know, I think, is—I might stand to be corrected on these, but broadly 118 million has been delivered in that same period. So at this stage in the market there seems to be about a 30 million shortfall for this period, and depending on—I would suggest that it is not going to be caught up whether the gap widens or maintains the same—that is a 23 per cent shortfall made to October from what was predicted. So whether it maintains 23 per cent over the period or broadens, I do not know, but I think that that is enough to highlight the difference. You have made no forward projections taking account of some of the incentives that might distort the market. I think that we would see that continuing, so that would not— Okay, thank you very much. Okay, just a tiny— Supplementary on that, if I could. You say that there is a bit of 30 million pounds shortfall on where we would expect to be. I note from the submission that we have from the fiscal commission that the Scottish Government estimates between 12 to 37 million of forestalling. Of that 30 million shortfall, how much of that could potentially be attributed to the forestalling effect, or is that something that you would have any information on? Well, I think that the point really is that you need to try and separate out the commercial market with the residential market, because they are performing very differently. I know that you can combine them to make the figures. However, if you are looking at the residential sector, then it is certainly not going to be of the quantum of potentially 50 million, 60 million by the end of the year. There may be an element that would have been collected in the year previously, but it certainly, as I said, behavioural patterns would not be that people moving in September advanced it to April. We saw that correction, the less transactional activity in May. I cannot say specifically, but I would not think that it was a huge amount. We have been given three possible scenarios, as I understand it, and we are still to see the Scottish Fiscal Commission next. Out of the three forecasts, two are showing that the actual position is behind the forecast and one is showing that it is ahead of the forecast. I am not sure how certain you are that we are behind the forecast. On the residential market, every month on month, every month there is a substantially less take. In April, the difference between previous year was 18.3 million. In April, that was down substantially. That would be as a result of the transition to the new tax. May, this year's revenue was 11.4 million, last year it was 19.8 million, on June 18.5 million, last year it was 24.2 million. You are comparing it to last year rather than the forecast. The forecast was 235 million, then the forestalling could be 12, 20 or 37 million. Our forecast is going back to my original position. If you take 60 per cent of the market activity or 60 per cent collection for this time of year, that is roughly 63 per cent. Even then, you would expect higher, so you would expect over 150 million of take. As far as we can see, there is 118 million. Depending on how much the forestalling is, have you taken into account the forestalling? The answer is the previous question. There will be an element of that, but not to the extent that there is a 30 million. One of the figures that we have been given is that 235 is the forecast, 37 is the forestalling and that takes us to 153. Is that a head of what is happening? How would you explain 37 million of forestalling? We are still to discuss that, as I say that we have not had the fiscal commission in yet. The Scottish Government forecast for forestalling was between 12 and 37. The OBR was 20. I do not think that we have clarified yet how much the forestalling was. About 37 million on to 116 is 153. I do not want to get too bogged down in the figures. My point is that there are a variety of figures out here. 37 million of take on forestalling would mean that if it was commercial property on a higher tax basis, that £822 million worth of transactional activity was— Sorry, I am just talking about residential here. Well, that is even worse. In terms of the figure, that is a huge number that would have forestalled. We are still to discuss that further with the other witnesses, but my main point would be that there are some of the forecast showing that we are actually behind forecast, some are at least one that is showing that we are ahead of forecast. You are all feeling that LBTT has had a big impact, or sizable impact, on sales and prices and so on. Has anyone done an objective study on this, for example one of universities or any kind of research body, or is it really just subjective feelings? No, it is definitely not subjective feelings. Our businesses cover whole sections of the market. We are not just covering individual segments. Homes for Scotland clearly cover the entirety of the market, so this is not sentiment, it is actual delays in property sales. Do you have asked or prospective sellers or purchases or prospective purchases? That is Savill's report. That is evident. Who is that based on? How have they found that out? It is a combination of their own transactional research, myhouseprice.com, so it is evidence-based. It is not. Have they actually asked purchases or sellers? Yes, they have. Because they are agents, they are property agents, they deal with transactions. I know that they deal with transactions and they could therefore say how much has it gone up, how much has it gone down. My question is why has it gone up, why has it gone down and how have they found that out? I suppose that we are all in the market. We all deal with buyers, sellers, whether it is commercial real estate or residential real estate. It is not just discussion, it is fact. I am sorry, but I really question how it is fact. It seems to me that we are six months into a new system unless some kind of academic organisation has studied it properly. The year on year difference in over 400,000 for May to September is 1,283 sales in this year, 1,657 sales last year for the same period. The fact is that it is down, but my question is if, say we take Aberdeen where the oil price is way down, there are a whole lot of factors going on, has anyone really studied how much of the sales drop is through the oil price, how much of the sales drop is through LBTT or is it just that you are coming to the committee, you would like to see the taxes down and so you are arguing that it is all based on LBTT? No, we would love to be able to say that it has worked, because what we are looking for is a positive buoyant market. It is not a political point, it is about a successful market where jobs are being created, where people are being able to move houses at whatever level. Are jobs being created because people move or just because there are new houses built? Well, there is employment in both sectors, clearly. My next area that I am really not sure about is how quickly all of this is going to settle down, and that has been touched on by other members. The first question would be, are we in a settled position now, or are some of the people at the more expensive end waiting to see if in April the rates might come down following all of your arguments, and so we are still in a firstalling period? Can we tell that? My guess can only be as good as anyone else is around this table. I am not aware that there is been an awful lot of press comment about or speculation that there is going to be an adjustment in rates. Certainly that is not the message that our members understand and the messages that we would be putting out to the marketplace. I would not have thought that there were many people sitting, waiting, hoping that maybe the rates might be adjusting. That is a personal opinion as opposed to one that I have researched. Your first part of the question was, has the forestalling element, as that washed through there, into a normal market? I think that the real test will be Q1 next year, although taking Kennedy's very valid point that the tax revenues follow a little bit after the purchase activity. I would have thought that by Q1, certainly by Q2 next year, we will know what the pattern is looking like and whether there is a continued depression of activity at those upper levels. If it is reduced, I would suggest that that would be the new norm and whatever implications that has for tax. I think that we are getting through now the adjustment period. Picking up on the point that you were making to Chris, I would have thought that some of the key estate agents such as Savals, Knight Franks and others will be very well placed to give you a very accurate picture of consumer behaviour at the sharp end. They will be speaking with prospective purchasers and sellers on a day-in-day basis and know how they are actually behaving, how they are reacting. I can only report back from our members who are telling me the conversations that they have with prospective purchasers in sale centres where LBTT is a big issue for those people who are particularly affected by it and the price brackets that we have been speaking about. We are talking about quarter one, quarter two next year before we really see if things are settling down, so it would be best if we left all the rates the same at the moment because if we change any of the rates, that is just going to confuse things more, is not it? I think that that is correct. That is the reason in our paper that we have suggested that we keep it under review for a little bit longer, but if the evidence by certainly by the end of Q2 next year is that this pattern is emerging, then we think that the concerns would then be valid and it would need a serious review. Mr Short, you said at one stage earlier that certainty was a good thing. Again, would you agree that it would be best to leave things in this year's budget and review it again next year? I certainly think that getting a full year of data is important to just mop all of that up, and we would welcome any review post that full year to see what the effect has been. You also mentioned in your input that it was all having an effect on the labour skills area. Was the suggestion that we were losing out on some skills because people couldn't afford to buy houses? I suppose that it is more around the development of the house building and construction industry generally, in order to invest in new developments, new land banks and new skills that are required to increase that activity, then consistency and understanding of where the market is. If sections of the market are not performing, then house builders are not going to be building homes in that part of the market. That does not mean that they are going to be building more homes in a lower end of the market, but that is not the way that it works. The consequence is that they are not investing in the jobs. We know that from speaking to the contractors that we work with to grow their businesses, which is fundamentally what we want to see in the market, is a healthy performing real estate market that is supplied by a healthy performing construction market. If wealth was shared out more evenly across the country, then instead of a £1 million house, somebody would build 10 to 100,000 houses, which I would assume would create more jobs. Would it not be better? Does it not happen that instead of building very expensive houses, we build more cheaper houses? I do not think that it is as simple as that, to be perfectly honest. The issue that we find in the construction industry and the house building market is that most house building and construction businesses are suffering from the financial crisis of 2008. They have yet to recover. Banks are not funding those SME businesses to the extent that they were. The local debt providers that we would usually turn to are not in the market for those. Therefore, the activity is just not happening outwith the major house builders in the market. The capacity in the market is not there, whether it is in lower-end homes, as you suggest. It is a confidence issue. On commercial properties, the comparison was made between Edinburgh and Manchester on the feeling that Edinburgh was suffering because of LBTT. If you take London, London prices are presumably higher, and even if their SdLT was lower, the net effect is that it is more expensive to invest in London, and yet people do invest in London. It is not quite as simple as saying that people will go to the cheaper location, is it? I do not think that that is what I was saying. Right. Can you explain what you were saying? Why is Edinburgh disadvantaged against Manchester? Well, the point is that there should be no disadvantage. There shouldn't be a disparity between transactional activity in those two markets. Edinburgh has traditionally been second to London as the next place for commercial real estate investors to put their capital, and that is evidently not happening. What I am painting is a picture where, for some reason, an LBTT is a part of it, as I said earlier, and it is not the entire reason, but that activity is not coming, as it would otherwise do, into the Scottish market. Again, has anyone studied that to see really what the reasons are? Has anyone spoken to the developers? There is a lot of anecdotal activity and information. Whether somebody has researched it formally, I do not think that that has been the case, but it is more down to number of transactions and that the extent of interest in the commercial property market is not the same as in Manchester. More research needs to be done in that area. My final area, Mr Hogg, was to talk to you especially about the guidance from HMRC. In fact, Revenue Scotland was not following HMRC guidance. Given that our laws are slightly different, should Revenue Scotland be following HMRC guidance? I see that it is noted on page 3 of our evidence. The point that we are making on page 3 of my document is that it was reported by one of our members that Revenue Scotland was not following HMRC guidance even when the rules or provisions within LBT and SDLT are bioidentical. That is why one of our members raised concerns that they could not see any logical reason why that guidance would not be followed. We were invited to comment on the performance of Revenue Scotland, and I am merely reporting back as reported to us. For me, one of the fundamental differences is the general anti-avoidance rules. They are slightly different under Revenue Scotland than HMRC. Even though the detail of the legislation might be the same, the overall picture is different. I would question whether Revenue Scotland should always be issuing the same guidance even in a similar situation to HMRC. I think that this may go back to the point that I raised before about the opportunity for people to have an informal discussion with Revenue Scotland to get that understanding about that. This apparently evidenced itself in complex transactions where people are looking to get some guidance as to how this should be dealt with, how these particular cases should be handled by Revenue Scotland. The evidence that came back to us is that there might not be as much access as was available previously to have discussions about how those transactions should be presented or how they should be calculated. More of that opportunity to have those discussions is what the call has been from our members. Are there people who are trying to avoid tax? I have absolutely no idea, but I suspect that probably not these are lawyers that have presented the data to us. Any inference of trying to