Welfare spending leap and prospect of indyref2 deemed economic risks by experts

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”.

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While she added it is “too early” to incorporate the prospect of a second independence referendum into the SFC’s forecasting, she went on to state: “We’ve already seen business investment in Scotland become a little subdued and we wouldn’t immediately see business investment popping back up until there was some more certainty about what was happening.”

On welfare, she said the devolution of further social security benefits to Scotland in April 2020 would result in a “big leap” in spending in this area for ministers.

Welfare spending by the Scottish Government is expected to total £447 million this year – but this could rise to an estimated £3.5 billion next year.

With the new benefits being devolved all demand-led, Dame Susan said “anyone who applies and is eligible must be paid, so the Government will need to manage any difference between the forecast and the actual spends”.

Next year’s spending is expected to top the £2.7 billion currently spent on the justice portfolio – which encompasses policing, the fire service, the courts and prison service.

Dame Susan Rice
Dame Susan Rice

Dame Susan added: “What makes this trickier is that forecasting the spend on new benefits to be administered, many of them in a distinctly Scottish way and possibly around different eligibility rules, is by its nature much harder in the first few years when we don’t have an establish baseline, we don’t have history behind it.”

SFC chief executive John Ireland added: “The [Scottish] Government has a big cash management issue. If there are more claims than are forecast, then it has to find the money from somewhere.”

The warning came after it emerged the Scottish Government could lose more than £1 billion from its budget as a result of income tax reconciliations.

Dame Susan said adjustments the Westminster Treasury will make to Scotland’s block grant “will begin to reflect actual income collected” in Scotland.

She added: “We estimate that these adjustments or reconciliations – which is our technical term – will reduce the Scottish budget by £229 million next financial year and by £608 million the year after.”