In its latest forecasts, published last week, the Scottish Fiscal Commission identified the transfer of around £3.5bn in welfare expenditure as one of the biggest risks to Scottish public finances, along with a predicted £1bn adjustment over three years to reflect faster than anticipated growth in income tax revenue south of the border.
The Scottish Government has committed to changing the eligibility criteria and delivery arrangements for some of the devolved benefits, which include complex and high-volume disability payments.
“A social security budget of £3.5bn with the possibility of eligibility changes coming into that as it gets fully devolved is a sum of money with a high degree or risk,” Professor Alasdair Smith of the Scottish Fiscal Commission told members of the Scottish Parliament’s finance and constitution committee yesterday morning.
“We’re drawing attention to the fact that there is a very significant fiscal risk in this.”
Commission chief executive John Ireland said that he expected “some significant forecast error” in the £3.5bn estimate, which he described as “pretty uncertain”.
Dame Susan Rice, chair of the commission, said the lack of historic data on which to base any estimates contributed to the lack of certainty.
“What makes this trickier is that forecasting the spend on new benefits to be administered in a distinctively Scottish way…is by its nature much harder in the first few years when we don’t have an established baseline to work from,” she said.
The commission was also questioned on the negative income tax reconciliations it predicts will see the Scottish budget reduced by £229m next year, £608m the year after, and £188m the year after that.
“It’s puzzling that the Scottish economy is still growing, unemployment in Scotland is lower than the rest of the UK, our tax take also continues to grow, and yet we end up, through the forecast of the income tax reconciliations, with less money - that’s not how a normal economy would work,” said committee convener Bruce Crawford.
He said an overhaul of the fiscal framework, under which Scotland’s budget is determined, may be required to address the “flaw” which saw Scotland losing out due to the greater concentration of higher rate income taxpayers in parts of England.
“Otherwise we’re going to be in a competition we cannot win,” he said.
The committee had heard that the biggest single reason for the reconciliations had been the faster than anticipated growth in income tax revenues in the UK as a whole, compared to the growth in receipts in Scotland which had been slightly slower than forecast.
Professor Smith said the fiscal framework was a matter for parliament rather than the commission, but that adjustments of this kind were in the “normal business of forecasting”. “Two years on from any set of forecasts you find things you could have done better,” he said.