avoid tax would be misplaced. Thank you very much for that. That has concluded questions from the committee. Are there any final points that have not been covered that you may wish to touch on? Thank you very much for answering our comments and questions. I will now call a five-minute recess to enable a change over of witnesses. To continue scrutiny of the devolved tax and by taking evidence from the Scottish Fiscal Commission, I would like to welcome to the meeting Lady Susan Rice, Professor Andrew Hughes-Hallert and Professor Campbell Leith. Welcome once again to the finance committee. Before we go to questions, I would like to invite Lady Rice to make a short opening statement. Thank you very much, convener, and good morning. I think that it is still morning, yes. Thank you for the chance to provide some comment today. You asked us specifically to share some views in relation to LBTT receipts relative to the outturn figures to date, and also to comment to the extent that we can on the impact of forestalling. You also asked for some commentary on the Government's forecast on landfill tax, and we have given you a short paper in relation to both of those. I have put a couple of reminders in relation to landfill tax in writing previously. We only have to date one quarter's worth of data. The second quarter, we believe, comes out at the end of this week or next week. Because there is a seasonality factor in landfill data, that is very little material on which to base judgments. We have done what we can, but just a caution, which I am sure you all do understand, this is an imperfect science at the stage. The other comment is in relation to LBTT. I want to thank you for taking the most up-to-date version of our paper yesterday. We prepared the paper using the six months of data through the end of September at the point that we needed to submit the paper to the committee. As the seventh month's October data had very recently come out, we thought that it was important to add that in. That was the main change plus a couple of clarifications in the paper that we sent out. That was important for reasons that we can go into more fully. Again, just a comment on that tax as well. There are factors with LBTT of both seasonality and for stalling, and every month more worth of data that we have, the clearer some of these factors will become. Again, looking midway is an imperfect science. I believe that you do understand that, but I think that it is really important to note that for the record. Those are my comments, and we are very happy to take questions. Thank you very much for that brief opening statement. As you know, I usually ask the opening questions, and then I will open out to colleagues around the table. I notice that you have said on your letter of 19th November that there is a challenge in making a judgment about a year's forecast based on part-year data, where assumptions have to be made about the effects of seasonality and of for stalling on the observed out-turn date. I think that the committee is fully appreciative of that. In terms of the letter of 19th November in the recent paper, there has been quite a significant change in terms of out-turn data. Analyzed, for example, the minimum figure in the first paper of £215.5 million has dropped quite considerably, £203.9 million, and the maximum has fallen from £247.4 million to £243.5 million. I understand that you are saying that because of an extra month's data. Have those figures been shared with the Scottish Government? The most recent report, which was sent out to the very end of the afternoon yesterday, sent it to the physical commission office and asked that that be shared with the deputy First Minister this morning. This is really late-breaking data. It has not been shared beyond yourselves and his office this morning. Thank you very much. I do appreciate that. You have talked about, typically, 63 per cent of revenues of £62.98. We would expect to have been raised over this part of the year, and that gives you the figures that have already been quoted, but that gives you quite a massive difference. We are talking about an error of, potentially, some almost £40 million. The figures here say that there is 31.1 in minus 8.9, which is just £40 million, although the figures in the graph annualised seem to be £39.6 million. Either way, there seems to be quite a huge difference in terms of the figures that we are talking about. You are talking about a potential marginal difference of some 16 per cent, would that be right? Sorry, which figures were you talking about? Well, if you are looking at what you have said in your most up-to-date paper, as in the very last sentences that you have talked about, the implied estimated forecast error is going to be between £31.1 million and minus £8.9 million, which, if you are looking at an overall tax take of somewhere between £2.3 million and £2.3 million of about 16 per cent. That is quite a huge difference in the potential forecast, despite seasonality, despite the issue of only having a few months' data. What kind of margins would you be expecting in terms of forecast error in your normal tax? I mean, it seems great. It is almost a guesdemat, almost, it seems. For this particular tax, the way that the Scottish Government forecast it, what they are doing is they are essentially extrapolating current prices and current transactions to long-run averages. They are then applying a kind of distributional model of transactions throughout the distribution of house prices. From that, they can build up estimates of the projected tax take. There is no actual formal statistical modelling that goes into the projection of prices or transactions. It is therefore not possible to assign standard statistical bounds of error to that forecast. We cannot formally say that the standard error for this is x per cent, given the techniques employed. On top of that, for this particular year, because it is a change in tax regime, we have firstalling effects, which I think you have been discussing earlier this morning. As a result, what we see from the data is that the outturned data is significantly below what you would expect given the seasonality that you would normally expect in the data. That might be because of a temporary forstalling effect, or it might be that the change in the tax regime has permanently subdued certain parts of the market, and that will continue indefinitely. The extent to which there is an underlying forecast error depends crucially on how much you believe that the shortfall in the early part of the year is a temporary phenomenon or is an on-going phenomenon. It seems that the media in the forecasting error is going to be air towards over-optimism, even though the Scottish Government's prediction was significantly lower than that of the OBR, which means that the OBR's prediction was way out in terms of being over-optimistic. Obviously, that had implications for the block grant adjustment, but when we look at landfill tax, we seem to have looked at figures from the UK for whole. When we were looking at the whole passage of the legislation in terms of landfill tax, one of the critiques of the OBR was that they just gave figures for Scotland, which extrapolated UK figures, but it seems that what we have here is that you have done exactly the same here. You have talked about the UK as a whole in terms of Scottish Government revenues, and you have basically just said that we therefore scale the outturn data, assuming that such seasonality is also applied in Scotland, which gives quite a significant forecast error between £39 million and £53 million. The outturn data is Scottish-only data, but we do not have the historic data for the revenues to be able to compute the seasonality for Scotland at this stage. It will take a few years of seasonality to be observed before we can do that for Scotland. What you are basically saying is that you have tried to consider the difficulties that you have had with forstalling seasonality, the fact that it is a new tax, et cetera. You have had to basically do your best within fairly broad parameters, but what you are effectively saying is that it is a year's progress that you expect to be able to hone that quite significantly and make much more accurate focus. Thank you very much for that, John. On the same theme, I was just really wondering myself, and I asked the previous witnesses, as you might have heard, how quickly can we get a clearer picture and what has been happening? They seem to be suggesting that at least we have got one-year figures, but is it the case that one-year figures will give us a clearer picture or do we need to actually wait longer than that? You can perhaps start to see something already. If you look at the second table in the updated document that we provided, it breaks down what you would expect to receive from residential LBTT by month compared with the liabilities that were generated. The second last column is the difference, so that is how much we did not receive that we were expecting to receive. You can see that, in April, that was £10.6 million, so that was quite massive. Then it falls throughout those early months until August, when it practically disappears. Had that continued in August, had the forecast error been zero for the next two months of data, you might have concluded that that early four months was the first stalling effect. The fact that it then bounces back a bit in September is the first stalling effect truly over or is there still an on-going permanent effect? From this data, the best guess is that there is a combination of first stalling and perhaps a little bit of a longer-term effect that we simply do not know until August. That is certainly consistent with what the previous witnesses were saying. They did not seem to feel that there was currently a first stalling effect in the hope that the rates might fall next year, but I suppose that who knows that. We have other factors such as the oil price affecting prices in Aberdeen, so part of that could be other factors that are having an effect and LBTT is not very much, or it could be that other factors are less and LBTT is more. It could be broad economic conditions, it could be for stalling, it could be a permanent effect from the change in regime as well. Any one of those three factors or combination of them will explain the data ultimately. Make an equally awkward point, and you are never going to know, because you cannot separate these two out, because nobody actually asked about each transaction. Did you for stall or were you going to do this anyway? Even when all the data is in, you will not know the answer to that question. You can only infer the best you can from what is on the second table here. If we did go round, we would have to ask all the buyers and sellers and people who did not buy and sell as to what their motives were, and that would be, I guess, impossible. In order to separate out of a stalling effect from other things, oil prices bouncing up and down or whatever they may do, to separate those two things out. Even after the end of all the data coming in on the actuals, we still would not know whether a variation was due to for stalling or to some regular, if you like, uncertainty. Presumably at some stage we should do a study or somebody should do a study like that, but what should we wait five years in the way to do that? Well, from an academic perspective, yes. Five years will be fine, because then we got five years' worth of regular performance from your perspective. No, you want five minutes, but you can't do it. What you can do is infer. My initial thought was that it was over by the end of August for stalling part. Then, in September, I cut the ground underneath my feet a wee bit. October looks more back on track. My guess, but it is a guess, is that it is largely over. Okay, thanks so much. But then that doesn't say anything about what happens next February-March. I mean, even if John's scenario was a majority take place and you were to ask all the buyers and sellers what I'm up as well, that doesn't mean they necessarily tell you, oh yeah, I did it, that you actually save a few bobbin tacks. Rather like opinion polls, yeah. Exactly. Okay, so Jackie, did we fall by Gavin? Thank you very much. I did in fact go back and read your October 2014 report, and you actually warned there about buyer behavior and the behavior in response to the higher tax rates. Now, I was fascinated by that because you then went on to say, you know, as you've said already, the current kind of forecasting methodology doesn't get you there, doesn't allow you to forecast that. What needs to change and how quickly can we change to start to model some of that buyer behavior? I'm not so much thinking about LBTT, I think, in terms of wider applications with the more powers that are coming to the Parliament. I'm keen we're able to model behavior in relation to taxation. Essentially, when you're doing economic analysis, there's a whole continuum of approaches you can follow. Typically, for short-term forecasting, you use varying degrees of sophistication but essentially data-driven statistical techniques. So you essentially take a bunch of historical data and you try to extrapolate that in as intelligent a way as you possibly can to get a short-term forecast. That's fine if everything is behaving as normal, but if you change policy regime, if there's a big financial crisis, if something has happened which is unusual, those techniques become less reliable. What you can do in those situations is you move away from these data-driven statistical techniques and you have to do a more formal kind of modelling which relies more heavily on economic theory to provide structure to the way you analyse the economy. Then you can start to look at behavioural responses to policy changes, whether, for example, in the case of the housing market, the current forecasting technique will essentially start from historical data and move that towards some long-run average. You may, of course, have booms or busts in the housing market and so perhaps you'll need a more sophisticated model to try and capture these booms and busts and these turning points in these booms and busts when the boom starts to crash and things like that. That requires what are called dynamics to cast a general equilibrium models, which are far more theoretically driven, can be estimated by the data. They're probably less useful for day-to-day forecasting, but they're better for analysing these policy changes, these big events in the housing market. You want to do this more sophisticated, more fundamental stuff to inform the evaluation of the day-to-day short-term statistical forecasting. I'm doing the latter, it takes a long time. Okay, okay. I don't know if anybody else has anything to add. Do you all agree? I can try. I don't want to disagree with what Campbell says because that's the correct answer. More practically, we've tried with some of these other forecasts to find out either the Scottish Government does it or we do back-of-the-envelope calculations to find out whether some of these behavioural factors actually have an impact on the forecast statistically, as to say, is a robust relationship there. You find a lot of the time there's not, but this is partly because we may have the wrong definition of the variable we're using. There may be no data, which is Scottish specific as opposed to UK wide, and if behaviour has a wee bit different from there, then of course it's going to be different. These are fairly obvious