SCOTTISH ministers were warned they could face a “half-a-billion-pound hit”to the country’s Budget because of incorrect tax forecasts.

The Scottish Fiscal Commission (SFC) said that previous income tax forecasts, which are used to set the annual Budget and determine how much money Scotland receives in the block grant, had got it wrong by an estimated £555 million.

The SFC said the Government needed to build up its reserves to deal with the large income tax reconciliations expected to reduce the Budget in 2021-22 and 2022-23.

John Ireland from the SFC said the reconciliations are needed because the UK Office for Budget Responsibility “was under-predicting income tax growth a couple of years back”, meaning the Scottish Government received more block grant funding that the data now shows it should have done.

When it was suggested this leaves the Government with a “£555m headache”, Ireland said: “I wouldn’t call it a headache, I would call it that funny feeling you have in your head when you wake up and you’re not quite sure if you’re going to have a headache.

“But there’s an awful lot of stuff to happen before the headache develops. It’s too early to do an awful lot of planning, but they need to have it in mind.

“At the moment, it’s being aware that you’ve got this half-a-billion-pound hit on the Budget in a couple of years’ time.

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“I’m not sure they need to start thinking about how much or how much do we borrow, how much we have to do to our savings, or how much we have to shave off expenditure – but they’re the options.”

SFC chairman Dame Susan Rice said the impending devolution of further social security powers will usher in “a new era for the Scottish Budget”, with £3 billion in extra funding for benefit payments.

She commented: “This introduces a complexity to the Government’s month-to-month budget management, because anyone who applies for one of these benefits and is eligible will have to be paid, and those numbers are unknown until they happen.”

Reflecting on Thursday’s Scottish Budget announcement at Holyrood, Dame Susan added: “On the tax side, the policy changes announced yesterday will add a little over £50m to be used in the new financial year.

“Most of this comes from the freezing of the higher rate income tax threshold.”

Meanwhile, the SFC said that Scottish Gross Domestic Product (GDP) is forecast to have grown by 0.9% in 2019, and is predicted to grow by 1% in 2020, 1.1% in 2021 and by 1.2% in the following three years.

In their analysis of the Budget, the Fraser of Allander Institute said spending on public services is up by around 3.6%, in part due to an increase in the block grant.