A consultation on the Draft Scottish Fiscal Commission (Modification of Functions) Regulations 2016

Introduction

Purpose

1. This consultation provides an opportunity to comment on the drafting of regulations that expand the Scottish Fiscal Commission's ("the Commission") functions. The Scottish Fiscal Commission Act 2016 ^[1] establishes the Commission as the producer of official forecasts to underpin the Scottish Budget. The expansion of functions is required to give effect to the Fiscal Framework ^[2] agreed between the UK and Scottish Governments and to reflect the further powers devolved by the Scotland Act 2016.

2. A draft of the regulations, which update the Scottish Fiscal Commission Act 2016 ^[3] ("the Act"), can be found in Annex A . The Scottish Government intends to lay finalised legislation in Parliament in January 2017. The intention is for this to take effect from the 1 April 2017 - at the same time as the Commission becomes a statutory body and the first of the new powers also commence. Your response will help inform that process.

Scottish Fiscal Commission: Current Position

3. The Commission was established on a non-statutory basis in June 2014, with a remit reflecting the fiscal powers devolved to the Scottish Parliament under the Scotland Act 2012. It serves as Scotland's independent fiscal institution with a key role in enhancing the credibility and transparency of fiscal projections prepared by the Scottish Ministers.

4. The Commission's non-statutory purpose, remit and duties are set out in a "Framework Document" ^[4] agreed between the Commission, the Scottish Government and the Scottish Parliament. Its key roles are to:

• Undertake independent scrutiny and assessment of forecasts, prepared by the Scottish Government, of receipts from Land and Buildings Transaction Tax, Scottish Landfill Tax and the Scottish Rate of Income Tax and of the economic determinants underpinning Scottish Government forecasts of Non-Domestic Rate Income.
• Lay before the Scottish Parliament a report of its assessment of the Scottish Government's forecasts of tax receipts from the devolved taxes and of the economic determinants underpinning forecasts of Non-Domestic Rate Income, at the time the Scottish Government publishes and lays before the Scottish Parliament its Draft Scottish Budget.
• Conduct its business independently with integrity and transparency.

5. It is intended that the Commission will be established on a statutory basis from 1 April 2017, at which point the Commission will become responsible for producing official forecasts to underpin the Scottish Budget, reflecting changes to the Commission's remit agreed in the Fiscal Framework.

6. Section 2 of the Act sets out the functions of the Commission. Under these provisions, the Commission is under a statutory duty to prepare forecasts of tax receipts and assessments of the Scottish Government's borrowing projections to inform the Scottish budget process. In particular, the Commission is to prepare 5-year forecasts of receipts from:

• devolved taxes, including Land and Buildings Transaction Tax and Scottish Landfill Tax and any future devolved taxes;
• non-domestic rates; and
• the Scottish rate of income tax.

7. In addition, the Commission must assess the reasonableness of Scottish Ministers' borrowing projections and may also prepare reports on other fiscal factors (including forecasts, assumptions or projections prepared by Scottish Ministers). Forecasts have to be provided twice a year - once in sufficient time for the Scottish Ministers to formulate the draft budget and the other in time for the Scottish Parliament to use forecasts to support scrutiny of the Budget Bill for that year. The timing of other reports is at the Commission's discretion.

Scottish Fiscal Commission: Context for Expanded Functions

8. Section 8 of the Act provides Scottish Ministers with the power to modify, by regulations, the powers of the Commission. This allows for the addition of new functions, modification of existing functions and removal of functions. Such regulations are subject to the affirmative parliamentary procedure.

9. The Scottish Government now intends to use the regulation-making powers provided in section 8 in the Act to expand the functions of the Commission to reflect the powers devolved through the Scotland Act 2016 and the content of the Fiscal Framework agreement. As the Act was passed before the Scotland Act 2016, the Scottish Parliament did not have competence to legislate for these functions during the parliamentary passage of the Bill.

10. In summary, the functions of the Commission will need to be expanded as follows (to take effect from the 1 April 2017):

• addition of a function to prepare forecasts of demand led social security expenditure, once devolved; and

• addition of a function requiring the Commission to prepare forecasts of Scotland's GDP excluding extra regio economic activity ( i.e. Scottish GDP excluding oil, gas and other hydrocarbons produced in the Scottish sector of the UK Continental Shelf).

11. Further commentary on these various aspects is set out in the subsequent chapters of this consultation.

12. The requirement to produce forecasts of revenues from further devolved taxes is already provided for in the Act, which will automatically require the Commission to produce forecasts of revenues from Air Passenger Duty (due to be devolved in April 2018) and the Aggregates Levy once devolved. Therefore no modification is required to cover the Commission's role in relation to these additional taxes devolved under the Scotland Act 2016. The position in relation to income tax is considered further at Chapter 1 below.

13. The Scotland Act 2016 also provides for the Scottish Parliament to be assigned half of the VAT raised in Scotland. Receipts from the first 10p of the standard rate of VAT and the first 2.5p of the reduced rate of VAT in Scotland will be assigned.

14. The assignment of VAT will be based on a methodology currently being developed by the Scottish and UK Governments estimating expenditure in Scotland on goods and services that are liable for VAT. The two Governments have agreed that VAT assignment will be implemented in 2019-20.

15. The Joint Exchequer Committee will agree arrangements for production of VAT revenue forecasts closer to this time, with the intention that there will be a transitional period within which the methodology and modelling will be refined. If a decision is taken that the Commission should produce these forecasts, further Regulations will be brought forward at the appropriate time.