points to make. It's a little bit of a hard job to actually nail it down. You want longer samples because the data, the unfortunate thing about humans is that they change their behaviour. It's not always regular behaviour, even if some of these factors are always in there somewhere. The other thing is, if we're talking LBTT or one or two of the others, there's speculative behaviour in there. We depend on house prices and we all know they zip up and down from time to time. It's very hard to deal with that. So I don't think that we ever get a complete answer. We might get further in due course. But I was very encouraged that you identified that as something way back in October 2014 that was of concern. Can I turn to the updated assessment? Just looking at the cumulative difference, the convener touched on forestalling, the OBR estimate is 20 million. Is that, in your view, a reasonable estimate given the Scottish Government minimum and maximum they seem to have landed in the middle? At the time these estimates were given, I think that the Scottish Government felt that the first stalling would likely to be more towards the lower end of the estimates than the upper end. The OBR had this figure of 20. In the latest challenge meeting that we had with the OBR and Scottish Government forecasters, the OBR was contemplating raising that estimate. So just looking at the figures in the second table, we give, it does look as if there has been substantial forestalling although we just, given that it's tailing off from those early months, it does look as though in those early months there was some substantial forestalling. I think people would recognise that. It's the extent of it, I suppose. I don't know whether you're at liberty to reveal the order of magnitude of the difference between their original estimate and what they're talking about now. Well, I think they're contemplating changing it, is my understanding, what they're contemplating changing it to. I don't know. If you look at the cumulative difference even after the first four months of data, it's 26.4 million, which would already take you above that figure of 20 million. Can I explore with you then the question of tinsolitis, which I find fascinating? Given the estimates of tax revenues from November to year-end, do you think that that's reasonable in light of what we know about seasonally? If you look at the first column, it gives you the percentage of the annual tax revenues that you should expect to receive in that month, and you can see the tinsolitis effect for December. You would get 9.8 per cent of people trying to move in before Christmas, they complete their transactions, pay the tax, and then in January, nobody moves, it drops down to 5.5 per cent. That effect is there. In fact, I'm going through it myself right now. Fantastic. Do you think that these are reasonable estimates in terms of life? Seasonality, yes. It was a standard approach to adjusting for seasonality that was employed and consistent. You get a site about tinsolitis, but I don't know what the equivalent for the summer holidays are, but the holidays' effect is larger. Yes, no, I saw that, which was quite interesting. It's a two-peak. I think that everybody makes the assumption that you sell more houses in the summer, but the reality is that it's after that, indeed. Thank you very much. I want to check a difference between your first paper and your second paper, which came in last night. In your first paper, and the convener touched on that, if you have the minimal figure for forestalling, which I think is a £12 million, in your first paper you say that the estimated annualised forecast error would be £19.5 million. That's at the bottom of the table on page 1 of your letter. In the document that you gave us last night, if you have the minimal level of forestalling of £12 million, your view now is that the estimated forecast error would be £31.1 million, so the change is an £11 million change in the forecast error. The only difference that I can see is that you very helpfully have to see added in the October figures, which I'm grateful for as up to date as possible. When I look at your October numbers, we expected £21.3 million in revenues. We got £20 million in revenues, so we're £1.3 million down, but by being £1.3 million down in a single month, suddenly your forecast error has shot up. Can you explain that? There was an error in the previous table. We lifted the £20 million forestalling figure from the spreadsheets and labelled it as the £12 million forestalling figure. It's simply a mistransposed figure, which we apologise for. The minimum forestalling figure in the original paper was actually a £20 million forestalling figure, not a £12 million forestalling figure. That was mislabelled. The estimated error shouldn't have been £19.5 million, should it have been higher than £19 million? It would be closer to the £31.1 million that is in the revised figure. Because everything is being scaled up from the annualisation, if it's 60 per cent, that's not quite as far as doubling the error, because there's an error that you've identified. Then you put that into the annual total, you divide by £0.6 million, which is nearly two times. That's an unavoidable thing, because we don't have the end of the year's data. The simple explanation is that there was an error in the previous paper, imagine that. I'm just warning, because that's the updated paper and ignore the earlier. The original paper for the £12 million forestalling figure should have been an error of £30.8 million, and now it's £31.1 million. We do apologise about that, but we did catch it. The next question is about the two figures on both papers. The OBR one is 20, which has been out there publicly. When I've reviewed documents, and this is in the spice paper, I hadn't noticed the £12 million and the £37 million figures published before. Now you've got to just give us some background of where those figures come from. Are they your workings or the Scottish Government workings? There are Scottish Government workings, so where they come from is that there's an academic paper by two authors, Best in Cleveland, which looked at the impact of the stamp duty holiday that was introduced in about 2008 and so on. That reduced stamp duty tax rates temporarily, indicated that they would be reduced for a certain period of time, then extended that period of time, and then they went back up again. You have the natural experiment of tax rates coming down, then being reapplied, so it can give you a measure of those for stalling effects to some extent. We encourage the Scottish Government to look into this paper and look at plots of Scottish data around those key events, and to look at both the magnitude of the effect and how quickly it dissipated, and the range of estimates that come out of the £12 million to £37 million capture. A range of estimates is to the magnitude of the behavioural effect and how long it lasts. That's where it comes from. I'm grateful for the explanation. Is that something new to liberty to publishers? Is that something that I would need to ask the Scottish Government to put in terms of the workings behind? Just plonking the figures down there is marginally helpful, but it doesn't tell the whole picture. Is it something that you're allowed to publish? I think that it's a Scottish Government document, so they would have to publish it. I can obviously ask the minister more about that. To your knowledge, is that a net figure? What I mean by a net figure is that, in terms of the tax changes, we know that some transactions were pushed through quickly ahead of April in order to reduce the tax bill. We know to a lesser extent, but there's certainly evidence from a number of sources to us that some transactions were delayed because the threshold was 145 instead of what it is in the UK. Therefore, presumably there's some kind of balancing act between the two. Coupled with, again as you identified well over a year ago, there would be some behavioural impact potentially in the medium to longer term anyway if you increase the tax rate. So there's a couple of factors at play there. My question is to your knowledge, the 12 to 37, is that taking into account all of those factors or is that simply looking at transactions that were rushed through before April? It's looking at the impact on the 2015-16 tax take. It's the net effect of the tax regime change on revenues raised in 2015-16, so it's all those transactions that didn't take place possibly because they occurred before March. So it's not adding back in any revenue gained prior to the fiscal year. It's also not including any permanent behavioural effects. It's purely an estimate of for stalling, which is that temporary phenomenon. If I go on to the page 2 of your updated report, you've outlined the months there from April through to March. You've outlined percentages for what the expected tax revenues are. On what basis did we think that we would get 7.5 per cent of the tax in April? Is that based on averaging five years? Was it based on just the previous issue? Where did that 7.5 figure, for example, come from? It's essentially based on looking at the seasonality that you observe in both house prices and in transactions in the housing market. It looks at historical data for prices, it looks at historical data for transactions, and it runs this technique called X-12, which is the standard way that statistical agencies seasonally adjust data so that you can decompose the historical path of data into trends, cycles and seasonality, so this is identifying the seasonality bit. What it says is that the combined effect of prices being lower and transactions being lower in April mean that you expect a relatively low amount of tax to be generated in April. The combined effect of lots of transactions and prices being more buoyant in July, you get a lot more tax in July. We were just trying to make sure that we weren't basing those on, say, for example, one-year figures. This is a longer time series to apply these things. That's helpful. That's my next question, and this is one where I'm a bit perplexed. On page 2, you've headed an updated assessment of firstalling, and you've looked at the months for the financial year so far. What you haven't done—at least what you haven't put out here—is look at January, February and March of 2015. By definition, firstalling is a transaction that takes place in advance of a deadline. Surely, if we're going to have any idea of what happened in relation to firstalling, we can't possibly have any idea if we don't look very closely at what happened between the announcements of the tax rates and the actual tax rates that are starting to bite. Why have we not published anything in the months leading up to April? We haven't looked at that. The original best in Clavin paper suggests that those effects might not actually be symmetric. Just by looking at what happens before, you cannot necessarily imply that the firstalling that you observe afterwards is the mirror image of that. That seems to be an asymmetry. You might get some transactions rushed forward, and you might see that temporarily more transactions just don't happen at all. It could be that that doesn't tie down the level of firstalling that you actually get. We don't have the actuals under the old regime, and we don't know how much the regime shifts. I don't mean tax rates. I mean from one type of tax to another type of tax, the old stamp duty one. It's a bit difficult to do, but what I can tell you, because I did it this morning over coffee at breakfast time very quickly, is the back of the envelope calculation. From the numbers that I got out of the evidence from your previous witnesses and conditional on that, at a rough average of the LBTT system, about £56 million was shifted before April. It's not symmetric, as Campbell says, but there is clear evidence on the basis. They have numbers on how much transactions went up and how much house prices went up, so you can put that together and see what the net increase was over what you might otherwise have expected. That's a very rough idea. I wasn't suggesting, Professor Luther, that it would necessarily be symmetric, but I don't see how you can do a sensible firstalling exercise by completely ignoring what happened before. If, for example, in the lead-up to the tax, transactions and tax collecting were exactly as expected, then presumably those differences that we're seeing here are down to something else entirely. I just don't understand how you could ignore it completely. There is substantial evidence that transactions did go up before it, certainly, and the brackets, the tax bans that were most affected, we haven't quantified the effect here. Another way of looking at it is that if it is purely for stalling, you should see the effects trickle out towards the end of the year, so that's another way of assessing it, and that's the approach that we're essentially forward. I assure you that we've discussed this point. You're absolutely right to raise it. We haven't ignored it. We've discussed it, but we haven't had the data in the detail. You have to compare by tax band as well, so it's slightly more complicated than just the sum of money, but the sum of revenue that Andrew has stated is at least a guidepost. One other factor that also complicates it, and we don't really have information on this, is whether house prices change in the circumstances. If people with houses they had hoped to put on the market in certain bands are then worried about selling, that might change. It is rather more complex, but the point is well taken and something that we will continue to look at. I'm grateful for that. Finally, in terms of the first stalling exercise, because in my mind there's been a bit of confusion here, from a Scottish perspective, who is leading on this? Is it the Scottish Government leading on it and doing all the work and asking you to review it, or are they asking you to basically do the work and show them your workings? There might not be an obvious answer, but it's not clear to me whether it's you leading or them leading, and I just wonder what your interpretation is of it. The Scottish Government did the work to reduce the £12 million to £37 million estimate. We recommended that they looked at the best enclavement paper in doing so, and then we reviewed extensively the work that they were doing and kind of critiqued it in the usual way we do, in the style of an academic seminar that they presented their work. We asked lots and lots of questions that get very picky with everything to toughen up that forecast. I go back to the wording of your question. The Scottish Government hasn't, and I would not expect them to ask us to do work, which they would then incorporate. That is not appropriate, I think, as far as we're concerned, but what we do is challenge along the way. In terms of the best enclavement paper, it was to say that we wanted to see a somewhat more sophisticated view, and therefore recommended that they take that forward. They didn't have to, but they did do it. In terms of going forward, in your entry at the moment, is there a specific task that has been given to you to look more at forestalling, or is it a case of you'll wait until the Scottish Government comes back to you? You've given us that task, so who would acknowledge that, Campbell? The table that we currently have is incomplete, and as more data emerges, we will fill up that table. That will give us a lot of information. Again, as resources come on stream for the