Scottish Government facing £500m budget black hole, economists warn

The Scottish Government should start planning for a looming "half-a-billion-pound hit" to its budget according to leading economists.

The Scottish Fiscal Commission (SFC) said previous income tax forecasts, which are used to set the annual budget and determine how much money Scotland receives in the block grant, led to the Government receiving more funding than it should have done.

An estimated £555 million of income tax reconciliation is therefore expected to come out of the budget in 2021-22 - which is more than the Government's anticipated reserves and borrowing can cover.

Kate Forbes MSP, Minister for Public Finance and Digital Economy, gave yesterday's budget speech in parliament. Picture: Getty

'Forecasting errors'

The Government is forecast to have approximately £100 million in reserve at the time, and can only borrow up to £300 million annually to address "forecasting errors".

The SFC's report on its fiscal forecasts states: "It would seem that the Government is not building up its reserves to deal with the large income tax reconciliations expected to reduce the budget in 2021-22 and 2022-23."

Mr Ireland said the reconciliations are needed because the UK Office for Budget Responsibility "was under-predicting income tax growth a couple of years back", meaning the Scottish Government received more block grant funding that the data now shows it should have done.

When it was suggested this leaves the Government with a "£155 million headache", Mr Ireland said: "I wouldn't call it a headache, I would call it that funny feeling you have in your head when you wake up and you're not quite sure if you're going to have a headache.

"But there's an awful lot of stuff to happen before the headache develops.

"It's too early to do an awful lot of planning, but they need to have it in mind.

"At the moment, it's being aware that you've got this half-a-billion-pound hit on the budget in a couple of years' time.

"I'm not sure they need to start thinking about how much or how much do we borrow, how much we have to do to our savings, or how much we have to shave off expenditure - but they're the options."

'New era for Scottish budget'

SFC chairman Dame Susan Rice said the impending devolution of further social security powers will usher in "a new era for the Scottish budget", with £3 billion in extra funding for benefit payments.

She added: "This introduces a complexity to the Government's month-to-month budget management, because anyone who applies for one of these benefits and is eligible will have to be paid and those numbers are unknown until they happen."

Reflecting on Thursday's Scottish Budget announcement at Holyrood, Dame Susan added: "On the tax side, the policy changes announced yesterday will add a little over £50 million to be used, in the new financial year.

"Most of this comes from the freezing of the higher rate income tax threshold."

Meanwhile, the SFC said Scottish Gross Domestic Product (GDP) is forecast to have grown by 0.9% in 2019, and is predicted to grow by 1% in 2020, 1.1% in 2021 and by 1.2% in the following three years.

Mr Ireland said: "A lot of this growth is down to productivity recovery.

"Productivity since the financial crisis has been very, very low, growing on average by about 1% a year.

"We expect productivity to pick up - not dramatically, but to pick up - and that's driving the GDP growth that we're seeing in our forecast, combined with a little bit of population growth."