MSPS are failing to appreciate the risks associated with more financial clout for Holyrood and need to pay more attention, the country’s leading economic think tank has warned.
The Fraser of Allander Institute said MSPs had been “happy to trade off these risks for more powers”, but could no longer ignore their growing impact on the Scottish budget.
In its new economic commentary, the Institute also poured cold water on the latest growth figures, saying the 0.5 per cent jump in Scottish GDP in the first quarter of 2019 was largely down to a one-off stockpiling by businesses in case of a no-deal Brexit.
The report said Brexit continued to create uncertainty, but revised its growth forecast up fractionally to 1.2% for 2019, and held it unchanged at 1.4% and 1.5% for 2020 and 2021.
But the forecasts were based on an orderly Brexit, with no-deal possibly causing a 4.2% contraction in the economy in 2020, but an orderly exit seeing growth of up to 1.8%.
The business school also said Brexit could hurt the Scottish economy by reducing the inward migration that is critical to Scottish growth.
Looking back over 20 years of devolution, the Institute highlighted the risks associated with the tax and welfare powers acquired by Holyrood in the wake of the 2014 referendum.
The pitfalls accompanying the powers, and the fiscal framework governing them, were now coming into focus, it said, although many MSPs seemed not to appreciate it.
Besides the so-called £1bn ‘black hole’ in the Scottish budget by 2023 caused by historic reconciliations to inaccurate tax forecasts, the weaker growth in per capita tax receipts relative to the rest of the UK (rUK) was emerging as a major concern.
The commentary said this had wiped out £500m raised by relatively higher taxes in Scotland, because of how the framework operated.
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The report said the Scottish budget had to bear “the cost of any divergence between Scottish and rUK tax growth no matter the source, or Holyrood’s ability to respond”.
It also meant Holyrood’s budget suffered if Scotland failed to match tax performance in rUK, despite this including London and its many additional rate taxpayers. Holyrood’s borrowing powers and reserves are also of limited use to cope.
The report said: “Whilst the Parliament has spent a lot of time debating how to use its new powers, it cannot ignore the risks.
“The quality of recent debates suggests that many MSPs are yet to appreciate the scale of the risks now embedded in the new budget process.”
It added: “With Brexit, the potential for IndyRef2, not to mention an ageing population, climate change and the 4th industrial revolution all on the cards, the next 20 years are likely to require a boldness in policy making far beyond what we have seen so far in the devolution era.”
Professor Graeme Roy, the director of the Institute, said: “At the heart of the framework is a risk that – with the exception of population - the Scottish Budget bears the full cost of any divergence between Scottish and UK income tax performance, no matter its source or the ability of Holyrood to mitigate its impact.
“Whether or not the framework is sufficiently flexible to manage these and other risks is open to debate. At the very least, it deserves much more effective scrutiny than we have seen from Parliament in recent weeks."
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