Scotland could raise taxes to plug £1bn funding black hole

31 May 19

The Scottish Government is facing a budgetary shortfall of £1bn over the next three years in the wake of updated forecasts, which more accurately reflect income tax receipts north and south of the border.

In its latest set of economic and fiscal forecasts, the Scottish Fiscal Commission warned the government may have to increase taxes or adjust its spending plans in order to fund a series of “large negative reconciliations” between forecast and outturn revenue, as its borrowing powers would be insufficient to plug the gap.

The commission predicted the Scottish budget would be reduced by £229m next year as a result of the adjustment, followed by £608m the following year and £188m the year after.

However, the actual size of the reconciliations will not be known until outturn data becomes available in July.

Commission chair Dame Susan Rice said the complexity of the fiscal arrangements between Scotland and the rest of the UK made long term planning essential.

“The important thing is how that volatility is managed,” she said.

“The government can borrow, it can use its reserves, it can consider adjusting its spending plans. They have some levers they can use [but] they need to plan longer term than they might have needed to before devolution.”

The commission also warned that the devolution of £3.5bn in social security benefits next year presented a “significant fiscal risk” to the Scottish budget, with reforms to increase take up and widen eligibility likely to escalate spending further.

“What makes this trickier is that forecasting the spend on new benefits, many of them to be administered in a distinctively Scottish way, possibly around different eligibility rules, is by its nature much harder in the first few years when we don’t have an established baseline to work from,” said Dame Susan.

Overall, the commission struck a sombre note in its economic forecast, downgrading its growth forecast to 0.8 per cent this year, followed by 0.9 per cent in 2020, as a result of Brexit uncertainty combined with sluggish growth in both productivity and real earnings.

However, its longer term outlook for the Scottish economy remained largely unchanged from previous forecasts.

Finance secretary Derek Mackay told the Scottish Parliament that the growth forecasts had been reduced as a direct result of Brexit uncertainty.

“The independent forecasters of our economy have said that were it not for continued Brexit uncertainty they would be forecasting faster economic growth, not slower,” he said. 

Setting out the government’s medium term financial strategy in the wake of the revised predictions, Mackay announced capital borrowing of £450m this year and £350m next year, with £300m of the borrowing limit left unused as a contingency.

“I think this strikes the right balance between supporting the economy and prudent use of the restrictive borrowing powers contained in the fiscal framework,” he said.

The Fraser of Allander Institute said that the income tax adjustments were likely to impact on policy direction in the coming years.

“It’s hard to not reach the conclusion that if these updated reconciliation assessments turn out to be realised, the Scottish Parliament will face some difficult decisions in the near future – including right in the middle of a Scottish election in May 2021 and review of the fiscal framework – about what spending areas to cut back on relative to current plans and/or to seek to raise revenues,” it said.

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