The Scottish Fiscal Commission published its latest official forecasts today setting out how Scotland’s economy is recovering from the pandemic and how the Scottish Government’s plans for social security will affect spending and its finances.
The economy is growing… and inflation will increase
The Scottish Fiscal Commission’s five year economic forecast shows Scotland’s economy is rebounding faster than was anticipated in the forecast published by the Commission during the second lockdown in January 2021. Although COVID cases remain high, the vaccination programme has reduced hospital admissions and economic activity has increased in response to the relaxation of public health restrictions.
The Commission’s chair, Dame Susan Rice, said:
“We now expect the Scottish economy to grow by 10.5 per cent in 2021‑22, mainly fuelled by household purchases as consumption reverts to pre‑pandemic levels, supported by higher income households who were able to save during the lockdowns.”
As the economy recovers, domestic recruitment difficulties combined with international supply pressures are pushing the inflation rate upwards, now forecast to peak at 4.0 per cent by the end of 2021 in line with the Bank of England’s latest assessment.
The Scottish Government has received additional funding from the UK Government to support the pandemic response. Funding for 2021-22 will not be confirmed until late in the financial year. The Commission notes any large changes may create difficulties for the Scottish Government in managing the Scottish Budget.
Social security bill is rising
The Scottish Fiscal Commission forecasts that devolved social security spending will increase from £3.7 billion in 2021‑22 to £5.2 billion in 2026‑27, as more people receive social security support each year and payment amounts are uprated by inflation.
The forecasts include the Commission’s first estimate of the Scottish Government’s spending on their new Adult Disability Payment (ADP), due to replace the UK Government’s Personal Independence Payment (PIP) from summer 2022. It is estimated that by 2026-27 spending on ADP will reach £3.0 billion which is £0.5 billion higher than would have been spent on PIP.
The Scottish Government receives funding from the UK Government based approximately on what would have been spent on PIP in Scotland, so these additional costs of ADP will need to be met from elsewhere in the Scottish Budget.
The Commission’s chair, Dame Susan Rice, said that:
“We expect higher spending as a result of new social security payments introduced by the Scottish Government. These new policies are a long-term commitment so finding the budget to fund them will be a challenge not just for this government but also for those of the future.”
NOTES FOR EDITORS
1. The Commission’s Report Scotland’s Economic and Fiscal Forecasts – August 2021 is available now, along with a one page graphic of key figures and a summary document. We have also published a Fiscal Update that discusses the 2021‑22 Budget in detail and a Supplementary Forecast Evaluation Report that contains evaluations of our December 2018 income tax and February 2020 Non-Domestic Rates forecasts. Background information for all the publications is available including spreadsheets with data for tables and charts.
2. The main report contains our official economic, tax and social security forecasts. Our forecasts are just one component of the Scottish Budget; the report also discusses how the Scottish Budget is set. Within this context we provide our assessment of the reasonableness of the Government’s borrowing plans.
3. Personal Independence Payment and Adult Disability Payment provide financial assistance to contribute to the increased costs incurred by an individual because of a disability or long-term health condition.
4. The latest estimate of COVID‑19 funding for 2021-22 is £4.9 billion, with the final level of funding not confirmed until early 2022. In 2020-21 the UK Government also provided the Scottish Government with a guarantee on funding levels so they could not be reduced later in the year. The UK Government also allowed late funding announcements to be deferred to 2021-22. This year there is no guarantee and currently no arrangement for deferring funding.
5. The Scottish Fiscal Commission is the independent fiscal institution for Scotland, established by the Scottish Fiscal Commission (2016) Act. Our statutory duty is to provide the independent and official forecasts of Scottish GDP, devolved tax revenue and devolved social security spending for the Scottish Government to use in its budget and financial planning. The Commission’s forecasts will also inform the Scottish Parliament’s pre-Budget scrutiny.
6. The Commission’s forecasting remit is specified by the Act and in secondary legislation. A full list of what we forecast is given in the ‘explainers’ section of our website.
7. Our forecasts represent the collective view of the Scottish Fiscal Commission, comprising the Commissioners: Professor Francis Breedon, Professor Alasdair Smith, Professor David Ulph, and the Chair, Dame Susan Rice.