fiscal commission, as we extend the depth of the modelling work that we're looking at, this is potentially looking at more behavioural effects in the housing market, which is an obvious area for us to explore. You've said that the maximum forecast error is likely to be £31.1 million, but the cumulative difference on your table is already £31.6 million. Every month so far, the difference has been higher. It has varied from £10.6 million to £0.1 million, so what makes you think that every other month isn't going to be exactly the same? You seem to have concluded that somehow the cumulative difference is going to be down to £31.1 million. We've not been given any workings about how you produce those estimates, so I'm just wondering how you seem to think that everything in the second half of the year is going to be much rosier and get down to that maximum of £31.1 million, which in itself is not exactly good news. I can explain. The original forecast of 235 is a forecast before for stalling. The forecast errors are therefore the forecast errors having added back your estimated effects of for stalling, so it's the forecast error relative to a world without for stalling. We hope to help us and ourselves to understand the strength or reasonableness of the forecast methodology for stalling that makes it harder to understand in this first year. Your headline forecast figure that we are asked to evaluate is the 235 figure, which doesn't include for stalling. Therefore, in assessing that, we adjust the outtunnel figures to add back in any estimates of for stalling, and then we project that forward for the year and compare that to the forecast to get the forecast up. It may be relevant later on this morning, but is this an illustration of how we work, in the sense that we've got a forecast here that came out of the Scottish Government. We have to assess, and that's a forecast without for stalling in it. We have to assess that's reasonable. You would normally just compare that to the actuals as they come out, but the actuals have had the forecasting taken out of it, so in order to be able to assess the Scottish Government's original forecast, we've got to put them back in. That adds errors into it, obviously, because the forecasting of the for stalling, trouble with the words ever, for stalling adds errors into it. I could differentiate myself slightly from my colleagues on that, because after we go past next April, when the actual numbers are in on the actual outturns, we'll turn out to have been assessing something that nobody's interested in anyway, because it's a counterfactual, which is something that's never going to happen, for stalling is actually there. That raises a whole stack of questions. However, what we're doing here, of course, is we're making a kind of forecast of what we think the end of the year would look like, had there been no for stalling, as a, if you like, aid to menoir, or I hesitate to use your word of benchmark, but it's a kind of calculation for checking whether what the Scottish Government is doing is about right, even if, in the event next year, we'll be talking about a completely different set of numbers. There are a lot of assumptions in there, inevitably. I understand that way. To bottom that out, at the moment, the cumulative difference, if you were to factor in for stalling, would be 31.6 just now. If you were to take the 12 million figure, you'd be looking at 19.6 instead of where you are right now, if you were to add in the for stalling effect to the cumulative difference at present. Sorry. The second table, that cumulative difference, what it does is it projects how much tax we would expect to receive, given seasonality, and assuming there's no for stalling. We then compare that with the actuals in the second table, and that can give you implicitly possibly a measure of for stalling, or it could be these permanent effects or it could be some other effect. That cumulative difference, if you took that to be your estimate of for stalling, then went back to table 1 and redid the calculation, and assumed that all those effects had now finished at the end of October, the rest of the year was just going to proceed with the seasonality that you would normally expect, with no further for stalling, then you would have a forecast error of effectively zero. The crucial question is, has for stalling finished or not? I wanted to go back to the question that Gavin Brown asked about the comparison of the months leading up from when the bans were announced. I guess my question around that would be how easy is it to get hold of that data, given that one would assume, if it were possible, to disaggregate Scottish data from the HMRC figures, the OBR would have come up with a very different forecast, because it would have been able to look at Scottish data, as opposed to what it appeared to have done for its forecast, which is to extrapolate from the UK-wide figure. If you have any indication of how easy it would be to get hold of that first three months of the year, in terms of Scottish data? I would have thought that it would be very difficult, because HMRC does not release its data very easily. The earlier period would be HMRC data, because revenue Scotland was not operating at that point. In this particular case, it might be rather difficult. Just to ask you a purely hypothetical question. Obviously, we had evidence just before you came from the Scottish Property Federation, who said that they think that the tax rates should be changed, and that that is something that should be announced by the Deputy First Minister as part of his budget. From your perspective, you might consider that we would see a different effect rather than purchases and sales being brought forward of purchases and sales potentially being delayed before that change comes into effect. That could have a knock-on impact on the expected revenues and the actual revenues in the January, February and March months. If people start expecting a tax cut, then the first stalling effect works somewhere else. I will ask a question on clarity on the question that Gavin Brown asked at the end of his period of questioning. To be clear about what those figures represent, is it a situation where you have received quite rightly data from the Scottish Government and applied your own methodologies to come up with the forecast, or is that in effect the commission analysing the reasonable worth of the figures and the forecast? Therefore, in effect, the figures are a Scottish Government forecast in terms of LBTT revenues? The 235 figure is the Government forecast for LBTT before stalling. The 12 to 37 figure is the Scottish Government's forecast estimate of the extent of for stalling as well. The rest of the analysis is essentially just taking the out-turn data that we have to date and trying to sensibly adjust that to account for both seasonality and the range of estimates of for stalling effects to try and then infer what we might expect out-turn numbers to be for the rest of the year as a basis of comparison with the forecast. Is it that the commission is carried out rather than the Scottish Government? That's right. That's right. Okay, so this is a forecast by the commission then. If we ask ministers here to explain their estimates, their figures, we could potentially expect a different set of figures and forecasts on the one that you've brought forward today in this analysis. Yes, so essentially what we're doing for this exercise is extrapolating the part-year out-turn numbers to make them a sensible annual out-turn number. So it's a very short-run extrapolation of out-turn numbers. It's not a forecast in the same way as the Scottish Government is forecasting for the next year or what LBTT revenues will be. Is it in the Scottish Government to make an extrapolation on the same basis? Do you think that it would use similar models, similar analyses or is that something that you're aware of or could it be potentially very different? This is the way we would do it. That's great. Thank you very much. Now at this point I would normally have a break, but we've got the same set of witnesses. I'm just wondering if colleagues would prefer for us just to blow on. Okay, we're happy with that or would you like a break? Okay, we'll have a two-minute break for witnesses. I shall reconvene the meeting. We're still on agenda item 3. We'll now hear from members of the Fiscal Commission on a separate topic, which is our consideration of the Scottish Fiscal Commission Bill at stage 1. Members have received a written submission from William Rice and I invite her to make her second opening statement of the day. Thank you very much, your gluttons for punishment, obviously. So let me say again first that we're very grateful for the chance to respond. This is clearly an extremely important piece of legislation in our eyes and I appreciate the chance to come here and discuss our views. We noted and have read some of the responses to the consultation which the committee received in writing and were interested in how broad the range of views and perspectives were. There clearly is not one right way to do this and I think that is an important point to make that we should here in Scotland choose the right way for Scotland to shape the commission, but it was interesting to see that breadth of viewpoints. We've also given a lot of thought to these issues in particular forecasting which has been raised by the committee and by others a number of times and also the issue of independence, particularly the fact that we need to be not just acting independently, which we believe we are, but that we need to be seen to be independent and some of our propositions and our response were based in trying to address that particular issue. In terms of forecasting, can I make one point which is that it's a word. As a banker I used to despair the fact that everybody called everything a bank and some things are banks and some aren't, but the language allows you to use the word widely. Forecasting is a little bit like that as well and when we talk about forecasting there are the official forecasts which in today's world are done by the Scottish Government. Forecasting is also a tool and I think that you are beginning to get at that with our table on for stalling. Forecasting is a tool along with analysis and research that can help inform debate and help inform our judgments, so it's almost forecasting with a capital F and forecasting with a small F and I just want to state that distinction very clearly. Some of the topics raised in your call for responses to your questions obviously relate to matters that will come out of the fiscal framework. We've tried to address them although more briefly because we don't know what will, nor does anyone just now, know what will be the final outcome in the development of the fiscal framework. Once we do in terms of whether there is a charter or fiscal rules or what the borrowing arrangements might be we could expand our perspective there but we've just given you some general responses. In general overall I should say our views are in the submission so I will close my opening statement and we're happy to take your questions. Okay, thank you very much for that news. I'm going to try and have a self-denying ordinance because there's so many things that I can ask and Gavin Shakespeare's head there but I shall try and limit myself to a number of things. Can we exercise a self-denying ordinance in terms of our responses? Certainly not, certainly not. Just for that cheek I'll go and make a tea time. I'm going to ask you something that you probably would expect to be asked first of all because it's near the end of your submission but I thought I'd start off with something like this rather than delve into the other areas which you no doubt will be asked a considerable number of questions on such forecasting. You said that the term of office should be stated in the bill and the SFC believes on the whole that a single non-renewable term as currently pertains is effective in the individual term should be staggered or I was quite surprised by that because a lot of our witnesses suggested that for issues of continuity they did agree to be staggering but perhaps two terms people members should serve. Has it been that onerous so far? I'll tell you that later. We discussed it and actually we could be persuaded in different directions but the point was in setting us up there was a strong view and we subscribed to that view that we should take on this role without any feeling in our own minds that we'd like another term so that might colour even subconsciously our responses are the work that we do. There is real value in having one term. The length of term can be shorter or longer we do think staggered terms are important. Some of the respondents who have said there should be two terms have also perhaps believed that there may be a dearth of other qualified and able people. I suppose I personally take a view that Scotland with its 13 or 14 or 15 universities, the UK with a great deal of talent and more widely that we should actually be able to find people of talent but we also discussed two terms possibly as long as there was a process for renewal or possibly a term a break of two years and then a return as well which isn't necessarily guaranteed so we wouldn't you know stake our feet to the ground on the one term but we see the advantage of it and we have no debate with it for ourselves. So you would consider the president Putin approach of a term of office fall by perhaps a gap by popular demand coming back to the SFC. Okay and I'm going to again talk about something different which is additional functions. I mean you've said in page 3 you said the SFC believes it should have responsibility for assessing the Scottish Government's forecast on the sustainability of Scotland's public finances such a de herneson fiscal rose as an example and would welcome the bill being amended now to anticipate this additional responsibility when it arises and I'm sure that that paragraph will be welcomed by a number of witnesses who have given evidence so far and some of the permissions indeed to I'm sure members of the committee as well. I'm just wondering if you can talk us through a wee bit more on your thinking on that particular issue. I've been asked to give evidence several times to the committee both prior to the fiscal commission being created and one of the main objectives of creating a fiscal commission is to ensure fiscal sustainability so that's going to raise on better of a fiscal commission is to do exactly that. Okay right so you're fit. Yes I could go on at length about that as well but and have in the past if you take the view which is in the remit of the as the bill is written at the moment that the commission should look at and comment on information revenues that the Scottish Government may use to make up its budget then of course I think at a minimum you have to worry about fiscal sustainability and of course I'm not quite sure what that means at the moment because that means sustainability against the rules which it has in place which means at the moment that the borrowing is minimal so it's not a big operation at the moment but it might be different in some other context so that's one part of the minimum which is not explicitly in the bill and it might help if it were and the second one is sensitivity analysis it'd be rather difficult to say we think this forecast is reasonable without having poked it a little bit to see whether it stands up against