The Scottish Fiscal Commission said that while the economy would grow by more than expected in the next year, longer term trends were “subdued”.
Finance Secretary Derek Mackay yesterday warned his budget may need to be re-visited next year in the event of a no-deal Brexit.
But the Fiscal Commission said that even with an orderly exit from the EU, there would be challenges ahead.
The economic watchdog has forecasted economic growth of 1.4 per cent in 2018 and 1.2 per cent in 2019, an upwards revision of its predictions in May, reflecting stronger recent economic performance.
However, it said it expected annual economic growth from 2020 onwards to settle back to around 1 per cent, reflecting low productivity growth compared with trends before the 2008 financial crisis.
Dame Susan Rice, chair of the Fiscal Commission, said: “We have seen economic indicators picking up recently and we believe that the economy will grow more quickly in 2018 and 2019. There is little change in the longer term when we expect the economic prospects for Scotland to remain subdued.
“Brexit is a major uncertainty in this forecast. Our central assumption remains that of a relatively orderly exit from the EU.”
The Fiscal Commission said the Scottish Government’s budget was being increasingly determined by devolved tax receipts, with a total of £15.2 billion to be raised through taxation in 2019/20 and £11.7bn through income tax alone.
Addressing MSPs at Holyrood yesterday, Mr Mackay said his budget may have to be “re-visited” if Britain leaves the EU without a deal.
He said it was “disappointing but necessary” to inform Holyrood he was preparing for the event of a no-deal Brexit.
He said: “If Scotland is forced out of the EU as a result of the actions of the UK government, it is vital that they ensure no detriment to the Scottish budget.
“As a responsible government, we are preparing as far as possible for all exit possibilities. We’re intensifying preparations in order to protect the Scottish economy, our businesses and our workers.
“A no-deal Brexit and continued chaos from the UK government will only make matters worse. It’s disappointing but necessary for me to advise parliament that if the UK does end up in a no-deal Brexit, I may be required to re-visit the priorities in this budget.”
Mr Mackay announced a series of measures to try and boost growth including a package of business rates relief and a “small business bonus” which would be the “most generous anywhere in the UK”.
He said there would be a below-inflation cap of 2.1 per cent on business rate increases.
Liz Cameron, chief executive of the Scottish Chambers of Commerce, said: “Much weighs on the mind of Scottish business amongst the midst of Brexit uncertainty and a lack of stability in Westminster.
“Today’s draft budget announcement by Cabinet Secretary Derek Mackay has responded to many concerns that have been raised by business.
“The Cabinet secretary has responded to the calls of Scottish business and announced the scrapping of the out of town levy, which was not practical or plausible.
“Whilst we recognise this will be kept under review, this is an important signal welcomed by the business community.
“Maintaining the small business bonus scheme and transitional support for businesses in hospitality, and for office premises in Aberdeen and Aberdeenshire is a sensible approach.”
Tracy Black, Scotland director of the CBI, said: “Against a backdrop of Brexit uncertainty, and the fact that no-deal remains a live concern, the Scottish Government faces tough choices ahead.
“Balancing ambitious spending plans with sustainable tax revenues isn’t an easy task, that’s why supporting the private sector to grow the economy is so essential.
“We welcome the fact that the finance secretary has listened to CBI Scotland and other stakeholders on business rates, scrapping the unhelpful out-of-town levy, capping the poundage rate and confirming the switch from RPI to CPI for the duration of this parliament.
“Scotland’s workforce is one of our greatest assets and we would like to see further detail on upskilling and retraining plans. Making use of the full talent we have available is key to boosting productivity and we’re encouraged by the Finance Secretary’s specific commitment to helping more women return to work.