Professor Alasdair Smith says any reasonable person would say the chances of a no-deal Brexit have gone up, but the SFC do not think that is the most likely outcome as the UK parliament is against it.

Prof Smith says the financial consequences of no deal are not in the forecasts, and would thus be a major financial risk.

SNP MSP Angela Constance asks what work the SFC has done about the various scenarios around Brexit.

The assumptions around the SFC's scenarios are broad brush enough for any outcome, other than a no-deal Brexit, replies Prof Smith.

Scottish Fiscal Commission chief executive John Ireland pivots to the impact of Brexit on the world economy.

The downward revision is around Brexit and net trade, he adds.

Tory MSP Alexander Burnett says the forecasts do not make for "pretty reading".

If we stay in the EU market, would the growth gap between Scotland and UK be closed, he asks.

Prof Smith says quite a lot of the difference is due to Scotland's working age population growing relatively slowly, compared to the UK.

If Brexit makes migration into Scotland unattractive or relatively difficult that will have a marked impact, he adds.

Mr Ireland says when the OBR made their original forecasts, there was a low rate for income tax revenue but there was a big adjustment to that.

Labour MSP James Kelly asks what new information came to light to allow the OBR to change their forecast.

"UK tax revenues have been surprisingly buoyant," says Prof Smith.

The committee convener asks what the main differences are between the increasing income tax revenues for the UK, and the Scottish picture.

Prof Smith explains there are fewer high rate tax payers in Scotland proportionately, compared to the rest of the UK.

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, external.

The commission published its official five-year economic, tax and social security forecasts last Friday.

From next year the UK Treasury's funding of the Scottish Budget will begin to be adjusted to reflect actual income tax collected.

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.

• Scotland's Economic and Fiscal Forecasts May 2019, external
• Read more here, external

Scottish Green Party co-convener Patrick Harvie questions the use of the word 'normal' for these reconciliations based on two income tax forecasts leading to a £600m figure.

John Ireland explains there will be an improvement this July with further out-turn data.

This is still definitely a forecast, but as the SFC gets more data it will be fed into the forecast, he adds.

Mr Ireland says overall, on average, you would expect the forecast errors to end up being zero.

The SFC chief executive explains there are three negative reconciliations here, but he hopes that sometime that will flip around, though he can't promise that.

Dame Susan Rice says there will be other reconciliations beyond income tax, adding this is a complicated landscape.

Mr Ireland adds that when the SFC saw the figure was £600m, they were not surprised.

SNP MSP Tom Arthur asks about the confidence in the forecast of £3.5bn for social security benefits next year.

John Ireland says that is the forecast for social security benefits Scotland has authority for, but is administered by the DWP.

It's a broad brush first attempt, he adds.

Mr Arthur asks again how confident the SFC is in the £3.5bn figure, to which Mr Ireland reiterates this is an initial forecast based on UK rules.

Prof Smith accepts there is a high fiscal risk with this size of forecast.

Mr Tomkins asks if the Scottish government has to be ready for a £1bn adjustment over three years to its budget, and if this will be normal.

The Tory MSP says the Scottish government's stewardship of the nation's finances has not been good enough to deal with the adjustment.

Prof Smith reiterates this scale of reconciliation should not be surprising, and the government will have to deal with it.

The SFC rep says the government can draw on its reserve to the tune of £250m a year, and resource borrowing of £300m a year.

He says the £600m adjustment estimated for a year's time is higher than that, and the government will need to adjust expenditure and raising revenue.

Tory MSP Adam Tomkins asks if the SFC stand by their forecasts that income tax levels would rise.

Mr Ireland says in December the out-turn data was adjusted, and the paradox was the increase in the number of higher rate income tax payers - but the income did not increase so much.

He stands by the forecasts made in December.

Mr Tomkins says there is a degree of scepticism about these forecasts and whether they can be trusted.

Mr Ireland says the forecasts are made on the best data available, adding that earnings are doing well which affects the macroeconomic picture, which in turn affects the forecasts.

Mr Crawford says: "Inevitably built in from the beginning... we have a problem here."

Scottish Fiscal Commission chief executive John Ireland accepts there is a structural issue, which is "due to the devolution of income tax, which is not our bag... that's your bag."

Image source, Getty Images

Uncertainty about the prospect of a second independence referendum and greater devolution of welfare to Holyrood are two of the key risks to Scotland's economy next year, according to experts.

The Scottish Fiscal Commission (SFC) highlighted these, together with the loss of more than £1 billion from the Scottish government's budget over the next three years, in its latest economic forecast report.

It has downgraded its economic forecast for 2019 to 0.8% - with the "ongoing uncertainty created by Brexit" key in this.

And with the Scottish Government also having published legislation which could pave the way for a fresh vote on independence, SFC chair Dame Susan Rice warned "uncertainty is a problem for any economy".

Prof Smith says with the benefit of hindsight the SFC would have done different forecasts, but says there is not a flaw and that it is not a terrible mistake to have made.

That's what happens with forecasts, he adds.

The SFC rep says the scale of the forecast reconciliations is not out of line with two forecasters doing a pretty good job.

"The Scottish government has to be ready to deal with reconciliations on this scale."

Mr Crawford says that doesn't explain why we are losing money through the reconciliations.

Prof Smith says the biggest factor is that the UK revenue has risen faster than when the budget was set, but the Scottish revenue has grown at a slower rate.

The committee convener asks if there is a flaw in the way the fiscal framework operates.

That's for the parliament and governments, replies Prof Smith.

Committee convener Bruce Crawford asks why is this happening.

Scottish Fiscal Commission Professor Alasdair Smith explains the reconciliation process is complicated.

Prof Smith says the SFC was forecasting a growth in income tax revenue, which fed into the budget.

He says Scottish income tax will have grown over this period, but it has grown at a slightly slower rate than expected, and the UK rate has grown at a faster rate.

Douglas Fraser
Scotland business & economy editor

Image source, Getty Images

A young scientist stunned us recently with the first ever picture of a black hole, somewhere far out in space. It was probably based on very clever science and maths.

But even if it wasn't, who was to contradict her? Who can offer an alternative vision of a black hole?

Black holes fascinate and bamboozle us, because they are mind-bendingly difficult to comprehend. That's why they fit easily into headlines and what passes for political debate.

So when you hear or read there's a £1bn black hole facing the Scottish government, take special care. It's an impossibly big number to comprehend for those more used to a household budget. And no-one else can disprove a mind-bending negative.

Read more here.

Scottish Fiscal Commission chair Dame Susan Rice gets us underway by telling MSPs of the commission's reduction in its estimates for the Scottish budget of £229m next year, and by £609m the year after.

These reconciliations are part of the fiscal framework agreed between the UK and Scottish governments, Dame Susan explains.

She explains Brexit is at the forefront of the commission's mind.