shocks of different sorts or slightly different outcomes in the rest of the economy so sensitivity analysis ought to be in there and I think again it would help if it were nominated so that everybody knew that it was going to be one of the things that you looked at. The only things that actually came up was just what you've touched on there Professor Hale, which is obviously the issue of reasonableness. We had some discussions about that as you've known from evidence and what's your view of what reasonableness is? I mean if a Scottish Government suggests, I mean how do you define whether a forecast is reasonable or not? I think that that was something that we tried to get to grip with and a lot of our witnesses had some issues with in previous sessions as you'll be aware. I wonder whether you get any reasonable response. Once you forget one. I don't like trying to define it because it's one of those things like the prime rate, what's that? Well it's what we say it is and I think Alison Wonderland has something on that regard. So defining it precisely is rather difficult. The next thing that people will tend to do is have a checklist. Does it satisfy this? Does it satisfy that? And the most obvious is looking exposed. Was it accurate? Is the obvious interview there? That has a place in all of this. The one thing I would caution is that don't be too prescriptive about that sort of thing because in the attempt to make something very objective instead of subjective, you find it very difficult to introduce any judgment and of course in the forecasts, you have to have some judgment as to what's likely to happen in the future and so I wouldn't be too prescriptive about it and by way of illustration with indulgence on my left the American SAT scores for getting into university was an attempt to say what's a reasonable performance and it was done with checklists and what you observe now is most universities don't use it because it was too inflexible. So I'll give you a different answer having said that much and that is what do we actually do and this is why I was raising in the LBTT case the way we're trying to assess the forecasts by not producing official forecasts but doing our own calculations to see whether we would do something similar. So to start off with if you look at specific scenarios on the tax, I'm saying this is the way you go about establishing reasonable to check the methodology if that's okay, whether there are things left out, whether there are specific economic factors that should be taken into account and haven't been those sorts of things, are the assumptions sensible right up front of the forecasts? People often pick on the example we had last year with the non-domestic rates being over-optimistic. It wasn't that we changed the forecast, what we changed was an unreasonable assumption up front so we do that in the first stage, those sorts of things. You can, difficult in this case perhaps, not impossible, check against other forecasts available, of course the OBR forecasts are available all the time so we can check against them. I'm beginning to get the feeling that maybe that's not a huge amount of competition because they do it on an UK basis and if the EU Scotland is a bit different then something else will happen. And then the third thing is to do the simple calculation and I emphasise that simple calculation is not a forecast to back up our position. If I did it myself rather simply, would I get a similar kind of number, not the same but a similar kind of number? This is the point, if it's different then you can try and dive in there and see why would it be different, what was it and if you'd learn something from what was wrong. That will help you to decide whether what they were putting out is reasonable or not. We're not going to change the number or you should change the number, we're going to say a different process with a good idea or a bit of extra information. That's how it's being done, I'm sorry that it's a bit rather waffly answer. I found it very helpful but ultimately when you do come to a number I mean if you look at the Scottish Government's figures and you think well we don't really think they're maybe as accurate as they should be, when does it become unreasonable, it's 1%, 5%, 10% of a differential, I mean how would... They were last year. Right okay, so you wouldn't pin down a... I wouldn't, no because circumstances are different, you get into a recession that your 1% is out of the window. Yeah, right. I'm just looking at what I'm not suggesting should be 1%, I'm just saying what the Scottish Fiscal Commission think would be reasonable. This is a judgment factor coming in. Right okay. So I think it's really important just to emphasise Andrew's point that this is not a matter simply of metricisation of metrics, that it is judgment and numbers and the judgment is really important. So if we went through the rational or intellectual exercise of saying in this particular case for this particular tax we would ourselves expect to look at A, B, C, D, E, F, whatever those things are. If we found that the Scottish Government team had not looked at any but perhaps one or two of those factors we might find it difficult to say will their forecast is rational, not because we're judging the numbers they come out with but because of the approach taken and so that is all about judgment and that is the kind of thing that comes out in our challenge meetings. Okay, now in your paper on page 2 you talk about transparency and you say in order to ensure transparency at every stage the SFC would publish minutes of its meetings with the Scottish Government. Transparency takes a number of forms. For example, we had in our previous session talked about forestalling but we didn't have any detail from the work that you did to come up with those numbers and Andrew just touched on non-domestic rates and the figures for the original forecast were not provided so it's not really possible for us to identify how much it was changed and it's also not clear why that recommendation led to a change in the official forecast while our Scottish Fiscal Commission recommendations didn't. For example, the SFC recommended the need to account for behavioural responses in producing forecasts for residential LBTT but the report doesn't mention where this was raised with the Scottish Government as part of the process of inquiry and challenge in what, if any, response was provided and there's no mention of this in the Scottish Government's own methodology paper. Transparency, I would think, surely goes a lot deeper than just producing minutes of meetings and decisions made. The production of the minutes now that we have a bit of support is one aspect of transparency. We publish our work, comments on our activities and so forth on our website, all of which is expanding over time. We're also learning what it is that you consider transparency and I think this is a learning process for us as well so if you're wanting to have a lot of the detail behind a table, we can provide that but in a way we're new to this and in terms of what your expectations might be so we're very happy to take guidance and advice about what it is you do want but overall in terms of transparency that matters greatly. I mean there's no point in having any of these debates or discussions without being quite open about what we're basing things on. We might be wrong on things as well and you know it might be others come to us and say actually you're off base in looking at this or that. That could only happen if we were transparent so we're looking for ways to increase that transparency to increase our overall communications and we're happy to take any point that you should give us. Just add a little point to that as well. In the medium to longer term as well we've already begun a number of what could be called research projects which are looking at more deeply at different aspects of the modelling of some of these taxis and we asked for provisions in the bills to allow us to publish technical working papers which then allow us on an ad hoc basis to publish the details of that research so that that would also contribute to the transparency of what we do. That again is helpful now. In your paper you've said in terms of rate of access to information memorandum of understanding of the normal way of working across public sector areas if SFC's right to establish relevant MLUs would be better safeguarded with more explicit wording in the face of the bill then SFC would support doing so. So I take it you are you would be quite keen for that to happen actually on the face of the bill then. You're really tentative in your wording there and just to see if I can push you with follow-ups. Well MLUs appear to be the way to establish good working relationships but actually the ultimate good working relationship depends on the people and the goodwill involved so MLUs alone and perhaps that is reflected in the tentativeness of the wording as you said. MLUs alone don't ensure what we want to achieve but they certainly help and they set out the boundaries and the fencing around what it is that we might do. So just so you know that we developed an MLU with Revenue Scotland specifically for the data we needed to analyse in relation to the outturns paper we did. They were extremely helpful. We're now in conversation with them to develop what I might call probably not your language but a perpetual MOU so that we don't have to do one each time we go to them with a request for information so we do think it's helpful to have those in place. I take it your hope to develop those with the HMRC and the OBR because you say over time in order to do its job properly the SFC's goal would be to have a deeper relationship with OBR and HMRC. Yeah and the the import of that statement is once the new powers are finally agreed and come to Scotland, new taxes and and and other related matters. Over time it will be more and more important to have those connections and have them formalised but let me also say that the OBR have been very well their doors have been open really from the beginning they've been very cooperative and supportive and have invited us into their challenge meetings when they've been looking at Scottish taxes last year over the summer as well so we have joined those and we have had access to their working and their thinking along the way and we have provided some challenges back there as well so in a way some of that is happening the MOU doesn't make it happen or doesn't make it happen perfectly but we think it is a useful tool and therefore we wrote that statement. Okay thank you and the last point I want to touch on before opening out to colleagues around the table is obviously forecasting. I mean you've said in your report for example that you're looking to have a better interaction, direct engagement, contact with the forecasters, the SFC could have direct engagement with the forecasters in the early part of the year when forecasters developing and refining their models, your role will be to challenge an influence in the case of Scottish Government process and approaches and you've talked about being in a rational world. There should be one official forecast of tax revenues and an independent assessment of that forecast. Those activities should lead to a check on the official forecast but not become the basis of themselves for informing the draft budget. Of course you say that your position has been quite consistent through it, I have to say on this. The SFC is assessor believes that it should develop the latter type of forecast alongside research, modelling and analysis but you'll obviously be aware and I'm going to quote you some of the comments here as you would expect me to do that most of the witnesses we have are not of that view, they take the view that basically the SFC should be producing its own forecast so for example that they're all set of Edinburgh are and I quote from the view that the SFC should be able to originate its own independent forecast of the future fiscal revenues and indeed to fulfil its functions the SFC will need to be able to produce independent forecasts. Professor McGregor and Professor Swales point out that in a national practice suggests that fiscal bodies not provide their own forecasted typical of access to sufficiently detailed independent forecasts and the Canadian parliamentary budget officer states that if the SFC produces its own forecasts this will allow parliament to challenge the assumptions underlying the Scottish government forecast and finally there's loads of these but I won't read them all out of course. Doctor Armstrong and Doctor Lysincova argue that the SFC should prepare their own independent forecasts on the basis that producing a forecast greatly adds to discipline so I'm just wondering why it is given that there's so many commentators and not all of them of course I mean as I cast and others who don't take that view but the general thrust among your academic colleagues for example is that the SFC should produce its own forecasts so why are you continuing to take the view that you should really comment in the Scottish government? A number of topics that would pertain in terms of a response let me start and I'll turn to both my colleagues as well because we've talked about this a great deal. If we produce this gets back to my opening statement earlier about the official forecast and forecasts and I wonder whether some of those comments that you've quoted have to do with forecasts in the sense that amongst our toolbox we should be able to produce forecasts possibly for some taxes at certain points in time for certain elements it's our choice where we think we need to see that and in a way you referred already to the work on forestalling as being a sort of mini forecast and we think that is part of what should be in our toolkit along with the ability to do analysis to do some technical papers and research as Campbell has pointed out that is different from producing the official forecast we think there needs to be one producer of the official forecast and an assessor of that forecast now if you turn to the fiscal commission and said well actually we've changed our minds you do the official forecast we would need to be assessed by someone if we were to do the entire forecast ourselves and we're really duplicating what the government is doing and that doesn't seem to make a whole lot of sense in terms of value for money we if we did our own forecast and needed to defend it we might then be biased as well so we've had a conversation about a lot of these elements but it is that we believe there should be an official forecast right now it's done by the Scottish government that needs to be assessed that is our role and we should not be doing an official forecast as well I'll turn to either or both of my colleagues yeah I think well my view in this it really goes back to some of the issues we already discussed in relation to types of economic forecasting types of economic analysis so the Scottish government currently has to produce the forecast it uses essentially statistical models based on historical data to do short term projections of that of that data if we were to produce an alternative or to produce the official forecast we would on a day to day basis we would probably have to replicate that style of modelling I don't think there's a great deal of added value in having the fiscal commission replicate that kind of modelling where I think the value added would be is if we do deeper more fundamental