Good morning, and thank you for asking us to give evidence. I will start with a brief overview of our latest forecasts and how they relate to developments in the Scottish budget. Obviously, Covid made last year difficult for everybody. On top of the health and social impacts, the Scottish and United Kingdom economies were significantly affected, contracting by around 11 per cent each in 2020.
We forecast that the coming year will continue to be tough. We expect the economy to shrink again in the current quarter, because of the lockdown, before beginning to grow over the remainder of the year. We also expect Covid to affect the economy for a long time. We think that gross domestic product will not return to the level that it was at before the pandemic until 2024, and we expect unemployment to remain elevated over much of that period.
The pain of the Covid pandemic has not been felt equally across society. We know that low-income households have been most affected. Many of the payments that Social Security Scotland administers are paid to those on low incomes. Covid-19 has undoubtedly increased the number of working-age people who are eligible for social security support, as unemployment has increased and those who are in work may have found their income reduced as a result of the restrictions. The surprising thing that our forecasts show is that the effect of those changes on total social security spending has not been as significant as one might have expected.
Devolved social security spending is dominated by the three disability payments—personal independence payment, disability living allowance and attendance allowance—and they account for about 80 per cent of spending. Any variations in those forecasts can have potentially large consequences in cash terms. However, in the past year, we have seen fairly small changes in those forecasts and fairly small changes in the funding received from the UK Government.
Overall, spending on social security in 2020-21 increased by £60 million since our forecasts a year ago. That is an increase of less than 2 per cent and is largely because of the Scottish Government’s responses to Covid-19, such as additional funding for the Scottish welfare fund and discretionary housing payments, and the one-off coronavirus carers allowance supplement. Those are examples of where spending has increased. At the same time, the Scottish Government’s decision to delay the Scottish child payment and child disability payment has reduced spending. Those payments are now due to start in 2021.
Our report discusses the risks to the budget in the year ahead. We highlight how forecast errors are likely to be larger for new payments, where we do not have historical information. It is important to mention the risks to the budget in the year ahead from social security in the context of wider change in the budget. For the past two years, we have said that the devolution of taxes and social security would make managing the Scottish budget more difficult, but we are clear that, in 2020-21 and 2021-22, the budget management challenge is different. Any variation in the budget because of social security payments this year has been far surpassed by the £8.6 billion in pandemic-related funding from the UK Government.
Members might remember that we met a year ago to discuss our forecasts. The world has changed dramatically since then, but one thing that I said last year is even more valid now, so I will say it again: regular monitoring of the budget over the course of the year is increasingly important; indeed, it is essential. For that reason, our forecasts and commentary focus as much on 2020-21 as on the coming year’s budget and we will continue to monitor the budget in this way.
My colleagues and I are happy to answer any questions that the committee may have.