This week has seen the release of the Scottish Fiscal Commission’s updated forecasts for Scotland’s economy and the funding of the Scottish Government.

These forecasts were originally meant to accompany the Medium-Term Financial Strategy and Fiscal Sustainability Delivery Plan, but as we covered a few weeks ago, Cabinet Secretary for Finance Shona Robison abruptly deferred those publications to the end of the Parliamentary session.

The SFC was not happy, and has instead decided to carry on regardless and update the publication once the Finance Secretary publishes her plans.

Since the last set of forecasts in December, the main development in terms of the economy has been the increase in volatility. Even at the time of writing, it’s unclear whether broad-based tariffs imposed by the US will or won’t stand, let alone whether they will be reinstated to higher levels by the time the 90-day pause expires.

All this contributes to weaker short-term growth in the SFC’s forecasts, and the effects could be larger were tariffs to be maintained over the long run. The SFC’s scenario analysis points to the productivity shock that permanent tariffs would bring about a reduction in GDP of 0.3% over the long term, similar to the UK’s hit as whole presented in the OBR’s publication a couple of months ago.

The path of income tax revenues and reconciliations looks very uncertain

One of the striking issues highlighted by the SFC’s publication is just how sensitive the Scottish Government’s net tax position forecast is to assumptions by the SFC and the OBR about earnings growth – and particularly when they differ substantially.

The income tax net position – that is, how much more is collected in Scottish Income Tax minus the deduction from the block grant based on receipts per person in England and Northern Ireland – is now projected to have been lower in the last couple of years than originally assumed by the SFC. This is largely driven by lower receipts than forecast.

Going forward, however, the net position is also less positive than in the December forecast. This is because the OBR have increased their forecast of short-term earnings growth, which increases the block grant adjustment – and therefore reduces the amount that the Scottish Government’s income tax policy raises relative to that counterfactual.

But the SFC continues to be more optimistic than the OBR over the medium-term. The net position is forecast to surpass £2 billion by 2029-30, but there is a clear risk that it will be much smaller if differences in earnings growth aren’t as marked between Scotland and the rest of the UK as in the SFC’s view. So it would not be prudent for the Scottish Government to bank on this being the case – the SFC clearly note that this is more of a downside risk, and it could be argued that a central approach might be to expect a smaller net position.

In fact, the Scottish Government’s planning ought to include an allowance for what looks like a substantial negative income tax reconciliation in 2027-28, relating to the 2024-25 Budget. The current projection is -£851 million, which is above what the Scottish Government can borrow for this purpose, and which would mean reducing spending on public services in that year to pay for it.

Pressures on the spending side

Two main areas are highlighted as significant pressures by the SFC. One is on social security, with the gap between BGA funding and projected spending widening by £0.6 billion by the end of the decade. About two-thirds of this is due to the cuts to PIP in England and Wales, which directly reduce BGA funding for Scotland. The remaining third is due to the cost of mitigating the two-child limit, although if this is done at UK level as rumoured recently, that additional cost might be borne by the UK Government instead.

The second main area of pressure is pay. As we highlighted last week, pressure seems to be mounting for pay awards to go above the stated pay policy of the Scottish Government. Of course, every year that pay awards are higher means higher costs of delivering public services into the future as those increases get consolidated into baseline pay.

We’ll know more on 11 June regarding how much (if any) additional funding there is for pay deals in England that might generate Barnett consequentials, but the SFC is clearly concerned about the need for the Scottish Government to “plan for how to handle the possibility that its paybill is growing faster than funding.” If that were the case, it’s hard to see how it would be sustainable over the long-term, and we (and the SFC) will be looking to see how the Scottish Government addresses this issue in its June publications.

For something completely different: SHERU key interest areas for research

This week, our colleagues at the Scottish Health Equity Research Unit (SHERU) published a document on Collaborative Research for Meaningful Impact. This is a document similar to the UK Government’s Areas of Research Interest approach, and aims to support more effective collaboration between research and policy by identifying shared priorities, highlighting key questions, and signalling where new evidence and insights are most needed.

Academic researchers, policy professionals, data specialists, and others working to understand and address the structural causes of health inequality are all welcome to engage with this approach. If this is an area of work you’re interested in collaborating or engaging with, you can get in touch with them at sheru@strath.ac.uk.