projects which delve more deeply into behavioural aspects results of policy change bits of bits of analysis of the economy which are not currently featured in the forecasting methods and we need to do these depending on economic circumstances because sometimes some issues will be more relevant than others and that's the point in which we need to do that piece of analysis and bring it to the fore in order to effectively evaluate the quality of the short term forecast so I would give us the role of doing this portfolio of research we're not just sitting there twiddling our fingers when we're not doing an official forecast we're doing lots of bits of research which are really fundamentally going at the heart of what's driving the official forecast okay Andrew you want to go in yes yes yes at length I don't what Campbell said is is right so that's one aspect of it so I'm not going to comment on that further that's absolutely right I would suggest my reading of what's going on is slightly different from yours there are some people saying we should be doing forecasts and there are plenty of people saying we should not one of them is the IMF and I think it's well worth listening to the IMF they have oversight of these kinds of commissions everywhere else there are not many of the regional level as opposed to the sovereign level but so that is the case I mean look at the numbers there are I think two out of 23 in the OECD which are doing forecasts as the official forecasts and nothing else there's a question of second opinions that's to say we're doing a kind of second opinion exercise the government producing the forecast as they will anyway and we're doing the second opinion and I go back to very old experience of mine in the Netherlands when the central plan bureau was doing the forecast and it was the only one doing the forecast and the constant complaint all the time is we don't know whether to believe it or not we would like to see some second or third opinions and other features so I think that aspect is important and that doing that way around it gives us here the freedom to compare with other forecasts there aren't many and there's the OBR and there may be I mean when when Smith comes in there'll probably be a new industry what I would assume in doing that sort of thing so that's an important aspect and then if I'm going to depart from my colleagues at all and I don't know if I'm actually departing with them it's just something that haven't said I think being asked to do the forecasting the official forecasts ourselves was seriously compromised our independence you imagine how you do these forecasts you've got to get data you've got to talk to we don't have access to all the data in the world we're going to have to talk to other people so you're going to have to share some knowledge of what you're trying to do at that point if we were then to put forward one forecast as the official forecast favoured over other possibilities you've seen when we're talking earlier that there are a lot of alternatives at any one point that's going to leave the perception in the world that the policies which underlie that particular forecast are the ones which are favoured so in some sense we're prejudicing the discussion an important point I didn't realise in talking to OBR people a month ago is that when in their operation they're doing the official forecast of course of course the Treasury often comes along with a proposition and they say we're going to think you're making the following policy change here are our projections what do you think of those now it's natural enough that they want to do that because they don't want to be slapped down by the OBR saying total rubbish a bit later on but of course you know the Chinese walls have been broken down and the influence is seeping in at that point and so and having no influence sorry having outsiders having no influence over independent forecast made by us does not guarantee that they don't try and influence the commentaries the one thing to have an independent forecast is quite another thing to have an independent commentary attached and the OBR's got problems with that so these are various different possibilities which suggest that the independence will be compromised by us doing that the other way round which is what we're doing at the moment is a different matter altogether because we take what we're given and we say is this reasonable or not and maybe we haven't published enough but here the reasons why and we can we can make a judgment at that point and people can take the judgment or dislike it as as they wish could I just add a final comment a personal view based on informal and other conversations I've had is that I think that there will develop over time as you might expect a bit of an industry in Scotland of think tanks or you know university bodies or whatever doing their own version of forecasts or delving into some of these areas as well some of the comment you've had from others is well there's nothing else to refer to you know what else is out there I think that will develop over time it's not surprising that it hasn't developed yet because the devolved taxes are so new this is a almost a market thing that I think will happen okay thank you an extra one sorry this is an enduring conversation but an extra point that I hadn't realized that when the OBR was set up and given an exclusive forecasting only mandate um give or take a little sensitivity analysis of some but it's on the forecast official forecast that this was done in securing the knowledge that the IFS would do the further analysis that doesn't exist in Scotland and if you didn't allow us to poke about and think of other factors that should be important in that and that sort of thing but we had to make the official forecast um then I think we'll be in a worse place okay I'm keen to probe further but I did say it's self denying ordinance and I know a lot of colleagues want to come in so the first one to ask questions will be Richard before by Jackie. Thank you so just to be clear I mean a Scottish government has informed the committee that there'll be no restriction placed on the commission to engage in forecasting which is to do so that there's no um nothing in legislation which would stop the commission from engaging in forecasting but as it stands you've got no intention of actually engaging in any forecasting uh independent forecasting yourselves as part of the the practice of assessing the reasonableness of the Scottish government's own forecasts. If you don't mind go back to the forecasting with the lower case f yes we will be and we have started doing that kind of thing so yes we are engaging in forecasting as an exercise that is absolutely something that we will do what we're saying that we ought not to do is to somehow develop an alternate official forecast that it doesn't make sense and would compromise our ability then to assess the official forecast that there is so we're doing lots of pieces of economic analysis we've got lots of projects starting up but we don't plan to replicate item by item the entire set of Scottish government forecasts and of course there'll be a learning process of parliament too in terms of scrutinising the the the work you're carrying out in assessing reasonableness but in terms of you know some of the international comparison for example we've looked at a Swedish example as well which I know you've studied and and there I mean their fiscal council doesn't produce its own forecasts but they have a national institute of economic research producing its own forecasts they were very many bodies assessing producing their own forecast figures and that means there can be a very lively public debate about therefore how accurate the government's forecasts are how close are they to national institute of economic researchers figures I mean isn't therefore beneficial to have those kind of comparisons out then and given the fact that as things stand currently it may change in the future it may not there is a dearth of separate forecasts from Scottish government figures that we've been beneficial for perhaps the the commission to consider taking your you know more forecast a greater forecasting role than that thing currently is in your mind I think that's a fair point that you want and this is sort of just not second opinion but third opinion and fourth opinion and so on and you make some comparison I think our comparative advantage will be making the comparisons between them you're right that there's a dearth of these things at the moment there may be forecasts of particular taxes or particular bits of a market or something of this kind from professional agencies but there isn't much else available apart from the OBR which forecasts everything that we want to talk about but on a on a different basis so we've got a second one already but if you want to and I'm sure it's case in the future it'll be more and so that's one thing and the other thing is the the deeper economic analysis in in the rest of the UK is pushed off in the IFS there isn't one here if there were one here that's likely to be where that would happen and if you look at Belgium or the Netherlands I think it's right that these functions have got split into they've got separate agencies for doing these things so they've obviously recognised the point there's just a question whether the resources available which is the most efficient way of doing it very nice if other forecasts came from somewhere maybe I'll just add a little something to that so I think if we did have alternative forecasts it does obviously provide some additional information I think it may be slightly overstated how much additional information that that would provide those so if if there were other bodies providing additional forecasts using very similar techniques to those that were used for the official forecast then they may make different assumptions at different points there'll be different numbers but they'll be within the kind of bounds of to which these forecasts vary what what you really want to see is additional information on some aspect of behaviour or some aspect of some development of the economy which is not being captured in the official forecasts or is not being addressed in the methods that underpin the official forecasts that that's the bit that gives you genuinely new information and allows you more fundamental scrutiny of the official forecast if you know the is a concern um wonder can see hands off it's an obviously having duplicating effort in terms of producing a full a separate forecast but I mean is it is a concern primary concern over the fact that would be duplication in itself or is it a resource issue I mean do you think that if you chose to undertake such an exercise as it stands the commission wouldn't have the resources to carry that out if we chose or were required to carry out such an exercise we would resource up in order to be able to do it we couldn't do it with today's resources we already have in the financial memorandum the ability to increase our our staff to some extent in our minds what we would do with that increase in staff would be very much would reflect what Campbell has just said to really look into some elements more deeply to understand what is really happening out there so that we can make a better more refined judgment about the reasonableness of the official forecast but if we had to do forecasting we would simply say to yourselves we need to resource up to do it um we'd have no hesitation I mean that would be you know our choice to the extent we needed more resource and of course experience in Ireland was that there the fiscal council decided to undertake its own forecasting later on as it as it developed its own work and I guess therefore that if it transpired there wasn't the additional forecast which you are expecting then you could at a later point take on that that role to greater extent if you thought it was appropriate at that point I think you make an interesting point because my sense of a number of the ifs the independent financial institutions is that they have evolved over time from their stark point and I would be surprised if we didn't evolve I don't know that we would evolve in that direction but I would imagine we would evolve My final question then Carina thank you very much again for your answers to the panel is um we've talked about the memorandum of understanding how important they are you've got an initial one with Revenue Scotland I mean at this point you've had a lot of meetings with different agencies are there any problem areas in terms of accessing information are there any departments of the Scottish or UK level government which you think need to be a bit more receptive to any request you've made for information or have broadly found it to be quite a constructive relationship we for where we have requested information you know broadly those requests have been met we are sort of interested I don't know if concerned is the right word but we're certainly interested to see how the relationship develops with HMRC obviously the Scottish rate of income tax isn't yet in place so all we have is anecdote about what that agency may or may not be able to deliver to us but our understanding is that they're very conscious of the need to deliver data to us in a way which keeps safe under privacy regulation and law what has to be kept safe just as Revenue Scotland has to has to do that so um there are some areas that are not tested but we have not had major issues to date thank you thank you thank you Jafster for by John um it obviously forecasting has been explored with you I'd like to move on to um the question of appointments and reports because I think your independence is is absolutely critical in in moving forward would you accept that you can't really be both an advisor to government and also scrutinise what it does yes again advisor may need a you know definition so that we are saying the same thing but we we do not conceive of ourselves as advisors to government on policy or whatever um but we do see ourselves as assessors the the body that scrutinises what um government produces that requires interaction with the government teams and I think I was referring you know quite particularly there were members of the commission who had a role on the council of economic advisors and I think there there could have been a perception that that um would have been unfortunate I gather that position has now changed there that position changed it was actually raised at our um appointment hearings or I'm sorry what the term is uh and um sort of we we took action then to um uh you know end our terms with the council of economic advisors although I could actually say to you that would not have been a conflict but that's a case of there might be perceived to be one and we wanted to address it and perception is is all unfortunately um in terms of appointments some witnesses have suggested that the powers that ministers wish to have over appointments and you know all of that area of work might be excessive and and be considered to be um dare I say it interfering do you think they've got the balance of powers right or would you again in terms of perception to secure your independence prefer it to be a relationship more directly with the parliament look to both my colleagues to give a view I mean we've talked about so many of these issues um at the end of the day we are answerable to the parliament at the end of the day the parliament approved our three appointments