SNP ministers 'may be forced to make cuts' to pay for rising benefits bill

It also warned of a “half-a-billion-pound hit” to finances as a result of a predicted shortfall in income tax receipts in 2021/22.

Scottish Conservative shadow finance secretary Murdo Fraser said the SNP “is about to find out just how difficult it is to create a fair and affordable welfare system”.

He added: “The nationalists have spent years criticising the UK Government without the faintest idea of how to run things themselves.

“They’ve long demanded these powers – now they have to prove they are capable of using them without that being to the detriment of public services.”

Scotland’s social security spending will rocket from £458 million to £3.4bn this year – and will rise by a further £524m by 2024/25.

READ MORE: Scottish Budget: What will be included in the government's spending plans?

The SFC said this change is largely driven by the Scottish Government becoming financially responsible for disability benefits, such as Personal Independence Payments and Disability Living Allowance, from April onwards.

In a summary document, it said: “Social security spending is variable and harder to control than other areas of spending.

"Spending will be determined by the number of eligible people who apply for support, all of whom must be paid at the rate set in the policy.

“The Scottish Government will have to meet this expenditure as it arises, even if it differs from the forecast used to set the Budget initially.”

It said the extra funding received from the UK Government to cover social security spending may also change during the year to reflect revised forecasts down south.

The paper added: “The Scottish Government faces a risk that if spending in Scotland increases and spending in England and Wales decreases, compared to the original figures used to determine the Block Grant Adjustments and the Scottish Budget, then there could be a significant in-year cash shortfall to manage.”

SFC chairman Dame Susan Rice said the impending devolution of further social security powers will usher in "a new era for the Scottish Budget".

She added: "This introduces a complexity to the Government's month-to-month Budget management, because anyone who applies for one of these benefits and is eligible will have to be paid and those numbers are unknown until they happen."

Under the 2016 Scotland Act, Holyrood was given power over 11 benefits worth £3bn, roughly 15 per cent of social security spending north of the border.

Scottish ministers will take responsibility for nearly all devolved benefits from April.

However, some payments will continue to be delivered by the Department for Work and Pensions (DWP) on the Scottish Government’s behalf for the next few years.

READ MORE: SNP government underspent its budget by £450m last year

John Ireland, chief executive of the SFC, said its current social security forecasts are based on UK policy. He added: “Now, everything we know about the Scottish Government’s commitments, from ministerial announcements through to the passage of the Social Security Act, suggests that in fact when the Scottish Government is in control of these benefits, when it starts Scottish policy, the bill will increase.

“The UK Government is, of course, giving the government some money for the devolution of these payments. But any increase because of Scottish policy will not be covered by the UK Government.

“So somewhere the Scottish Government is going to have to find the additional money to pay for any improvements in these payments.”

He continued: “These are our forecasts of these payments, and those go into the Scottish Government’s Budget.

“But because these are demand-led in the sense that anyone who is eligible that applies needs to be paid, those forecasts might be incorrect.

“And the Government has to find the money somewhere…it can borrow, it can dip into its savings, into the Scotland reserve, or it can reduce expenditure elsewhere.

“Nonetheless, during the course of the year the government has to find the money to pay for the benefits. And that leads to a significant Budget management issue during the course of the year.”

The SFC said the estimated £524m rise in social security spending between this coming financial year and 2024/25 is due to inflation, demographic change and an expected rise in take-up.

Elsewhere, it said an income tax reconciliation will be applied to the Budget for the first time in 2020/21.

Reconciliations relate to the difference between how much revenue was forecast and how much was collected in Scotland and the rest of the UK. Holyrood must grapple with this discrepancy following the devolution of income tax powers.

More than £200m will be deducted from the 2020/21 Budget as a result of this. But the SFC warned ministers should start planning for a looming half-a-billion-pound hit the following year.

It said previous income tax forecasts, which are used to set the annual budget and determine how much money Scotland receives in the block grant, led to the Government receiving more funding than it should have done.

An estimated £555m of income tax reconciliation is therefore expected to come out of the budget in 2021-22, which is more than the Government's anticipated reserves and borrowing can cover.

SFC chief executive John Ireland said Scottish ministers "need to start thinking" about how they will account for the money.

The Government is forecast to have approximately £100m in reserve at the time, and can only borrow up to £300m annually to address "forecasting errors".

When it was suggested these figures leave a "£155m headache", Mr Ireland said: "I wouldn't call it a headache, I would call it that funny feeling you have in your head when you wake up and you're not quite sure if you're going to have a headache. But there's an awful lot of stuff to happen before the headache develops."

A Scottish Government spokesman said: “We are fully funding social security to ensure the system can deliver a service based on dignity and respect, is an investment in the people of Scotland and provides clear value for money for the public purse.

“The funding provided to the Scottish Government, through the Block Grant Adjustment for social security, is also expected to increase over time.

“The Scottish Government will manage any variance between actual and forecast expenditure or Block Grant Adjustment, in a fiscally responsible way, in line with the principles and policies set out in the Medium-Term Financial Strategy.”