HOLYROOD’S independent budget watchdog has downgraded its growth forecasts for Scotland’s economy and warned of a record slump in household spending power.

The Scottish Fiscal Commission said it had lowered its forecasts for GDP growth by around 0.3 per centrage points each year since its last projections in December.

The SFC said the change - with GDP set to grow 2.1% in 2022/23, then by 1.1%, 1%, 1% and 1% in 2026/27 - reflected falling employment, earnings data and soaring inflation.

It said it expected a tight labour market this year and inflation to drive up wages this year as employees exercised their bargaining power. 

However it said earnings growth would not keep pace with inflation - currently at 9% and set to rise - leading to a slump in real earnings, or “true purchasing power”, of -2.7%. 

It said: “As a result of the worsening employment and real earnings outlook, the SFC are now forecasting the largest fall in real household disposable income since records began in Scotland. 

“The SFC have now downgraded their forecast for GDP growth in Scotland over the forecast horizon by an average of around 0.3 percentage points each year relative to their last GDP growth forecast in December 2021.”

The SFC said the outlook for the Scottish economy was “much more uncertain” than in late 2021 because of the Russian invasion of Ukraine, steeply rising energy prices and further global supply chain disruptions in China.

It said rising wages would mean the Scottish Government’s income tax revenue would increase in cash terms, but stronger growth in earnings in the rest of the UK meant this would be wiped out by a larger deduction from the Treasury block grant.

“This will result in additional pressure on the Scottish Budget in the early years of the Spending Review,” it said.

On the spending side, the SFC said the Scottish Government faced a growing funding gap for its social security payments, rising from £500million this year to £1.3b by 2026/27. 

This is due to differences between the Scottish and UK Governments’ approaches to social security, including the introduction of new Scottish payments. 

As payments are demand-led, the size of the gap in future years is determined by policies the Scottish Government has already set and commitments in its Social Security Charter.

As a consequence, spending on social security will rise from around 10% of the resource budget in 2022/23 to 14% in 2026-27. 

This puts pressure on non-social security spending, particularly in the early years of the Spending Review, the SFC said.

Commission Chair Dame Susan Rice said: “The difficulties the Scottish Government faces in managing its budget are illustrated by the eight percent fall in funding available by 2025/26 for areas other than health and social security after adjusting for inflation.

"Scotland continues to be affected by challenging economic circumstances and uncertainty. Rising inflation means earnings aren’t keeping pace with the cost of living. 

“We expect inflation pressures to last into the middle of next year, with a return to positive real earnings growth in 2023-24.”