NEW devolved social security powers pose a “very significant risk” to Scotland’s budget, compounding problems with a £1bn black hole in income tax forecasts, MSPs have been warned.

Holyrood’s finance committee heard there was a “significant forecast error” attached to the official estimate that Holyrood would spend £3.5bn on social security from April 2020.

The possibility that the take-up of devolved benefits could be higher than UK ones, or eligibility rules changed in Scotland, meant the figure was a “pretty uncertain forecast”.

When the Scottish Government launched a Best Start pregnancy and baby grant last year, it was expected to get 4000 applications in all of 2018/19.

However it received 4000 on just the first day, and almost 10,000 payments were made in three months.

The Scottish Fiscal Commission (SFC) said such uncertainty around social security was one of two long-term risks to the budget, alongside backdated income tax adjustments.

The watchdog warned last week that £1bn of tax “reconciliations” were hanging over the government’s spending plans because previous budgets had been based on estimates.

The final, outturn figure for Scottish income tax in 2017/18 will not be available to this July, leading to an expected reconciliation of £229m taken off the 2020/21 budget.

Further negative reconciliations of £608m and £188m are expected to hit the 2021/22 and 2022/23 budgets.

With the Scottish Government limited in what it can borrow or draw from reserves to cover the changes, the SFC warned it may have to raise more in tax or cut spending to cope.

The reconciliations are due to forecast errors by the SFC and the UK Office of Budget Responsibility (OBR) about parts of the budget.

SFC chief executive John Ireland told the committee that, based on past forecast error rates, reconciliations of around £500m a year could be typical and the Scottish Government would have to manage them, although some would be positive as well as negative.

SNP MSP Tom Arthur asked if the Scottish Government’s resource borrowing power of up to £550m a year to cope with income tax and social security forecast errors was enough.

Mr Ireland said: “Forecasting new social security benefits, as has been shown with [Best Start], is difficult.

“I would expect there to be some significant forecast error there. It’s a pretty uncertain forecast.”

SFC Commissioner Professor Alasdair Smith said: “We think a social security budget of £3.5bn, with the possibility of eligibility changes coming into that as it gets devolved, is a sum of money with a high degree of risk.

“There is a very significant fiscal risk in this. Putting numbers on it is harder.”

He added: “The Scottish Government’s borrowing powers, as set out in our report, are relatively modest set against the scale of possible reconciliations.”

SFC chair Dame Susan Rice said: “The forthcoming benefits are demand-led. In other words, anyone who applies and is eligible must be paid. So the government will need to be able to manage, in year, any difference between the forecast and the actual spend.”

“By way of context, the government’s entire spend this year on its justice portfolio, which covers the police, fire, court and prison services, is £2.7bn. So you can see that £3.5bn is a great deal of money.”

Meanwhile, the Fraser of Allander Institute has criticised Scottish ministers for a “striking” lack of transparency and foresight in last week’s medium-term financial strategy. The FAI said the the failure to address future risks and the economic outlook was “striking”. Tory MSP Murdo Fraser called it a “withering attack” on SNP competence.