Public services face cuts to plug £1.7 billion black hole

●Falling wages force a dramatic downgrade of Scots economic forecast

Scotland is facing a £1.7 billion black hole in its public finances as another five years of economic misery looms, according to the country’s fiscal watchdog.

There are now stark warnings of further cuts to public services including schools and hospitals as budgets come under new pressure.

The economy is likely to lag behind the rest of the UK, with growth not expected to top 1 per cent until at least 2023, the Scottish Fiscal Commission warned in a new report on the state of the nation’s finances.

Wage levels will also remain sluggish, meaning the forecast for income tax revenues has been cut by £1.7bn over the next five years. Finance secretary Derek Mackay is facing a shortfall of £209 million in the next year alone, the Fiscal Commission finds.

In response, Mr Mckay set out an alternative to UK fiscal plans which would provide “additional resources” for Scotland’s public finances, in his inaugural Medium Term Financial Strategy.

Dame Susan Rice, chair of the Fiscal Commission, said: “Our view of the Scottish economy has not fundamentally changed since December – the outlook is for subdued growth in Scotland over the next five years. The drivers of this are modest population and productivity growth; with productivity forecast to improve slowly

from the weak performance experienced over 2016 and 2017.

“We have reduced our expectations for wage growth which feed through to a reduction in income tax revenues throughout our five year forecast.”

GDP growth is expected to remain below 1 per cent a year over the forecast period, reaching 0.9 per cent in 2023, according to the latest report ‘Scotland’s Economic and Fiscal Forecasts – May 2018’.

But it is the slump in wages over the coming years which is likely to lead to the tax shortfall. Real wages are now anticipated to fall by 0.5 per cent during 2018, before levelling off in 2019 and starting to grow slowly from 2020 onwards.

This means less cash will be collected in taxes, with the Commission’s forecast for 2019 alone having been revised down by £209m from the previous forecast in February.

Mr Mackay set out his inaugural Medium Term Financial Strategy yesterday, introduced after the new fiscal powers transferred to Holyrood in the post-referendum Scotland Act. He said it recognises the “challenges and opportunities” ahead.

“This strategy clearly lays out the consequences of UK choices on Scotland’s public finances, including UK imposed decisions on austerity, immigration policies that don’t suit Scotland, and taking us out of the single market through Brexit,” he said.

“We will always deliver responsible government and balance the books, and I challenge the Chancellor to change course. I have therefore set out fiscal alternatives that would mean a fairer deal for Scotland with substantial investment to support our public services and stimulate our economy.”

Mr Mackay sets out two scenarios which would see the UK government raise an additional £60bn or £86bn to increase spending, by relaxing current curbs on the public finances.

He said this would deliver extra funding for key public services in Scotland.

“We want to grow the economy, invest in public services and give the taxpayers of Scotland the best deal anywhere in the UK,” Mr Mackay added. “We have set out our key social and economic policies, and despite the challenges ahead of us, we can be trusted to keep on delivering for Scotland.”

The stagnant performance of Scotland’s economy could mean even more tax rises, increased borrowing and further cuts to public services to fill the gap, according to the Tories, whose finance spokesman Murdo Fraser said the latest figures were an “indictment of the SNP’S economic negligence”.

“This is the most damning evidence yet that the SNP is unfit to run Scotland’s economy,”hesaid.“theconsequences of tax hikes, poor growth and low productivity look set to cost public finances hundreds of millions of pounds. Not only is this bleak news for the future, it also leaves an immediate hole in Scotland’s budget of more than £200m.

“Unless the SNP government sorts this out, the consequences could be even deeper cuts to public services.”

The Fiscal Commission’s forecast for growth in 2018 is unchanged from the 0.7 per cent predicted in December, but next year’s forecast has been revised down by 0.1 per cent to 0.8 per cent. The watchdog had previously forecast growth would reach 1.1 per cent by 2022, but this has been revised down to 0.9 per cent and will remain at this level the following year.

Labour finance spokesman James Kelly said: “The forecasts make for grim reading with growth of below 1 per cent extended by a year, again calling into question the SNP’S growthcommission’sassumption of 1.5 per cent growth.

“Scottish Labour is the only party proposing bold and radical action to end austerity and invest in our public services to deliver real change across Scotland. SNP finance secretary Derek Mackay needs to stop promoting another divisive referendum and start taxing millionaires rather than punishing Scottish communities.”

Liberal Democrat leader Willie Rennie also raised concern over the prospect of cuts to services. “This is a clear failure of the Scottish Government to boost the economy after ten years in government,” he said.

Greens co-leader Patrick Harvie called for new tax controls for local councils to help fight austerity.

“The Scottish Government has chosen to bind the hands of local government when it could devolve tax powers to help our councils protect services and jobs,” he said.

“The government’s Financial Strategy gives no clarity at all about the future of local government, and Greens have already warned that we can no longer view funding for council services as an annual rearguard action. Whether it’s a replacement for council tax, ideas such as a visitor levy or further reform of income tax, we need firmer plans from the Scottish Government if we want to protect local services.”

“We want to grow the economy, invest in public services and give the taxpayers of Scotland the best deal anywhere in the UK”

DEREK MACKAY