TALK of a £1 billion “black hole” in Scotland’s finances is an exaggeration, a leading think tank has said.
In its latest economic commentary, the Fraser of Allander Institute raises fresh concern about the likely impact of Brexit on Scotland.
And it says reports about a £1bn “black hole” over the forecast income tax take are an “over-dramatisation”.
In May it emerged that Finance Secretary Derek Mackay may have to impose higher taxes or austerity measures over a shortfall in the amount of income tax expected to be collected.
Next year will mark the first time that Holyrood is required to tailor its public spending in line with devolved taxes, following the transfer of responsibility for income tax.
Scottish Fiscal Commission work revealed there will be a £229 million shortfall next year, rising to £608m in 2021-22 and £188m the following year. Meanwhile, Scottish GDP is expected to grow at a lower rate than the UK as a whole.
READ MORE: Holyrood’s hands tied on budget ‘black hole’
At the time, Mackay said the Scottish Government has been boosting reserves to deal with such circumstances and borrowing powers could be used to cover any gap. He also related the lower growth to Brexit and said the scale of the adjustments on tax, or “reconciliations”, would be unclear until accurate figures are available.
Now Fraser of Allander has given its take on the matter in a report released today. David Eiser, the think tank’s head of fiscal analysis, stated: “To call this a ‘black hole’ is an over-dramatisation. But the reconciliations will reduce the resources available to the Scottish Government in the future, and by a significant amount in 2021-22, the last budget of this parliamentary session.”
The institute said its latest analysis shows that while Scottish earners are paying £500m more than they would under UK policy, this has been “completely offset by the relatively weaker performance of the tax base”.
It stated: “Whilst media and political scrutiny is focussed on the £1bn of potential income tax reconciliations resulting from forecast error, there is a potentially more serious underlying risk to the long-term health of the Scottish budget. This is the risk that Scottish earnings continue to grow more slowly than those in the rest of the UK.”
Professor Graeme Roy, director of the Fraser of Allander Institute, commented: “Three years on from the Brexit referendum, we still have little clarity over the timing or format of the UK’s departure from the EU.
“Much of the Brexit debate has focused upon the potential dislocation of trade patterns. But arguably an even greater challenge, particularly over the longer-term, are the implications for Scotland’s population. Should Brexit make migration to Scotland more difficult, or less attractive, then this could have serious implications for key sectors and the economy at large.”
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