we were recommended through a ministerial line but uh we were debated um and I read the debate uh transcript and actively debated on the floor of the parliament and then our appointments were approved and we are answerable here I mean you represent the the fuller parliament so that's ultimately uh how we conceive ourselves but um Andrew or Campbell any other view no I substantially agree with that I think perhaps only to slightly rephrase your position on that if I may um I'll do it anyway and that is it's not it's not it's not so much uh it's not so much the power of the ministers it's you're really suggesting with it an alternative appointments committee or something should sit to make the nominations rather than the ministers and I wouldn't want to intervene on that I don't think we make much difference in reality but it's the perception maybe important can I also say sorry am I cutting you off okay um can I also say that um as we build in um a little bit of a team um to help us in our work and we have started that this over recent months with two part-time research assistants but we would probably look to uh some full-time uh you know economist strength bench strength um we would hire those individuals externally I mean we would we would advertise we'd have an open process um to hire those individuals so um if that is helpful to to your thinking I think again perception is all the fact that ministers control the degree of the appointment process and take powers to themselves to do so I don't think is is helpful to that perception but but um let me see if I can manage this question without it being rephrased um submission of your report okay um what's interesting we have experience obviously of public bodies submitting reports to government in advance of publication um technically for um checking your issues of accuracy but actually in practice issues of presentation have been covered as well um again as a perception in some cases of government interference in that process some witnesses have suggested um that actually you shouldn't give them any notice of your report on theirs um and that actually they should they should um or if they're being generous they should have 24 hours notice to enable them to respond and I would be interested in your view on what you would think would be appropriate given that the OECD thinks that providing a report in advance favours the government again we've given a lot of thought to this and we've heard views from this committee in the past as well we feel first of all so we have done one report which you were very kindly said you had read being new to the committee um and in that case we did submit it because we're told this was the proper thing to do last year for fact check and that was very helpful to us and we continue to think that that is very helpful to us to make sure we've got our facts uh correct um so so there's there's something in that we didn't change our findings we didn't uh uh you know we weren't concerned that um we were offending anyone by doing this and no one came to us and said change anything this was purely a fact check so there is something about that kind of engagement um that can be the timings are um when can play with the actual timings so the forecasters could have the forecast essentially done um and not to be changed and they could see our report and correct any facts uh or suggest facts were different um or it could be done before the forecast is finalised we could look at those details but we think that that is valuable we think it is hugely valuable to have a series of challenge meetings um with the forecasters because that is really the value that we add as Campbell has said that's what we can do um and what we tried to put out in our our submission to you was a way to to balance um what is a bit of a conundrum um how do we get this right so we proposed this may or may not be right we'd happily take some guidance but we propose that we have those challenge meetings early in the process we would go back to the previous year's budget we'd uh look at any suggestions we made or criticisms we perhaps had and discuss those we'd find out what the forecasters were doing in terms of changing or adapting their approach to a forecast or indeed taking on a new devolved tax because we'll be facing those relatively soon and what they're doing do that early early days give them our challenges or whatever we give them uh which is not advice um we do this by the way in the OBR teleconferns as we join as well this seems to be normal practice um and then let the forecasters get on with doing running their numbers we wouldn't be part of that because we don't look at the numbers and the outputs we look at what their thought process is going into it um at the end of the day we've proposed that we could come out with our uh report on the budget um right at the end of the process but quite honestly if we're to add value there need to be the right points in time to add value if we simply sit aside as a think tank might do and analyze the budget once it comes out um you know if the budget um I um changed my wording here so forgive me for speaking in slang but if the budget turned out to be the draft budget turned out to be rubbish um I don't think it would but if it did um surely um that does no one any good in the parliament and surely it doesn't do the commission any good because people would say well where were you um so we do need to engage we need to engage in the right way that's our thinking just now okay um can I go back to something because I absolutely accept that you look at the processes and the assumptions that are made um but from our perspective you you gave advice on non-domestic rates um the cabinet secretary reflected on that okay on the assumptions the modelling reflected on that made a change we've no idea of what he changed it from you know and what what was wrong with the underlying assumptions equally with lbtt you made a recommendation about behaviour we don't know what's happened since then if the Scottish government have taken that on board or not so that there's almost a bit that doesn't feel transparent about what's happened since you've said what you've said on on those issues and my fear is um that that the interaction you described that might be quite reasonable amongst reasonable people um isn't transparent and the perception is there's something not quite right there so you know my approach to this is not to make things difficult necessarily um but but how do we ensure that your independence is absolutely guarded that's the most precious thing I think here it is the most precious thing and we continue to ponder on how best to do this um but one thought that occurs to me is that when we write our report on the draft budget uh we should give you more or give anyone who reads it more detail uh you know we said he said he said that kind of thing um so that may be that may be helpful in terms of of those kinds of movements but in terms of the change which the um minister made um uh the economic determinants and you know non-domestic rates um we didn't advise on what that change should be or give a parameter we simply thought that the range from our perspective our judgment was that it looked somewhat optimistic so we would in that case probably have to have the government spell out as well what it changed from and to or you would have to speak to the government I suppose and ask that question I don't know but keep keep challenging this because we will get it better and better as we hear those those perspectives thank you okay john before by gene thanks convener um I mean I suppose to build on this because you do I like the word conundrum which seems fair and you mentioned that in your written paper and also in your answers to Jackie Baillie but but this whole question of you know more interaction might get us to better results as against less interaction might be perceived as more independent but we might not end up with the best result I think my main point on this would be do we need to have more some of this in legislation or can we leave the legislation as it is and there's going to be a memorandum of understanding or there's just going to be practice or you know how do we put that all of that into practice I'm not an expert on legislation I would give my two colleagues a minute to think about how to respond to your question but my first thought is in all my professional experience the more you know I think of regulation which is what I've dealt with so much in my business life the more restrictive the more those statements try to anticipate something the more they omit and don't anticipate the full you know the full so more general expectations can be enshrined in legislation but I wouldn't instinctively say we need to become very specific in legislation because I think ultimately that will have some unintended consequences or omissions I don't know but idea that I mean I think your key point is that all minutes would be published so for you that would be the the way we answer that in a sense yes so you'd see what it was that was being discussed and what came to the table the challenges we raised and you know you could see that on an iterative basis we started taking minutes of those challenge meetings once we had a bit of assistance which was the beginning of a summer and we have put summaries of those meetings already on our website so in essence we've said we discussed these topics in a challenge meeting we have the meeting the minutes and with our draft budget report we will append the full minutes so that those are completely public I think I just would agree with Susan but there's also it's a kind of evolutionary process if we'll post these minutes we'll add commentary in our report if the committee then finds that that's insufficient demonstration of independence or the whole method is still not quite convincing enough then as an iterative process we will we'll find something else until it works for everyone's satisfaction that's the we're we're here to make it work so and our goal is the same as yours that that we are perceived independent yes so that's how we're going to say something first out now and when those minutes come out if you look at them you'll see some thoughts comments as to what the Scottish Government might think of doing next on a particular problem so it's not just so and so said such and such it's a bit more detailed than that and second thing is that's exactly what the manager policy committee in London does is puts up the transcripts I mean it actually does it who said what and this is likely to be a little bit briefer than that but they actually do to get the transparency they do exactly the same thing they work on the minutes I mean as I understand it that model is similar to what was happening in Ireland and Gina Irker and I were over in Dublin meeting the Irish fiscal advisory council and others I think they'd come up against the problem I think this year that they were also involved quite early on with a lot of the macroeconomic forecasts they were not involved in the detail of the budget but when the budget was announced there was such a big increase in spending because the Irish are doing so well apparently that that was then knocking on to the macroeconomic forecasts and then there was a bit of attention between the government and the council as to exactly what was being endorsed while endorsed in their word reasonable in our words I mean is there a potential problem there if you're not involved kind of at the latter stage as the budgets being prepared it depends on the forecasting methods that are being employed whether they if there's a big regime change if there's a big change in tax policy that no one has discussed up until that point then there could be behavioural consequences and if the modelling isn't taking account of that then it's quite late in the state late in the day for us to then intervene to factor in that effect so your argument would be the model should be robust enough to cover these different scenarios that's the ideal situation yes okay enough I think just a couple of other points I mean again partly because I was over in Ireland myself the when they they also moved from a non-statuary to a statutory basis and I think we're somewhat taken aback at the amount of admin HR policy health and safety you know all of these kind of things which fall in once your statutory body because although you're a small statutory body you've got a lot the same responsibilities as a big statutory body is that something you're aware of and you've taken into account very much aware of that and we have been thinking about that and beginning to have discussions and give some shape to a transition team or transition board which would be supported out of the the civil service so there would be a team that would actually take us through all the stages we would be we would go on to a statutory footing on 1 April 2017 so from now we have about 16 17 months whatever it is but we feel we need to get ourselves well ready well before that and what I mean by that is we understand that the keeper of the records I think is the title or the office that we have to keep records of all of our exchanges emails notes everything now as a banker I'm quite used to that but we have they're trying to put in place or have put in place now processes to maintain those records so we want to get ourselves into those good habits well ahead of time but we will need a risk register I assume we will need to have our own finances audited we will you know need to do all of those things we've started having right now over this year quarterly what we call governance meetings although we discuss these things more frequently but those meetings are to discuss those governance issues so we're trying to anticipate both to plan what we need to do over the next year plus but also put a number of those things in place now so we're ready we also understand we have to have a an accountable officer and we have talked about my suggestion of a title so it may change or not but a chief of staff but a senior individual who who we would hire again hire you know ourselves if you see what I mean advertise for the post and I would look to that individual also to keep us right in terms of those matters but I wouldn't underestimate the amount of time that all of that takes at the same time those matters are important and we would undertake them okay that's fair and the final area touched on in your letter the final paragraphs about resources and you talk about you know future if your remit expands you'll have to commit more time and then leading on to the resources available to it will need to grow prudently to support the additional work I mean we have at some suggestion that we are funding the Scottish Fiscal Commission quite generously when we compare to Ireland which has full range responsibilities and also Sweden I mean are you anticipating that your budget might not be sufficient no a few comments there one is that the budget partly is built on an assumption of the this government's pay rates for if we have two or three or one full-time economists let's say that pay rate comes from this government that may be different in other countries the budget proposed also anticipates the potential need that we might have to go into fully commercial office space for instance right now we as you know are being hosted in our non-statutory phase by the University of Glasgow very generously so it anticipates some additional