The Scottish government will be able to borrow up to £300m more a year for three years and draw down strategic reserves after forecasts of a sharp contraction in output this quarter met the criteria for a “Scotland-specific economic shock”, finance secretary Kate Forbes announced on Thursday.
The disclosure of the first use of such powers since substantial control over income and other taxes was devolved to Scotland in 2016 came as Ms Forbes unveiled an annual Scottish government budget focused largely on tackling the coronavirus crisis.
The independent Scottish Fiscal Commission on Thursday forecast a 5 per cent contraction in economic activity in Scotland in the first three months of 2021, sufficiently below predictions for the UK from the Office for Budget Responsibility, the fiscal watchdog, to trigger the “economic shock” clause in the complicated framework governing fiscal relations between Westminster and Edinburgh.
In her budget speech, Ms Forbes acknowledged that Scotland’s economic performance during the coronavirus crisis had actually been similar to the UK as a whole and that the difference in forecasts was only because the SFC’s was recent enough to take into account the renewed lockdown.
The SFC said the economic-shock criteria increased annual limits on resource borrowing by £300m if tax revenues fell below expectations and removed annual limits on the withdrawal of funds from the Scottish government’s reserves.
The Scottish government is usually limited to borrowing a maximum of £450m a year up to a total of £3bn for capital investment and £600m a year for current spending up to £1.75bn.
Ms Forbes, who has repeatedly complained about the relatively tight limits on Scottish government borrowing, said she would use the extra borrowing and spending power allowed by the economic-shock clause.
“The UK government has confirmed these flexibilities are now available to me and I will use them to support our recovery from Covid-19,” she said.
The independent body said it expected Scottish gross domestic product to grow by 2 per cent over 2021 as a whole and by 7 per cent in 2022, but not to return to its pre-Covid level until 2024.
Ms Forbes’ budget speech, her second since being drafted in at only a few hour’s notice to unveil scandal-hit predecessor Derek Mackay’s plans in February last year, made no major changes to Scotland’s income tax bands and rates.
The thresholds of the lower bands were increased in accordance with consumer price inflation but the top-rate threshold was frozen at £150,000. This means most Scottish taxpayers will again pay slightly less income tax than those elsewhere in the UK while the better-off pay more.
Business groups welcomed Ms Forbes’ decision to cut business rates as part of efforts to support companies suffering the impact of the coronavirus crisis.
Ms Forbes also announced a three-month extension from April of 100 per cent relief for the retail, hospitality and leisure sectors businesses, a move that could put pressure on Rishi Sunak, UK chancellor, to extend the break in England, too.
Ms Forbes said tat if the UK government extended its business rates reliefs for the sector for the full year, she would use the resulting boost to Edinburgh’s funding from Westminster to do the same.
The Campaign for Real Ale said the three-month extension was a “desperately-needed lifeline for pubs” but was not long enough.
Tracy Black, Scotland director at the CBI employers’ lobby, said companies would “be relieved” to see a continued commitment to Covid-19 business support and no further changes to income tax.
“With so many struggling companies across Scotland, it’s only right that proper consideration is given to reopening the economy when it is safe to do so,” Ms Black said.