Scottish ministers have been warned they “can’t run up a big credit card bill” to deal with a looming £1 billion budget shortfall.
The Scottish Government is facing a resource gap of more than £1 billion over the next three years, resulting from block grant adjustments
Experts at the Scottish Fiscal Commission (SFC) have already indicated either tax rises or spending cuts could be needed as a result.
While the Scottish Government has more borrowing powers under devolution, SFC chief executive John Ireland told Holyrood’s Finance Committee that these are limited.
He said while the Government effectively had “£300 million on the credit card” – the amount it can borrow to cover any shortfall in day to day expenditure – which could be used, “the issue is it has to repay that borrowing over three to five years, so you can’t run up a big credit card bill”.
Forecasts from the SFC have revealed Holyrood ministers will receive £229 million less than previously anticipated in 2020-21, with this rising to £608 million less the following year.
A further shortfall of £188 million is anticipated for 2022-23.
Commission member Alasdair Smith said it is a matter of “simple arithmetic” that the forecast shortfall for 2021-22 is more than the Scottish Government could deal with by simply borrowing and taking money from its reserve fund.
The maximum amount Scottish ministers are allowed to borrow for revenue expenditure is limited to £300 million, while a strict limit of £250 million a year is applied to the amount that can be drawn down from reserves.
Mr Smith stressed that overall, the changes to the Scottish budget are “of a general order of magnitude that shouldn’t be surprising, and that the Scottish Government will need to plan for”.
He stated: “It’s not so much an issue of maxing out the credit card, it’s that the credit cards have got annual limits on them. And even however much money is in the Scotland reserve only £250 million can be drawn in any one year, that’s the annual limit.
“If we have to face an adjustment of £600 million in a year’s time – and at the moment that is just an estimate – it is just a matter of simple arithmetic, to add 250 and 300 and say it doesn’t add up to 600.
“Which is why if things turn out this way the Government will need to look at adjusting expenditure or raising revenue to deal with it.”
The changes will be required as a result of adjustments the UK Treasury will make to the block grant, to reflect the level of income tax collected in Scotland.
SFC chair Dame Susan Rice told MSPs: “The reconciliations arise from the use of two sets of forecasts at the time the budget is set, our revenue forecast and the forecast of the block grant adjustment which is based on OBR (Office for Budget Responsibility) forecasts of receipts by the UK Government.
“Forecasts, as we all know, are never entirely correct.”
Committee convener Bruce Crawford said the situation had resulted in “a £229 million problem for the Scottish budget” next year.
He added that “while it might not be much in forecasting in terms of that, it is a lot of money at the end of the day”.
But Tory MSP Adam Tomkins argued income tax reconciliations would be a “normal feature of fiscal events and financial planning in Scotland” under devolution – suggesting the “current stewardship of the nation’s finances has not been sufficiently prudent to deal with this ordinary, usual, routine scale of adjustment”.