costs but I would also point out and I don't know I read your write-up from the the visit to IFAC in Ireland where it points out that they have half a dozen or eight sycandies the note didn't say whether these were carried in their own budget whether they came from government or or or what the OBR certainly Robert Chote has been very open with this committee in talking about the number of people in government at the UK level who provide data and information and support the work of the OBR so I wouldn't want to say that the budget that's proposed is right wrong generous or not it depends what that encompasses could I also just assure you that and we have had this conversation we're in absolute agreement that we would have no intention of spending up to a budget a budget isn't there to be spent the budget is there to allow us to grow and develop as we see fit in this very you know incredibly important moment as we go from non-statutory to a statutory footing we wouldn't go out and hire four full-time economists if that was allowed in the budget we might hire one if we feel we need another or as new taxes come in we might need to add to that and to answer an earlier question if we found we suddenly had much expanded responsibilities we might have to come back and say it's not enough but we certainly would not today say it's not enough we think it's a very fair budget and does give us some scope for making our own independent decisions about how and in what ways to expand thank you very quickly really having the Irish experience that was very interesting two things that come to mind first of all smaller country but in the Eurozone and of course independent and with different and you're right to say that the staff my memory was that actually they were all seconded one from central bank and so on for a period of time so that the staff were changing as well but came with different experience and that was that was interesting but of course they did have five members of ifac and I wonder whether that's something that you've thought about too that three people is that under discussion do you think about that going forward and further to that you mentioned earlier on today in an answer to a question that about the pool being very small that was also a discussion in Ireland and four of their five commissioners live abroad although they're Irish and that that was a bit of a revelation to me I mean suddenly we were looking internationally and knowing that the Scottish diaspora is even bigger than the Irish diaspora that there may be expertise around a globe that we might want to encourage and you did say earlier on that with 13 14 universities in Scotland that you know that there was plenty of expertise for people who would step into your shoes and I just wondered if you would address that question whether there really are the people that again perception being everything I mean three of your very high profile and so on is there really that pool available in Scotland I my colleagues may have anecdotal views being academics themselves and knowing knowing their peers we haven't sat down as a commission and said who would those likely people be but there is something about the governance of succession and succession planning and that should become part of our conversation so in a way your question is a good trigger in that direction should there be more than three of us as members of the of the commission it seems to me two would be too few and there is always the number 27 bus risk so there might be a thought about increasing our number but we all of us are quite prudent in saying let's grow in anticipation our view is let's grow as we need to as we become bigger as we go into statute if we need to grow so I wouldn't be surprised if we spoke to this committee at some point and said look we do think we need another another commissioner whose term would then be staggered who would gain the experience and the knowledge that was needed to keep all of this going but in in terms of is the pool out there or not I think you occasionally talk to some other academics who might well be considered candidates if they were interested for something like in something like this but we haven't determined who those might be or how big the pool is I would if we're thinking about having four four instead of three or something of this kind I would rather than fix on particular number I would fix on particular expertise and skills so there's a comparative advantage within the within the commission at the moment that's working fine but you know you keep an eye on that so we certainly talked about that going international the diaspora point it's not just Ireland a lot of these commissions do that so that's not from my perspective not an issue that's fine there are too few expertise there's always a sorry too few a too smaller pool there's always a problem there's plenty of people out there the question is whether you want actually want them it's a question of you know what kind of people are out there and that might be a bit more restrictive it depends and whether they would want to take on this role and they might want to do it yeah I mean certainly in the swedish example I mean I know quite a lot about these things in the swedish example the original chairman walked out in a huff because it was taking too much time he wanted to publish a few academic papers at the same time I sympathise enormously so some people might not want to do it so it's a bit of a tricky thing okay and just finally I'm sorry that time's moving on but while you don't see yourself producing you know duplicating work that's been done in a full forecast and so on but selecting particular pieces of work I mean would you would you say that the that the change in in LBTT from stamp old stamp duty and the kind of figures that we've got at the moment that merit the kind of work that you would home in on to see whether that I mean it's quite a small part overall of the budget but it's quite an important one and I can see that there are there are kind of government policies which come through into these kind of forecasts how would you deal with with drilling drilling down into or looking more comprehensively at any one particular part of the forecasting and avoid or ignore government policy that will actually have a determinant on the outcome so I think in our initial report there's I think several instances where we suggest that kind of the behavioural effects of policy it would be I it would be best if these could be incorporated somehow into the method of producing the forecast so I would I would argue that the kind of analysis that we could do is essentially to analyse these kind of behavioural effects and then you build up a model you build up some piece of analysis and wherever the policy happens to be you feed it through that's that model so it's kind of ready to do the policy analysis that you need it to do there may be other factors as well not just government policy changes but if you look at mortgages regulation over the last year has made the mortgage application process much more rigorous particularly for first-time home buyers than ever before there's a lot of debate going on whether that's too much so that will affect the number of people who can qualify for mortgage completely outside government policy so it's important to look at all those factors the external ones as well so it's a bit does any kind of break and the economic conditions that underpin an extrapolation of historical data then its behavioural responses you're starting to look at to those changes a little bit we're quite right about priorities setting the priorities which taxes to look at and so on which is and there are different sizes so I would put more weight on the bigger ones and I would also insist that the errors when we quote them if we quote them not only in percentages but also in pounds so you see what it bang that going to have on the on the budget as it were that helps prioritise quite considerably so I hope we do that in the future and for this sort of thing I also think it's important to avoid implicitly commenting on the underlying policies that's to say you take them as is for now if you're told for sure next year we're going to put this tax up or something and then you might be able to do that because that's a public announcement that's being made but otherwise we we don't want to be in the position which we've said this forecast rubbish because everybody knows this tax rate is going to go up or down or something which is why we've got a slightly delayed effect on the first hauling which is a case in point you know it's only when it actually comes in do you able to do something about saying how much effect will this have in pounds terms and even then it's somewhat uncertain when it's important to do it at that point but not second guess ahead of time thank you thank you thank you very much thank you I just wanted to very briefly on on the on the forecasting issue just to get my head around where we are because obviously we've had the evidence that I think lady rice you've very helpfully tried to disaggregate between what you call the sort of the capital F and the small F forecasting which I think is a helpful analogy to draw I mean when you're undertaking your work presumably the the work you're doing involves a degree of modelling that essentially replicates elements of the forecasting method in order to test the robustness of forecasts without sort of beginning at the beginning and ending at the end of the forecasting process would that be a fair assessment of the work that you're doing there's a there's a mixture of things so we kind of go through the nitty gritty of the methods that the Scottish Government are using we're also undertaking as I've said a series of projects which are looking at things which are just not contained within the methods that are being used as well so it's it's not just replicating an element of the forecast it's looking at something that's off model as far as the Scottish Government's concern and to see whether that's an influence that's a factor that maybe should be taken account of but currently isn't so it's a mixture of you know step by step analysing what's actually being done and looking at other issues of forecast which maybe should be taken account of but aren't currently being taken account of so it's a mixture of those and also in terms of the independence point or the separation between yourselves and Scottish Government I mean the some of the perception that has been is of you essentially sort of looking over the shoulder and you know saying are you sure about that how how involved are otherwise do you think you need to be in order for your challenge essentially the challenges that you would put forward to be one taken seriously but also done in such a way that it ensures that the information that is laid before Parliament is as robust as it needs to be I guess I would answer that question by saying it's not really our job to ensure that the information laid before Parliament is as robust as it could be it's the Government's job they're laying the information before Parliament so um so we're not saying here you must do this but we're suggesting have you looked at these factors you know we think this might have a big impact the Scottish Government can take these on board or not it's there it's their choice at the end of the day if they produced a forecast which in our judgment was not particularly robust we would say that um and they would have laid a not a non robust forecast in front of you but I don't think it's our job to ensure that they do their job we would have a different role spec if if that was the case sure I appreciate that I mean Ian Lainart who has done some work around comparisons etc has suggested that exertion of influence over over forecasts changes the kind of definition from independent assessor to advisor would you would you suggest that what what you perceive your role to be maintains that independent assessor role rather than becoming an advisor because to me an advisory role is very very much much more heavily involved and directing what happens or at least having a role in direction of what happens rather than challenge but yes we would expect the teams to be accountable in some way or answerable to us about why they did or didn't take any advice we gave them we're not in that kind of relationship with them we we operate and again I would say what I said before this is really absolutely the way the OBR operates it has a series of challenge meetings that produces some tables some data this is our thinking so far speaks to key key individuals in these meetings who raise questions and challenges and whatever and they go off and do some more work we're doing the same thing here that's what we do my way of work what I'm used to as an academic economist is the academic seminar so if someone presents their work and you interrogate them while they do that it's not always comfortable for the person presenting their work you go through it line by line you make very critical comments and it toughens up what they do and that's the model I have in mind when we then go and do our own independent pieces of research we intention is we would release those as technical working papers present them to interested audiences as well and go through the same process ourselves of the the academic seminar and you know come and get get us see what we've done kick holes in it if you can okay as I said a lot I'm back how you approach it is motivated by would I do the same would I or would I do something different at that point you can suggest have you thought about looking at this variable or this factor which has got left out it is up to them to to decide they may well come back if we have this extended period in which we're not doing this maybe more difficult but they would come back and say we tried that and it didn't work and there are a number of things we've picked on in different forecasting models they're using where we're not come to a complete end of trying this and trying that and all the rest but it's entirely up to them as to whether they try it or whether they come back or not so the motivation from our side is would I do the same which is what of course what you're doing in a seminar and if you if you go to beyond that stage then you do get more heavily involved and as I said earlier in general peroration on on forecasting you then find your independence is compromised so that's why I think it's not a good idea to be doing that and most I think probably most of these kind of commissions have come to the same conclusion they have these sort of backup calculations if you like they don't produce the official forecasts okay thank you very much that's concluded questions from the committee I've got three or four still to ask I think it's been a very long session I do appreciate your your involvement and your concentration and the clarity of your answers anything further you want you to add before we wind up the session I don't think so no this has been very useful as always conversations are but nothing else okay well thank you very much and no doubt we'll see you at the committee again before too long okay at the start of the meeting committee agreed to take the next item in private therefore we'd like to close the public part of the meeting to enable witnesses in the official report in public to leave I'm just going to call a one minute recess so we can go straight on to the final piece of business in private