Audit Scotland's latest report on financial devolution says the Scottish government has updated its structures for overseeing the new powers giving it more choice over tax and spending, and more decisions to make about how and when to use its new borrowing and reserve powers, and has good programme management processes in place.

Once the Scotland Act 2016 powers are fully implemented around 50% of devolved spending in Scotland will be met by money raised directly. This compares to around 10% before the Scotland Act 2012.

At the end of 2015/16, £18.5m had been spent to implement new powers and the watchdog says costs will increase significantly over the next four years, as new social security responsibilities come online. The Scottish government needs a clearer picture of potential future costs and to plan how it will fund these, the watchdog claims.

Most of the spend so far has been to cover HMRC's costs in setting up and operating the Scottish rate of income tax. The Scottish government budgeted a further £18m for 2016/17 and £92m for 2017/18. The remaining amount will be used to support other work flowing from the Scotland Act 2016, such as employability programmes and the Crown Estate transfer.

A more strategic approach to public financial management and reporting is also needed, including a medium-term financial strategy based on clear policies and principles. There is also an urgent need for the Scottish government to finalise and publish its approach to borrowing and reserve, the report states.

An estimated £22bn will be raised in Scotland by 2020, five times more than the £4bn raised prior to the 2012 and 2016 Scotland Acts. The audit watchdog says establishing new social security arrangements is an exceptionally complex task and by 2021 the Scottish government expects to process as many transactions in a week as it now does in a year.

 A share of VAT collected in Scotland will be assigned to the Scottish budget from 2019/20. Scottish and UK ministers are still to agree how this will be calculated. HMRC will continue to collect VAT in Scotland. Given the complexity of the work to agree the methodology for assigning VAT to the Scottish budget, Audit Scotland says it will be important that the Scottish government and HMRC maintain effective working relationships.

 It also says implementing and managing the new financial powers will have major staffing implications. While the Scottish government has identified the skills it needs, recruiting enough people with the required abilities may prove difficult.

The Scottish Fiscal Commission (SFC) will be established as a statutory body on 1 April 2017, with a similar role to the Office for Budget Responsibility. Its remit will expand to include preparing five-year forecasts of devolved tax revenues, non-domestic rates and Scottish income tax, as well as five-year forecasts of demand-led social security spending, once devolved, and providing GDP forecasts as well as assessing the reasonableness of Scottish ministers’ borrowing projections. Its recruitment campaign to find a new chief executive has yet to find anyone to fill the post, although it expects to do so by the summer and currently has an interim leader.

Caroline Gardner, auditor general for Scotland, said: ‘Implementing and managing the new financial powers will transform the work of the Scottish government on an historic scale.

‘It's made some good progress by getting the foundations in place for managing the new powers but the major funding and staffing implications of the next stage of financial devolution must be planned for and managed in an open and transparent way.’

Audit Scotland’s report Managing new financial powers An update is here.