The Scottish Government “will need to manage volatility” in its budget as the devolution of tax and spending powers becomes fully operational, according to the Scottish Fiscal Commission.
The Commission published its official five-year economic, tax and social security forecasts on Thursday.
“From next year the UK Treasury’s funding of the Scottish Budget will begin to be adjusted to reflect actual income tax collected,” said the Commission.
“The Commission estimates that this will reduce the Scottish Budget by £229 million in 2020-21 and by £608 million the following year.
“These reconciliations are part of the fiscal framework agreed between the UK and Scottish governments.
“The Government can borrow and use its reserves to help deal with these variations, but it may also need to adjust its spending plans.”
The Commission highlights other complexities facing the Scottish Budget.
It said the scale and nature of social security benefits devolved from April 2020 — around £3.5 billion — means there are “greater uncertainties” facing the Scottish budget.
All eligible benefit applicants must be paid even if the total cost is greater than was budgeted for, based on the Commission’s forecasts.
Scottish Fiscal Commission chair Susan Rice said: “Managing the Scottish Budget becomes far more difficult from next year.
“The income tax reconciliations and major social security powers that begin in April 2020 introduce substantial risks.
“The Scottish Government will need to set its spending plans to accommodate these challenges.”
Also in the report, the Commission forecasts Scottish economic growth of 0.8% in 2019 and 0.9% in 2020.
Although GDP growth picked up in 2018 to 1.3% and unemployment remains at a historic low, the Commission said it “expects slow growth in productivity and real earnings to persist.”
Combined with ongoing uncertainty created by Brexit “it is expected these factors will continue to limit growth in the Scottish economy,” said the Commission.
The Scottish Fiscal Commission produces independent forecasts of Scotland’s revenue from fully devolved taxes, devolved social security expenditure, and onshore Gross Domestic Product (GDP) and reports on the Scottish Government’s borrowing projections.
The Scottish Government’s Finance Secretary Derek Mackay said: “Despite Scotland’s strong economy and labour market, the Scottish Fiscal Commission has reduced its growth forecasts for 2019 and 2020 as a direct result of continuing Brexit uncertainty.
“On top of this, Scotland faces a challenging future as a result of continuing UK austerity, which has meant that over £12 billion less has been invested in Scottish public services over the last nine years.
“In spite of this prolonged period of UK austerity and uncertainty, the Scottish Government is continuing to invest in our public services and the economy.
“We will continue to do all we call to support Scotland’s economy, including calling once again on the UK Government to provide guarantees for the potential loss of EU funding to Scotland – currently worth over £5 billion to support jobs, deliver infrastructure, sustain rural communities, and deliver research funding for universities.”