Scotland faces £1.7 billion black hole in public finances

Scotland is facing a £1.7 billion black hole in its public finances as another five years of economic misery looms, according to the country's fiscal watchdog.

The economy is likely to lag behind the rest of the UK, with growth not expected to top 1 per cent until 2023.

The Scottish Fiscal Commission issued the warning in a new report on the state of the nation’s finances.

Wage levels will also remaining sluggish, meaning the forecast for income tax revenues has been cut by £1.7bn over the next five years.

Finance Secretary Derek Mackay has set out his strategy to tackle a 1.7 billion black hole in Scotland's public finances

Finance Secretary Derek Mackay is facing a shortfall of £209 million in the next year alone, the Fiscal Commission has found.

In response, the Mr Mackay set out an alternative to UK fiscal plans, which would provide “additional resources” for Scotland’s public finances, in his inaugural Medium Term Financial Strategy.

Dame Susan Rice, Chair of the Fiscal Commission, said: “Our view of the Scottish economy has not fundamentally changed since December.

“The outlook is for subdued growth in Scotland over the next five years. The drivers of this are modest population and productivity growth, with productivity forecast to improve slowly from the weak performance experienced over 2016 and 2017.

“We have reduced our expectations for wage growth, which feed through to a reduction in income tax revenues throughout our five-year forecast.”

GDP growth is expected to remain below 1 per cent a year over the forecast period, reaching 0.9 per cent in 2023, according to the latest report ‘Scotland’s Economic and Fiscal Forecasts - May 2018’.

But it is the slump in wages over the coming years which is likley to lead to the tax shortfall. Real wages are now anticipated to fall by 0.5 per cent this year before levelling off in 2019 and starting to grow slowly from 2020 onwards.

This means less cash will be collected in taxes, with the commission’s forecast for 2019 alone having been revised down by £209m from the previous forecast in February.

As Mr Mackay set out his Medium Term Financial Strategy yesterday, he said the plan recognised the “challenges and opportunities” ahead.

“This strategy clearly lays out the consequences of UK choices on Scotland’s public finances, including UK imposed decisions on austerity, immigration policies that don’t suit Scotlands and taking us out of the single market through Brexit,” he said.

“We will always deliver responsible government and balance the books and I challenge the Chancellor to change course. I have therefore set out fiscal alternatives that would mean a fairer deal for Scotland with substantial investment to support our public services and stimulate our economy.”

Mr Mackay sets out two scenarios which would see the UK Government raise an additional £60bn or £86bn to increase spending, by relaxing the current curbs on public finances.