While forecasts show increasing optimism that the Scottish economy will return to pre-pandemic levels by mid-2022, emerging evidence suggests that the recovery and economic performance in Scotland is not as strong as in the UK as a whole - primarily due to a reduction in oil and gas activity.
The effect is likely to put more pressure on Scotland's public finances, according to the committee’s Budget Scrutiny Report.
Furthermore, with UK Government capital grants down by 9.7%, borrowing to the £450 million maximum permitted is required to enable a 1.2% increase in infrastructure expenditure after inflation.
The Scottish Budget is limited by the forecasts of the independent Scottish Fiscal Commission (SFC), beyond which the Finance Secretary cannot go.
In evidence the SFC said: “The overall Scottish Budget in 2022-23 is 2.6% lower than in 2021. After accounting for inflation, the reduction is 5.2%.”
The committee says more work is needed to understand what lies behind these economic and demographic trends and how best they can be addressed.
Today’s report explores the issues in more detail. Next week sees the Stage 1 debate of the government’s Budget Bill.
Finance and Public Administration Committee Convener Kenneth Gibson MSP said:
“The Committee agrees with the Scottish Government that it faces a challenging year, with further decreases in resource expenditure in the two years that follow.
“It’s clear that with UK Government grants continuing to decline, further fiscal flexibility for Scotland must be considered. Borrowing limits are too constrained and are being eroded by inflation. Tax rates remain unchanged but, as in the rest of the UK, inflation will bring more people into higher bands.
“To ensure Scotland’s public finances are placed on a more sustainable footing, productivity, wage growth, demographic change and labour market participation should be a key focus for Scottish Ministers.
“Transparency in the full and timely presentation of figures is also essential, particularly regarding COVID-19 funding, how it is allocated both by the UK Government and subsequently by Scottish Ministers, and the impact of this expenditure.
“As part of the Fiscal Framework review, both the UK and Scottish governments must consider and agree a process by which Barnett consequentials are clearly communicated, to bring greater certainty over what is ‘new’ and what is ‘reprofiled’ money.”