SCOTLAND risks falling behind the rest of the United Kingdom because the newly-devolved economic powers are insufficient, a leading pro-independence economist has warned.

 

Dr Jim Cuthbert claimed that the new devolution settlement is "unstable" due to a lack of economic powers to match the tax responsibilities transferred to the Scottish Parliament. He added that if the Government makes the "wrong call" in the use of the new powers " it is likely to find itself on an accelerating path of relative economic decline".

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In a stark warning to the SNP Government, Cuthbert said "decisions are likely to go badly wrong" if ministers fail to get to grips with the risks of the new arrangements.

 

Under the devolved powers Holyrood will be less dependent on the annual block grant from Westminster and instead be responsible for raising 50 per cent of the money it spends through taxes.

 

However, Cuthbert claimed the settlement leaves Holyrood without sufficient economic levers to grow Scotland's economy if the new tax powers do not raise enough money to match the block grant.

 

He said that the potential shortfall and a decline in North Sea oil revenues would squeeze Scotland's public finances and harm growth.

 

The warning, in a paper for the left wing think tank, the Jimmy Reid Foundation, came after official figures showed Scotland's economy contracted in the last three months of 2016, with output falling by 0.2 per cent.

 

The economist said ministers had to have "an adequate grasp of issues" that the reduction in the block grant from Westminster could be greater than revenue raised from devolved taxes.

 

Cuthbert said a failure to take this into account when setting budgets could have damaging consequences for Scotland's economy.

 

He said: "Understanding how the fiscal settlement is operating, and the factors underlying its operation, will be a vital element in making sensible budget decisions.

 

"In particular, if the Scottish budget is threatened because the increase in the block grant abatement (BGA) over a few years is greater than the buoyancy in Scotland’s devolved taxes, then a critical call will have to be made.

 

"The big risk for Scotland, particularly in the circumstances of secular decline in the North Sea, will be that per capita receipts on devolved taxes fail to grow as fast as in rUK (rest of the UK)," he said.

 

Cuthbert added: "Unless there is an adequate grasp of issues like these when actual decisions come to be made in the budget setting process, then these decisions are likely to go badly wrong.

 

“The fiscal settlement is unstable, in the sense that, once Scotland finds itself in a position of relatively declining tax receipts as compared with rUK, the operation of the settlement will tend to reinforce and accelerate these tendencies, rather than moderating them."

 

Cuthbert's paper also warned that "a crisis in local authority finances" could add to further pressure on the Scottish Government's spending plans in the years ahead.

 

He said: "It is quite clear, however, that if local authorities were to hit severe financial problems, then the Scottish Government would not be able to insulate its own budget from the resulting effects.

 

"If local authority services were being radically cut back, or council tax increasing too rapidly, then central government would face irresistible pressure to reconsider its own priorities, and to make additional resources available to authorities.

 

"The Scottish Government appears to be remarkably poor at assessing even the fairly short term prospects for local authority budgets."

 

Cuthbert also highlighted the need for an independent central body to be "responsible for making an informed assessment of the medium-term prospects for local authority finances" to prepare for such problems.

 

A Scottish Government spokesperson, in response to Cuthbert, said: “The biggest threat to the Scottish and UK economies over the next five years is the hard Brexit being pursued by the UK Government that could cost our economy around £11 billion from 2030, and cost the country 80,000 jobs over a decade.

 

"Despite the challenges posed by the slowdown in the oil and gas sector, the foundations of our economy are strong."

 

A UK Government spokesperson said ministers had delivered on the promise of more powers for Holyrood made to Scots ahead of the 2014 independence referendum.

 

“The UK Government has delivered in full, on the vow made to Scottish people, with a fiscal framework that is fair to Scotland and the rest of the UK," the spokesperson said.