In its Budget Scrutiny report, the finance committee also expressed concerns over an additional £620 million of funding counted on by the Scottish Government, which it warned had not been confirmed and could leave a gaping hole in Scottish Government finances.
It said that evidence had shown that mean pay growth relative to pre-pandemic levels was below average in all Scottish regions, as the country is hit by a reduction in oil and gas activity, while there is also a lower level of labour force participation in Scotland, driven by an ageing population. It pointed to data published by the CBI which showed that Scotland lags behind other parts of the UK or international competitors in productivity indicators such as business investment, exporting and innovation.
The report said: “We consider that evidence showing that Scotland is lagging behind almost all other areas of the rest of the UK in key indicators of economic performance is deeply worrying.”
It added that forecasts showing Scotland’s income tax receipts falling behind the Block Grant Adjustment could put Scotland’s future fiscal sustainability at risk.
The additional sources of income cited by the Scottish Government as making up the £620m funding include: additional UK Government funding at Supplementary Estimates; additional Government funding at a spring fiscal event; agreement between the UK and Scottish governments on funding transfers for a spillovers dispute relating to income tax, and income from the Crown Estate offshore wind leasing.
The committee asked for the government to issue updates as and when the sources of income are confirmed and for clarification of how the government would address any shortfall if the funds do not materialise.
It said: "The Scottish Government’s assumption that it will receive £620 million in additional sources of income for the resource budget which have not yet been confirmed, gives the Committee some cause for concern. While we accept that this approach has benefits in providing greater opportunities for transparency, scrutiny and effective financial management, should this sum not materialise, it will place significant additional pressure on the Scottish Budget at a time when the impact of Covid-19 and other continuing pressures persist.”
The report raised the issue of an independent report into the Fiscal Framework, which which was due to be produced by the end of 2021 and has not yet been commissioned – and called for plans to be put in place to manage the potential risks of the Scottish Government almost reaching its capital borrowing limit.
Kenneth Gibson, convener of the finance committee, said the Committee agreed with the Scottish Government “that it faces a challenging year”.
He said: “It’s clear that with UK Government grants continuing to decline, further fiscal flexibility for Scotland must be considered. Borrowing limits are too constrained and are being eroded by inflation. Tax rates remain unchanged but, as in the rest of the UK, inflation will bring more people into higher bands.”
He added: “To ensure Scotland’s public finances are placed on a more sustainable footing, productivity, wage growth, demographic change and labour market participation should be a key focus for Scottish Ministers.”
A Scottish Government spokesperson said: “We will study the detailed points the report raises before responding to the Finance and Public Administration Committee shortly.”