Scottish government faces £1bn shortfall in spending plans

Finance Secretary Shona Robison told MSPs the outlook was "extremely challenging"

The Scottish government faces a £1bn shortfall for day-to-day spending next year, according to its finance watchdog.

The Scottish Fiscal Commission said the gap between income and spending plans could rise to £1.9bn in four years.

That would equate to 4% of the resource budget when the Scottish government is required to balance spending with income.

Finance Secretary Shona Robison said the outlook was extremely challenging.

She said tough choices would be set out in the budget later this year.

Plans for capital spending - investing in buildings, roads, rail and ferries, for instance - are now seen as "unsustainable" and are to go through a more radical "reset".

The capital budget is expected to fall by 14% in real terms within the next four years, leaving a gap between available funds and investment plans of £900m by 2025.

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Ms Robison, the deputy first minister, also said a review of tax options would take place over the next 12 months, aimed at raising more funds from those best able to pay.

In a statement to MSPs, she set out details of the Fiscal Commission's report, including a fall in real-terms disposable income for the average Scottish household of 4.1% between 2021 and this year - the biggest fall on record.

Recovery to 2021 levels of output is not expected until 2025-26.

Much of that impact on household budgets is due to price inflation eroding the spending power of salaries and other income.

The independent commission said inflation could be expected to average more than 6% this year, falling to 2.9% by the end of the year, and then going much lower.

It said the outlook had improved since the assessment it published in December.

The Scottish economy is no longer expected to be in recession this year, but growth is expected to be flat and recovery is on course to be "slow and fragile".

Scotland was at risk of recession when the economy shrank last year

Income tax revenue is now forecast to be slightly ahead of its previous outlook, due to the resilience of high employment.

But there will be a hit to the budget next year from an adjustment linked to an over-estimate of income tax revenue in 2021-22.

That was when it was particularly hard to gauge what was happening in the economy due to Covid. It means nearly £700m will be withheld in the block grant that comes from the Treasury in London.

The commission has also revised its forecasts of spending plans, and said Adult Disability Payments, being introduced by the Scottish government to replace the UK government benefit, can be expected to cost more than it previously estimated, and a lot more than Whitehall would spend if it still had controls.

The Fiscal Commission believes that the Scottish government's choices on welfare, and its intention to make them easier to claim, will result in £1.3bn more spending on benefits than Whitehall would have spent.

That money is not, therefore, funded through the block grant that comes from the Treasury, and has to be funded either by taxes in Scotland or by cutting other programmes.

That benefits bill is one of the main causes of the widening gap between forecast income and spending plans at Holyrood.

It is a key part of the medium-term financial strategy, which Shona Robison set out to MSPs, in her first major Holyrood statement in the role of finance secretary.

'Tough decisions'

She outlined three priorities for budgeting - of tackling poverty, helping to grow the economy and using tax powers to raise more funds from better-off Scots.

While focusing on these, she said other programmes would be "de-prioritised".

She said: "I am committed to taking the tough decisions required to deliver focused, ambitious and affordable measures which protect our environment, promote business growth, and improve wellbeing through the reduction of poverty for the people of Scotland."

She said the Scottish government lacked the levers it requires to improve economic growth, and called on ministers in Westminster to release more funds for public sector pay increases and for capital projects which have been hit by inflation.

Liz Smith, the Scottish Conservatives' finance spokeswoman, said the "very precarious situation facing the Scottish economy", with a "significant gap" between spending and resources, was "yet more proof of the SNP's utter failure".

She highlighted "widespread concern in the Scottish business community that Scotland is the highest-taxed part of the UK, with the serious detrimental effects this has had on innovation, jobs and growth".

Labour's Michael Marra spoke of the "record fall in living standards" among Scots as household disposable income drops.

He said: "There are far too many people who are seeing their lives diminished in Scotland, the end of the pay cheque before the end of the month.

"It is disappointing that there is almost nothing in this document about a strategic approach to growing wages and helping household income for the vast majority of the population."