The Scottish Government will need to manage volatility in its Budget as the devolution of tax and spending powers becomes fully operational, according to the Scottish Fiscal Commission.
The Commission published its official five-year economic, tax and social security forecasts today (30 May).
From next year the UK Treasury's funding of the Scottish Budget will begin to be adjusted to reflect actual income tax collected. The Commission estimates that this will reduce the Scottish Budget by £229 million in 2020-21 and by £608 million the following year. These reconciliations are part of the fiscal framework agreed between the UK and Scottish governments.
The Government can borrow and use its reserves to help deal with these variations, but it may also need to adjust its spending plans.
The Commission highlights other complexities facing the Scottish Budget. The scale and nature of social security benefits devolved from April 2020 - around £3.5 billion - means there are greater uncertainties facing the budget. All eligible benefit applicants must be paid even if the total cost is greater than was budgeted for, based on the Commission's forecasts.
Reforms such as increasing take-up and widening eligibility are likely to mean spending on social security will be more than the funding received from the Treasury.
Dame Susan Rice, the Commission's Chair, said:
"Managing the Scottish Budget becomes far more difficult from next year. The income tax reconciliations and major social security powers that begin in April 2020 introduce substantial risks. The Scottish Government will need to set its spending plans to accommodate these challenges."
Also in the report, the Commission forecasts economic growth of 0.8 per cent in 2019 and 0.9 per cent in 2020. Although GDP growth picked up in 2018 to 1.3 per cent and unemployment remains at a historic low, the Commission expects slow growth in productivity and real earnings to persist. Combined with ongoing uncertainty created by Brexit it is expected these factors will continue to limit growth in the Scottish economy.
- The Commission's Report 'Scotland's Economic and Fiscal Forecasts - May 2019' is available now, along with a one page graphic of key figures and a summary document. Background information is also provided, including spreadsheets with data for all the report's tables and charts.
- An explanation of reconciliations appears on Page 4 of the forecast summary document and on Page 6 of the main forecast document. There is further reference on Page 49.
- For our forecasts, we assume the UK leaves the EU in October 2019. As the terms on which the UK may leave the EU in October 2019, if at all, are still highly uncertain, we make broad-brush assumptions to capture a range of possible Brexit outcomes in our forecasts, and so they are robust to a range of possibilities. A no-deal Brexit is not captured in our central assumptions and remains a significant downside risk to our forecasts.