Convener, I will answer that question in three parts, addressing the accuracy of the figures, how the commission has arrived at them and how we manage reconciliations, which is the right question to pose.
Our budget and the resources that we deal with are, of course, driven by the SFC’s and the Office for Budget Responsibility’s numbers. I have looked very closely at the SFC’s report—as members would expect me to do, since it informs the MTFS—and also at the evidence that it has given to the committee on the accuracy of the figures and its explanation of them.
It is important to point out that some people confuse forward forecasts with specific reconciliations. It does feel perverse that, when income tax is rising, overall tax take is up, gross domestic product is performing positively, unemployment is low and earnings growth has been increasing, we will have negative reconciliations over three years, as you have described, convener. However, that is down to relative forecast accuracy, as the Scottish Fiscal Commission has explained. It has said that its forecast error was “inevitable”. In new information that has appeared in the course of its giving evidence to the committee, it has also said that the average absolute forecast error could be around £500 million a year, positive or negative. The figures must therefore be seen in that context.
On the forecast errors, I note that we are dealing with two different forecasters that have two different methodologies and two different sets of assumptions. We then arrive at the figures on outturn. As we get more outturn data, we will have the exact figures. At present, the figures are still forecasts, but we will have the outturn data for the first financial year in July.
The SFC’s commentary and analysis says that the reconciliation is not about the performance of the UK or Scottish economy but about the accuracy of the forecasts. That is what this is about—the accuracy of the forecasts, which are reconciled on outturn. The explanation for that is given by the SFC, and we follow its analysis. Although an increase in income tax is forecast for Scotland, there is a block grant adjustment, and the income tax in the rest of the UK has increased by more than the income tax in Scotland, making our net position worse than was forecast. Of course, at the next fiscal event, we will get further updates to the forecast.
Beneath that, there has been stronger-than-expected growth in UK receipts, which was not forecast by the OBR, and that explains the divergence in the figures from the OBR and the SFC. What they are not sure about is whether that is a distributional or a cyclical issue. The SFC has pointed out that the negative reconciliations may well be followed by positive ones. I have read in the Official Report the commentary that it gave to the committee, and I note that, to explain why it believes that that has happened, it said:
“the rest of the UK has a higher concentration of higher-rate taxpayers and ... the recent growth in UK income tax revenue has been concentrated among them.”—[Official Report, Finance and Constitution Committee, 5 June 2019; c 5.]
From my point of view, that has increased the inequality in the rest of the UK between higher-rate taxpayers and others. As responsible forecasters, the SFC and the OBR will look at the outturn data, and their analysis of that data will inform future forecasts with a deeper understanding of the tax composition in Scotland that is based not on estimate but on fact.
That is the explanation of how the position has arisen, and I will now turn to what we are going to do about it. I think that it is prudent and fiscally responsible for me to assume that the reconciliations are right, although there will be further amendments, and work through the consequences of that.
The Fraser of Allander institute has said that many factors that are materially significant to Scotland’s economy are outwith our control. Those include the contributions of oil and gas to the economy, migration, Brexit and other matters. However, as we look at the potential reconciliations, the tools that we will have to manage the position will include the resources that are available at the time. We should bear in mind that, although we have the ability to draw down from the reserve and we have the borrowing powers, as is set out in the MTFS, the majority of funding will still come from the block grant and the Barnett consequentials. They are still significant to Scotland’s budget, as are UK fiscal policy and UK tax policy as they relate to Scottish tax policy. Those things will be determinants of the resources that we will have available. We also have resource borrowing of up to £300 million available, and we can draw down from the reserve to manage the reconciliation on the scale that has been set out.
A range of factors will have an impact. Those include the block grant, Brexit, austerity and, in relation to future resources, the tax policy of the UK Government, because that will determine the resources that we will have under the fiscal framework. We will also have the forward look. All of those will set the context in which I will manage the reconciliations as part of the budget process—which I will, of course, explain at budget time. I do not think that it would have been right to set out individual scenarios. I know that there has been some criticism of that and some comment on how I could have done that. However, I have set out the principles that I would deploy in using the borrowing reserve.
Politics changes from day to day, and the UK Government’s tax position is very likely to change. One of the Tory party leadership contenders will ultimately become Prime Minister, and whatever tax policy they have will be materially significant to the fiscal framework and the relative position for us in terms of tax.
I will take a prudent, fiscally responsible approach to managing the substantial reconciliations. That is not helped, of course, by the Brexit uncertainty. However, that is the explanation on forecast accuracy, which is all that this is about; on how it has been explained by the SFC; and on what the Scottish Government will do to manage the process. I agree that the reconciliation that is required is quite substantial.