The Scottish economy entered recession this year and real household income is expected to see its sharpest decline since records began in 1998, experts have said.
The forecast from the Scottish Fiscal Commission was published alongside John Swinney’s budget on Thursday afternoon.
It said the Scottish Government would have to deal with higher prices and increased pay demands in the public sector.
The report said: “Rising prices run through all of our forecasts.
“Higher energy prices and their consequences for inflation more generally mean that we now think the Scottish economy has entered recession this year, and Scottish households are expected to see the biggest real-terms fall in their disposable income since Scottish records began in 1998.”
The report continues: “Even once inflation returns to lower levels, and real household incomes start to grow again in 2024-25, living standards will take time to recover to the pre-crisis 2021-22 level.
“Our forecast suggests that, by 2025-26, real disposable income per person will be no higher than its level a decade earlier.”
The SFC said the impact would be particularly strongly felt among those on low incomes, while the overall economy is undergoing “profound shifts”.
Modelling from the SFC shows that Scotland will see a 1.8% drop in GDP as a result of the current recession, recovering to pre-recession levels in the first quarter of 2025 – one quarter later than the rest of the UK.
The Scottish Government’s income tax receipts are also set to grow, according to forecasts from the commission, as a result of inflation driving up nominal earnings growth and the decision of the Scottish Government to raise taxes in this year’s budget, which is expected to raise about £129 million.
The SFC also modelled the impact of inflation on the Scottish Government’s budget for day-to-day spending, finding it would see a real terms rise of £279 million, despite a cash rise of £1.7 billion.
“The difference of £1.4 billion in the value of the nominal and real 2023-24 budget compared to the latest 2022-23 position shows the effect higher inflation is having, eroding the spending power of the Scottish Government,” the report said.
The capital budget – used to fund major infrastructure projects – has seen a real terms cut of £185 million.
