Scotland will remain stuck in its decade long slump of low economic growth for another five years

Scotland is unlikely to benefit from previous economic boosts contributed by oil, construction, an increasing workforce and consumer spending in the near future, the Scottish Fiscal Commission (SFC) said in its first ever economic forecast.

Instead, it risks being dragged down by Brexit, a global downturn in trade, an ageing population, a weak oil sector feeding through to the onshore economy, and depleting personal savings which have almost been stripped to the bone, the SFC suggested.

Finance Secretary Derek Mackay outlined what he described as “a budget for growth”, with £270m, or 64 per cent, increase to the economy, jobs and fair work portfolio.

He also announced an initial £340m capitalisation of the Scottish National Investment Bank between 2019-2021, with a £150m Building Scotland Fund in the interim.

However the accompanying SFC forecast starkly illustrated the scale of the challenge ahead.

Scotland’s public sector and government spending are effectively propping up a Scottish economy in which productivity growth is almost flatlining, the SFC suggested.

“Scottish economic growth has been slower over the last decade than historic average rates, and the Commission’s view is that pattern of slower growth is likely to persist over the next five years,” it said.

The number of people aged 16 to 64 - who pay the substantial proportion of tax - is expected to shrink from 2018 onwards, producing “significantly lower revenue from income tax than previously forecast by the Scottish Government”.

Household disposable income is expected to be stagnant until 2020/21, and then strengthen gradually.

Mr Mackay said Scotland faces “the most challenging economic and fiscal environment for any budget in the devolution era”.

He said: “Austerity and uncertainty are damaging the UK economy, and there is a knock-on effect on public finances, the pound has fallen, inflation has risen, and growth forecasts have been downgraded."

He urged parliament to unite around the SNP’s call for devolution of immigration to increase the the number of working age people.

He also introduced a new five band system of income tax that will leave those on a salary of £33,000 or above paying more.

The Conservatives accused him of penalising taxpayers for the SNP’s “failure to grow the Scottish economy”.

Tory economy spokesman Dean Lockhart said: "These growth projections from the Scottish Fiscal Commission are absolutely dismal and much worse than expected.

“It will mean that Scotland's economy will have trailed behind the rest of the UK for 14 years.

“Instead of prioritising economic growth, the SNP has decided to impose higher Nat Taxes on the hard working people of Scotland.

“It’s the SNP’s responsibility to grow the economy, but it is abjectly failing to do so.”

The Scottish Council for Development and Industry (SCDI) warned that tax rises are not a panacea for economic stability.

Chief Executive Mark Bevan said: "This is a progressive, mature and significant use of Scotland's income tax powers. However it comes on the back of a sustained period of weak growth in 2017 of 0.7 per cent for the Scottish economy.”

He added: "Future growth requires our productivity challenge to be addressed and the initiatives which attract and retain talent will support this.

“In that context, we welcome the announcements on increasing research and development funding by 70 per cent as well as a commitment to deliver £600m to ensure access to superfast broadband for all homes and businesses by 2021. Support for childcare is essential to ensure that all of our potential workforce can contribute to our future."

Professor Graeme Roy, Director of the Fraser of Allander Institute, said the SFC’s low growth forecasts were “the big story of the budget”.

He added: “Despite this weak outlook for growth in the economy, the SFC’s forecasts for tax revenue growth are more optimistic enabling Mr Mackay to offset a reduction in the resource block grant from Westminster through a targeted income rise focussed on higher earners.”

Andy Willox, Scottish policy convenor at the Federation of Small Businesses, said: “We wanted to see a Scottish Government budget which offered firms a little ballast in choppy market and political conditions.

“Instead the Scottish Government has chosen to steer us into uncharted economic waters.

“A majority of those in business in Scotland were against changes to the income tax regime.

“However, the Cabinet Secretary underlined that his tax changes were designed to cause minimum economic disruption. Only time will tell what the wider impact will be, but our members have a real concern about the effect of these changes on household spending power.”

David Lonsdale, Director of the Scottish Retail Consortium, said: “The subdued predictions from the SFC for economic growth over the next few years are sobering, more so as Scotland’s economy has recently underperformed the UK as a whole.”

He said the “welcome” decision to limit business rates rises to CPI, rather than RPI, “will shave £5m off the rates bills of hard-pressed retailers”, but said the decision to raise income tax in some bands will mean “less money overall in consumers’ pockets” which “is likely to cause shoppers to carefully consider what purchases they can afford” and “may also have implications for VAT revenues which are being assigned soon to Holyrood”.