SCOTLAND’S economy is set for a dramatic rebound from the Covid pandemic, growing more than 10 per cent this year, according to Holyrood’s independent budget watchdog.

In its latest forecast, the Scottish Fiscal Commission said it expected GDP to return to its pre-Covid level by the second quarter of 2022, almost two years earlier than expected.

However the Commission also warned spending on devolved social security was set to climb by hundreds of millions of pounds and inflation was also set to rise sharply.

Overall, however, the watchdog said it was “good news” for the economic outlook.

In its January forecast, in the midst of lockdown, the Commission forecast GDP growth of 2% in 2021 and 7% in 2022, with a return to a pre-Covid sized economy in 2024. 

Both assumptions have been revised in light of the economy rebounding faster than anticipated because of the success of the vaccination programme and lockdown ending.

Commission’s chair Dame Susan Rice, said: “We now expect the Scottish economy to grow by 10.5 per cent in 2021/22, mainly fuelled by household purchases as consumption reverts to pre‑pandemic levels, supported by higher income households who were able to save during the lockdowns.”

However the recovery also has implications for inflation, with employers facing demands for higher wages to overcome staff shortages.

Inflation is forecast to peak at 4% at the end of this year, twice the Bank of England target.

The Commission also forecasts devolved social security spending will increase from £3.7billion this year to £5.2bn in 2026/7, as more people receive support each year and payments are uprated by inflation.

Scottish Government spending on its new Adult Disability Payment (ADP), which is due to replace the UK Government’s Personal Independence Payment (PIP) from summer 2022, is expected to hit £3bn in 2026/27, around £500m more than would have been spent on PIP.

As the Scottish Government receives funding from the UK Government based approximately on what would have been spent on PIP in Scotland, the additional costs of ADP will need to be met from elsewhere in the Scottish Budget.

Dame Susan added: “We expect higher spending as a result of new social security payments introduced by the Scottish Government. 

“These new policies are a long-term commitment so finding the budget to fund them will be a challenge not just for this government but also for those of the future.”

The Scottish Governnment welcomed the forecasts.

Finance and Economy Secretary Kate Forbes said:  “The predicted return of economic activity to pre-pandemic levels in the first half of 2022, almost two years of ahead of the SFC’s previous forecast, is a tribute to the innovation and adaptability displayed by businesses during the pandemic. Equally encouraging is the forecast that unemployment will peak at a much lower level than predicted in January.

“Increasing economic prosperity is one of my core objectives because it is the means by which we invest in infrastructure, deliver public services and support our citizens. 

“Fair and sustained economic growth is essential and to that end I am today chairing the second meeting of the Advisory Council on Economic Transformation to discuss an ambitious 10 year national strategy that builds on our economic recovery, prioritises investment in the industries of the future and delivers new, good and green jobs.

“The SFC’s forecasts are also an indication that the Scottish Government’s policy of providing more than £3.7b additional Covid-19 support for businesses, while carefully easing restrictions and pushing ahead with the vaccination programme, has been the correct approach.

“We are delivering a social security service based on dignity, fairness and respect, rather than taking an austerity-led approach, as the UK Government has done, where all that matters is driving down the cost of supporting those who need it most.

"Social security is an investment in the people of Scotland and we are committed to making sure everyone can access the financial support they are entitled to as we continue to roll out devolved and new benefits, including disability benefits and the Scottish Child Payment to under 16s.

“The pandemic is not over. Challenges remain and sectors such as retail, tourism and hospitality still face obstacles on the road to recovery.

"But the SFC’s forecasts are a further sign that Scotland’s economy is emerging from the global pandemic in good shape as we work with business and trades unions to build a greener, fairer and more prosperous economy with wellbeing at its core.”

Tory MSP Liz Smith said the report confirmed the huge success of UK Government job and business support schemes. 

She said: "Our economy is on course to rebound swiftly but only if we stick together and both of Scotland’s governments fully focus on our recovery. 

"While this report is encouraging, the economic outlook remains precarious. The reintroduction of Covid restrictions could hinder growth and knock business confidence. 

“Our economic recovery could be thrown off course by the looming threat from the SNP-Green nationalist government and their anti-jobs, anti-business agenda. 

“What businesses really want now is certainty and stability, not a damaging coalition of chaos.”

Scottish Liberal Democrat leader Alex Cole-Hamilton added: "The improvement in the economic forecasts is testament to the game-changing vaccines which have established a route for us to escape this crisis. However, continuing business and job support must be built around the fact some sectors will need longer to rebound.

"The impact of restrictions and dependence on international connections isn’t equal.

“Liberal Democrats fought for more powers for the Scottish Parliament but it is taking far too long for the Scottish Government to get itself ready to take on the weight of social security powers. The £3 billion system was agreed all the way back on the Smith Commission but only a fraction of that system is operational.

"Powers and people continue to be left with the DWP. It is time the Scottish Government hit the accelerator because this shouldn’t take a decade to complete.”