Scottish Budget faces pressures from tax and social security

The Scottish Fiscal Commission says today it expects a strong economic recovery in 2021-22 with Scottish GDP growing by 10.4 per cent and economic activity returning to pre-pandemic levels by the second quarter of 2022.

But there is some evidence that the Scottish economy has been lagging behind the rest of the UK. Scottish income tax revenues have fallen behind the Block Grant Adjustment – the amount subtracted from the Scottish Budget to account for the devolution of tax revenues – with a shortfall of £190 million anticipated in 2022‑23. This shortfall is expected to reach £417 million by 2026‑27, driven by slower growth in employment in Scotland compared to the UK.
 
The Scottish Government continues to make significant reforms to social security. The largest new payment, Adult Disability Payment, launches in 2022, while Scottish Child Payment will be doubled to £20 per child each week from April 2022 and extended to children under 16 by the end of 2022.
 
As a result the Commission expects spending on the Scottish Government’s largest social security payments and completely new payments to be £750 million more than the social security funding received as part of the Block Grant by 2024-25, reducing the funding available for other spending priorities.
 
The Commission’s chair, Dame Susan Rice, said:

“After taking account of inflation we expect the Scottish Budget to increase by 1 per cent in total over the remainder of this Parliament, largely because of increases in UK Government funding.
 
“Behind this headline increase, the Scottish Government faces slightly slower growth in income tax revenue than the rest of the UK but faster growth in social security spending. These will create pressures over the next five years which the Scottish Government must manage carefully.” 

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Notes for Editors

1. The Commission’s Report Scotland’s Economic and Fiscal Forecasts – December 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 explains changes in the 2021‑22 Budget since it was set in January and since our last publication in August. Background information is also available including spreadsheets with data for tables and charts. 

2. The main report contains our official economic, tax and social security forecasts along with policy costings for the changes in tax and social security proposed in the Government’s budget. Our forecasts are just one component of the Scottish Budget; the report also gives an overview of public funding over the next five years and provides our assessment of the reasonableness of the Government’s borrowing plans.
  
3. Overall the Scottish Budget in 2022-23 is 2.6 per cent lower than in 2021-22, after accounting for inflation the reduction is 5.2 per cent. We expect the Scottish Budget to increase by 10 percent in cash terms over the five years between 2022-23 and 2026-27 and by 1 percent after accounting for inflation. 

4. Current information on the severity and likely implications for restrictions of the new Omicron variant is limited, but broadly we think it remains reasonable to assume the effects of Omicron fit within the central COVID-19 judgements described in our Report. We treat more severe effects from Omicron as a downside risk to the forecast. 

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 assist the Parliament’s scrutiny of the Scottish Budget and Budget Bill. 

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. 

 


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