Holyrood’s Finance & Constitution Committee warns of forecast error risk to public finances in Scotland

26.01.2018

Scotland’s public finances are exposed to risk if the Scottish Fiscal Commission’s income tax revenue growth forecasts are overly optimistic, says Holyrood’s Finance and Constitution Committee.

In its unanimously agreed report on the Draft Budget for 2018/19, the cross party committee of MSPs highlight the reliance on forecasts under the Fiscal Framework as potentially increasing volatility and uncertainty in Scotland’s budget.

The committee says it is therefore essential that tax revenues are monitored closely by the Scottish Government and that HMRC publishes monthly outturn data for Scottish Income Tax as soon as practicable.

This information will be vital for transparency and public confidence in the Fiscal Framework.

Finance & Constitution Committee Convener Bruce Crawford MSP said:

“Our committee recognises there is now likely to be a much greater degree of volatility and uncertainty in relation to Scotland’s public finances.

“A key factor in determining the size of Scotland’s budget is growth in income tax receipts north of the border, relative to the rest of the UK.

“The SFC is effectively forecasting that without tax policy differences, income tax revenues per capita will grow at the same rate in Scotland as in the rest of the UK. That, importantly, will offset wider predictions of Scotland generally seeing slower economic growth per capita than the rest of the UK.

“However, these are only forecasts and there is a risk to public finances if there is any significant forecast error - particularly if income tax revenues do not grow as strongly in Scotland as in the rest of the UK.

“Having said that, there may also be some benefit to the public finances if SFC income tax forecasts prove to be overly pessimistic.”

Mr Crawford added:

“Our committee emphasises that it is therefore essential that tax revenues are monitored closely by the Scottish Government and, as recommended by the Budget Process Review Group, that HMRC publishes monthly outturn data for Scottish Income tax as soon as practicable to do so.

“This information will be vital in providing a sufficient level of transparency to ensure public confidence in the operation of the new financial powers and the Fiscal Framework.”

Background information

The Committee noted in its report on the Draft Budget 2017-18 that there is now likely to be a much greater degree of volatility and uncertainty in relation to Scotland’s public finances.

The Scottish budget is also more directly dependent on the performance of the Scottish economy relative to the performance of the UK economy. The Committee noted that while per capita GDP growth in Scotland has largely tracked the UK since 1999 a gap has begun to appear over the past two and a half years which shows lower growth in Scotland.

The full committee report is available here.

The Stage 1 debate of the Budget Bill will be scheduled for Wednesday 31 January 2018.

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