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EDINBURGH (Reuters) - Scottish economic growth is expected to remain at around 1 percent next year, below overall UK growth, limiting the devolved government's scope to raise revenue via newly won tax powers as the uncertainty of Brexit bites.
Cabinet Secretary of Finance Derek Mackay, presenting the first Scottish draft budget since enhanced tax powers for its devolved parliament were introduced, predicted economic growth of 1 percent this year and 1.2 percent next, versus 2.1 percent and 1.4 in the UK as a whole.
The devolved government says the option of independence must remain in place to protect Scotland's interests. While Britain voted overall to leave the European Union, most people in Scotland voted to remain.
But the uncertainty dogging the economy over leaving the EU and the questions over trade and immigration that it poses may limit the scope for a new bid for secession. Scots rejected independence by a 10 point margin in 2014.
Current economic underperformance is primarily because of Scotland's dependence on a weak oil and gas sector, the main factor behind a fiscal deficit at about one tenth of the Scottish economy.
Mackay said Britain's vote to leave the European Union was the main reason behind a murky economic outlook.
"We are seeing the fall in the pound pushing up inflation. That puts pressure on household budgets and companies are re-evaluating their plans," he said. "This economic uncertainty makes it all the more important that this budget provides support."
Mackay announced rates relief for small businesses, a boost in the spending power of local authorities and the introduction of a bill to cut Air Passenger Duty in Scotland from 2018. The latter measure has been long anticipated, but it is unclear what its final form will be and who will support the minority government to get it through the Scottish parliament.
Scotland's public finances are partly funded by a block grant from London and partly by an increasing share of Scottish tax revenue.
Whereas in the past tax bands and rates were set by the national government in London, from this year the Scottish government has the power to set a portion of its own taxes.
Those enhanced powers came after a last-minute pledge by the British government just before the independence referendum in 2014, when it looked like the secessionists might win.
Reporting by Elisabeth O'Leary; Editing by Janet Lawrence