When the most senior judges in the land ruled last autumn that prisoners who had suffered the indignity of “slopping out” could sue for compensation, they may have overlooked the law of unintended consequences.

Last week former inmates of Saughton and Barlinnie, their pockets bulging with government money, went on a drink and drugs binge that forced the closure of a Salvation Army centre, and brought three van-loads of police on to the streets to deal with the resulting disturbance.

The incident, in Edinburgh, is not the only manifestation of a big upsurge in drug and alcohol abuse triggered by the compensation packages, which are funded by the taxpayer.

In the past few weeks dozens of former prisoners have received cheques for between £1,000 and £5,000 from the Scottish Prison Service and have been blowing their money, causing chaotic scenes of drug-dealing on the street and around homeless centres.

Bill Aitken, the Scottish Conservative justice spokesman, condemned the situation as “Kafkaesque”, and the Taxpayers' Alliance described it as “a reckless use of taxpayers' money”. The Salvation Army drop-in centre in Bread Street, which offers meals, hot drinks and showers, was forced to close twice last Thursday evening when it was overrun by drug dealers and three van-loads of police had to be called to restore order. At the nearby Job Centre in Tollcross, there has been a 60 per cent increase in calls to the police to remove drug addicts from the premises.

Compensation payments for slopping out began after a court decision in 2004 under human rights legislation. Claims were thought to be time-barred to one year after leaving prison. Last autumn, however, the law lords opened the door for claims from people who had been in prison from 1999 onwards, and hundreds of cases are now going through the courts.

The Scottish Prison Service confirmed yesterday that 1,090 court actions had been settled and another 1,266 claims settled. The service has paid out £4.9million in compensation but the spokesman said there may be “many more claims in the pipeline”.

A contingency fund of more than £70million has been set aside by the Scottish Government for the payments. Many of the claimants are described as “revolving-door” prisoners - individuals addicted to alcohol and drugs who spend repeated short periods in prison and receive small sums. The average payment is £2,100.

No one at the Salvation Army centre would speak to The Times but a source said: “Things are just chaos. They're buying large amounts of drink and drugs and some of them are setting themselves up as drug dealers. They're not allowed to deal inside the centre, but they go and do it at the door, or walk down a short way down the pavement.”

Local residents and shopkeepers have been complaining repeatedly to police in recent weeks. One resident in a nearby block of flats, who did not wish to be named, said: “It is appalling. So many addicts are congregating in the area, breaking into stairwells to take drugs or sleep.”

Many voluntary sector workers are angry at millions being “squandered” which could be used to build a detoxification centre for addicts.

Mr Aitken said that he was aware of similar problems in Glasgow. He added: “This whole situation is highly predictable and indeed has developed Kafkaesque proportions. Due to the failure of the last Executive we have had to pay out all this money to highly undeserving people who are rewarding Scottish society by committing more crime and disorder in the knowledge that in soft-touch Scotland they will probably not be prosecuted.

“The taxpayer must think that the Government has gone mad.”

Tom Fox, a spokesman for the Scottish Prison Service, said he was aware there were problems. “It's something that we were acutely aware might happen. It's the direct consequence of the settlements being made to people with slopping-out claims,” he said.

“We spend a lot of time and energy helping people address serious addiction problems within the prisons and it's sad that this is exacerbating those problems.”

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