Graeme Roy: Long-term sustainability of Scotland’s finances in focus

These forecasts for devolved taxes and social security help underpin the size of the funding envelope that the Government can spend each year. Just as importantly though, by publishing the forecasts in a transparent manner – and crucially by setting out its assessment of the economic conditions that shape that outlook – the commission aims to help MSPs scrutinise budget decisions and to support public debate.

Robust debate, and an appreciation of the trade-offs on tax and spend, are important foundations for good policymaking. But understanding how the different elements of Scotland’s fiscal framework fit together is not easy. There is more that we need to do to improve our collective understanding of Scotland’s new budget responsibilities and how economic conditions – both here in Scotland and further afield – can impact upon outcomes. Expect to see more on this from the commission in the months to come.

It is a hugely interesting time to be taking on this role. Just last week the commission published its latest forecasts. In doing so, it provided a hugely informative overview of the state of the economy. We have had to get used to rapidly changing events impacting upon economic forecasts in recent times. This occasion is no different with the legacy effects of the pandemic, Russia’s invasion of Ukraine and continued disruptions in global supply chains all acting to add uncertainty to the growth outlook.

But the big story is inflation. Prices are now rising at their fastest rate in decades, with the commission now forecasting that it will peak near 9% toward the tail end of the year. Higher inflation means falling real incomes for all of us. It also adds pressure to government budgets, both by eroding the spending power on public services and through raising the cost of our newly acquired social security commitments.

The commission also spoke of some of the additional spending pressures that the Scottish Government will face in the coming years. For example, the expansion of the Government’s flagship Scottish Child Payment policy will help support three times as many children in Scotland next financial year than it did in 2021/22 – but the costs will rise eight-fold as the amount families receive has also increased. The outlook for income tax revenues remains challenging too, with a negative “net tax position” forecast up to (and including) 2023/24.

Whilst the immediate outlook is likely to dominate much of the debate, it is important that we do not lose sight of the long-term dynamics that will shape our economy in the decades to come. This was a key theme of the Government’s wider spending review narrative and the need to prepare our public services for future demands. The threats to our climate and environment, the pace of innovation, and the changing nature of work are already having major impacts on today’s economy. They are also impacting the provision of and demand for public services. Such effects are only likely to become even more pronounced in the years to come.

With this in mind, the commission will soon start important new work examining the long-term sustainability of Scotland’s devolved public finances. The aim is to gain a better understanding of how structural changes in our economy, such as our ageing population, might impact upon tax and spending commitments in the years to come. As with any projection, particularly those over a long period of time, there are levels of uncertainty that need to be borne in mind. But, if done well, such an exercise can highlight key pressures, opportunities and risks in Scotland’s fiscal powers that can be better planned for.

None of this will be straightforward but I’m delighted that we have a great team at the commission to help work through all of these issues.

Graeme Roy is professor of economics at the University of Glasgow’s Adam Smith Business School