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

Chapter 3: Function to Provide GDP Forecasts

25. In order to exercise the additional tax powers effectively, the Scottish Government and Parliament will need to have Scottish GDP forecasts to assess if the contingency borrowing criteria are forecast to be triggered as a result of an asymmetric economic shock (as defined in the fiscal framework - see paragraphs 64 and 66 set out in the box below) and to assist with the management of the Scotland Reserve. Further commentary on borrowing is provided in the box below.

26. At the UK level, the GDP forecasts which underpin the UK Government's Budget and Autumn Statement are produced by the Office of Budget Responsibility. As mentioned in paragraph 4, the Fiscal Framework states that the Commission will produce forecasts for Scottish onshore GDP. The draft regulations therefore add a new function to section 2(2) of the Act, requiring the Commission to prepare Scottish onshore GDP forecasts. Onshore is defined for this purpose as excluding extra regio economic activity, principally North Sea oil and gas extraction, but including the ancillary industries to the sector which are based onshore. This is the same definition used in producing the existing Scottish Quarterly GDP National Statistics publication,

27. The draft regulations also require that GDP forecasts should be produced on two occasions a year, including in time for the draft budget and then the laying of the subsequent Budget Bill. Forecasts will cover the period from the last published outturn GDP figures and the budget year split into quarters whilst the subsequent four years will consist of an annual figure. This will allow Scottish Ministers and the Scottish Parliament to assess borrowing parameters for the forthcoming budget year.

Paragraph 64 of the Fiscal Framework Agreement

Under this agreement, the Scottish Government will have the power to borrow up to £600m each year within a statutory overall limit for resource borrowing of £1.75bn, for the following reasons:

• for in-year cash management, with an annual limit of £500m;
• for forecast error in relation to devolved and assigned taxes and demand-led welfare expenditure arising from forecasts of Scottish receipts/expenditure and corresponding UK forecasts for the Block Grant Adjustments, with an annual limit of £300m; and
• or any observed or forecast shortfall in devolved or assigned tax receipts or demand-led welfare expenditure incurred where there is, or is forecast to be, a Scotland-specific economic shock, with an annual limit of £600m.

Paragraph 66 of the Fiscal Framework Agreement

A Scotland-specific economic shock is triggered when onshore Scottish GDP is below 1% in absolute terms on a rolling 4 quarter basis, and 1 percentage point below UK GDP growth over the same period. The shock may be triggered from outturn data or forecasts. In the event that forecast data shows an economic shock but outturn data does not, no retrospective revisions will be applied to borrowing powers.

Paragraphs C.65 and C.66 of the Fiscal Framework

C.65. A Scotland-specific economic shock is triggered when onshore Scottish GDP growth in real terms is or is forecast to be below 1% on a rolling 4 quarter basis ( i.e. actual or forecast real terms GDP growth is to be measured over 4 quarters compared to the previous 4 quarters) and at least 1 percentage point below actual or forecast UK GDP growth in real terms over the same period. Where a revision to forecast or actual onshore GDP growth figures shows a Scotland-specific economic shock, the trigger will also apply. Where the provision is triggered, the Scottish Government will be able to borrow up to the agreed limits for the year in which the trigger applies plus the following two financial years. In the event that forecast data or GDP figures suggest an economic shock but outturn data or revised data does not, no retrospective revisions will be applied to borrowing powers.

C.66. Forecasts of onshore Scottish GDP growth will be produced by the Scottish Fiscal Commission. Onshore Scottish out-turn GDP will be estimated by the Scottish Government in their quarterly GDP National Statistics release.

QUESTIONS

Question 4: Do you think the approach in the proposed regulations will successfully place a duty on the Scottish Fiscal Commission to produce onshore GDP forecasts, excluding North Sea oil and Gas extraction?

Question 5: Do you think that the regulations, and the resulting GDP forecasts, will enable Ministers and Parliament to assess Scottish Government borrowing parameters for the budget year?