Scotland faces income tax ‘shortfall’ and rising welfare bill, Commission warns

The Scottish Fiscal Commission published a report at the same time as the Scottish Budget.

Scotland is facing an income tax shortfall at the same time as spending on social security is forecast to rise, the Scottish Fiscal Commission warned (Jane Barlow/PA)

Spending on social security in Scotland could be some £760 million more than Holyrood receives from Westminster for welfare payments in just four years’ time – leaving ministers north of the border to cover the costs of this from their own Budget

The Scottish Fiscal Commission (SFC) revealed details of the growing cost of devolved benefits – which it warned could potentially squeeze funding for other areas – in a new report published at the same time as the Scottish Budget.

In addition to the  rising costs for social security – which are expected to grown from £4.1 billion next year to £5.5 billion in 2026-27 – the expert body revealed Scotland’s income tax revenue is likely to be £190 million less than the lump sum taken off from the block grant by Westminster following the devolution of some tax powers to Holyrood.

The SFC further stated it expected this “shortfall” to increase over the next few years – and that it could amount to £417 million by  2026-27.

The report stated: “Although our forecast of Scottish income tax revenues has increased since January, we expect revenues in 2022-23 to be £190 million less than the income tax Block Grant Adjustment (BGA) – the amount subtracted from the Scottish Budget to account for the devolution of income tax.”

And it said: “We expect this shortfall to increase over the next five years, in spite of taxpayers earning over £27,850 paying higher levels of income tax in Scotland than in the rest of the UK.”

The income tax shortfall comes at the same time as the Scottish Government faces paying out more in social security – parts of which are also now under the control of Holyrood ministers.

This has seen “significant reform” of the system north of the border, with the Budget containing a commitment to double the Scottish Child Payment – a weekly payment made to low-income parents – from £10 to £20 in April.

And while this is currently only paid to those with children under the age of six, from the end of 2022 the scheme will be expanded to all youngsters in poorer families who are under 16.

A new Adult Disability Payment is also due to be launched in 2022, with the SFC saying that spending on social security is forecast to rise from £4.1 billion in 2022-23 to £5.5 billion in 2026-27.

For some elements of welfare spending the Scottish Government receives cash from Westminster via the block grant – with this applying where payments in Scotland replace those administered by the UK Government.

But the SFC noted: “The Scottish Government has introduced new payments that do not receive any funding from the UK Government and the costs must be met entirely from the Scottish Budget.

“Combining completely new payments and payments with BGA (Block Grant Adjustment) funding, we expect that by 2026-27 spending on the Scottish Government’s social security benefits will be £760 million more than the corresponding funding received, reducing the funding available for other parts of the Scottish Budget.”

SFC chair dame Susan Rice said: “The Scottish Government faces slightly slower growth in income tax revenue than the rest of the UK but faster growth in social security spending. These will create pressures over the next five years which the Scottish Government must manage carefully.”