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Finance Committee 06 January 2016

06 Jan 2016 · S4 · Finance Committee

Item of business

Draft Budget 2016-17

Professor Leith Watch on SPTV

Okay. Last year, the Scottish Government approached the issue of forecasting buoyancy by starting from the long-run average, then it looked at a range of economic indicators to see whether, for example, GDP growth was higher, unemployment was going down or business confidence was going up. If the Scottish Government believed that the economy was strengthening, it would shift the buoyancy forecast above its average; if it believed that the economy was not strengthening, it would shift the average down. The problem that we had with that was that there was no formal assessment. I suppose that GDP growth has increased by 0.5 per cent but how does that 0.5 per cent translate into the deviation of buoyancy from its long-run average? Should buoyancy go up by 0.5 per cent as well? Should it go up by 1 per cent or less than that? There was no formal link between the two. Our position was that until that formal link was demonstrated, the adjustment was essentially ad hoc. There was a limited span of data for buoyancy subsequently, so it was difficult to do any modelling work on buoyancy at all. We recommended that the Government try to obtain a longer historical series for buoyancy. It managed to obtain such a series and create a second proxy series from NDRI receipts, so we now have two historical data series for buoyancy. If you look at those two series, you will see that there seems to be a cyclical pattern. Every time there is a revaluation cycle, there is a peak in buoyancy that slowly declines; then there is another revaluation year, buoyancy jumps back up again and then slowly declines. Given the way in which the buoyancy numbers are constructed, revaluation cycles should have no impact on buoyancy, so why that was the pattern is a bit of a puzzle. Throughout the year, we have pushed the Scottish Government on the matter and explored with the Scottish Assessors Association why the pattern exists, given that, a priori, we are not quite sure why it should exist. They have come up with the story about the relationship between the revaluation cycle and what are called rolling revaluations. The idea is that the rateable value of a property can be appealed at any point in time if the nature of the property changes, but revaluations can be appealed only in the year in which they occur. What tends to happen is that the rolling revaluations are resolved only when the revaluation appeals are resolved. That gives a mechanism for explaining the cyclical pattern. We have encouraged the Scottish Government to quantify whether it can reasonably explain the pattern, and we now believe that it can. We are looking for further work on that to strengthen our description of the cyclical pattern because only by controlling that can we extract the residual information from the series to assess to what extent buoyancy is affected by other economic variables such as GDP growth, unemployment and all the rest. We are half way through a process of enhancing the description of the data to allow a more formal modelling of buoyancy in the future.

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Finance Committee 06 January 2016

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